<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
____________________
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-12757
TMBR/SHARP DRILLING, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4607 WEST INDUSTRIAL BLVD.
MIDLAND, TEXAS 79703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (area code) (915) 699-5050
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.10 Par Value Outstanding at November 3, 1998
(Title of Class) 4,710,886
<PAGE> 2
TMBR/SHARP DRILLING, INC.
FORM 10-Q REPORT
INDEX
Page No.
Part I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets, September 30, 1998 and
March 31, 1998 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations, Three Months
Ended September 30, 1998 and 1997 . . . . . . . . . . 5
Statements of Operations, Six Months
Ended September 30, 1998 and 1997 . . . . . . . . . . 7
Statements of Stockholders'
Equity . . . . . . . . . . . . . . . . . . . . . . . 9
Statements of Cash Flows, Six Months
Ended September 30, 1998 and 1997 . . . . . . . . . . 10
Notes to Financial Statements . . . . . . . . . . . . . 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 16
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 19
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PART ONE - FINANCIAL INFORMATION (UNAUDITED)
Item 1. FINANCIAL STATEMENTS
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
September 30, 1998 (Unaudited) and March 31, 1998
(In thousands, except per share data)
September 30,
1998 March 31,
ASSETS (Unaudited) 1998
------ ------------- -----------
Current assets:
Cash and cash equivalents $ 2,662 $ 1,623
Marketable securities 87 87
Trade receivables,
net of allowance for doubtful
accounts of $1,135 at both
September 30, and March 31, 1998 6,186 8,149
Inventories 123 82
Deposits 104 73
Other 572 664
-------- --------
Total current assets 9,734 10,678
-------- --------
Property and equipment, at cost:
Drilling equipment 48,858 48,691
Oil and gas properties, based on
successful efforts accounting 16,840 15,452
Other property and equipment 3,750 3,786
-------- --------
69,448 67,929
Less accumulated depreciation,
depletion and amortization (55,496) (54,132)
-------- --------
Net property and equipment 13,952 13,797
-------- --------
Other assets 174 173
-------- --------
Total assets $ 23,860 $ 24,648
======== ========
See accompanying notes to financial statements.
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<PAGE> 4
TMBR/SHARP DRILLING, INC.
BALANCE SHEETS
September 30, 1998 (Unaudited) and March 31, 1998
(In thousands, except per share data)
September 30,
1998 March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) 1998
------------------------------------ ------------ -----------
Current liabilities:
Trade payables $ 2,541 $ 2,622
Accrued workers' compensation 239 411
Other 869 1,655
-------- --------
Total current liabilities 3,649 4,688
-------- --------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued 5,979,625 shares at
September 30, and March 31, 1998 598 598
Additional paid-in capital 69,429 69,429
Accumulated deficit (49,666) (49,917)
Treasury stock-common, 1,268,739
shares at September 30, and
March 31, 1998, at cost (150) (150)
-------- --------
Total stockholders' equity 20,211 19,960
-------- --------
Total liabilities and
stockholders' equity $ 23,860 $ 24,648
======== ========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per share data)
Three months ended
September 30,
-----------------------------
1998 1997
----------- -----------
Revenues:
Contract drilling $ 3,293 $ 9,253
Oil and gas 506 424
----------- -----------
Total revenues 3,799 9,677
----------- -----------
Operating costs and expenses:
Contract drilling 2,515 6,070
Oil and gas production 144 216
Dry holes and abandonments 392 124
Depreciation, depletion and
amortization 685 882
General and administrative 562 512
----------- -----------
Total operating costs
and expenses 4,298 7,804
----------- -----------
Operating (loss) income (499) 1,873
----------- -----------
Other income:
Interest 51 35
Gain on sales of assets 16 --
Other, net -- 935
----------- -----------
Total other income 67 970
----------- -----------
Net (loss) income before income
tax benefit (provision) (432) 2,843
Benefit (provision) for
income taxes 9 (60)
----------- -----------
Net (loss) income $ (423) $ 2,783
=========== ===========
See accompanying notes to financial statements.
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TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Three months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per share data)
Three months ended
September 30,
-----------------------------
1998 1997
----------- -----------
Net (loss) income per common share:
Basic $ (.09) $ .61
Diluted (.09) .54
=========== ===========
Weighted average number of
common shares outstanding:
Basic 4,710,886 4,579,244
Diluted 4,710,886 5,113,145
=========== ===========
See accompanying notes to financial statements.
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<PAGE> 7
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per share data)
Six months ended
September 30,
-----------------------------
1998 1997
----------- -----------
Revenues:
Contract drilling $ 9,563 $ 18,454
Oil and gas 1,004 953
----------- -----------
Total revenues 10,567 19,407
----------- -----------
Operating costs and expenses:
Contract drilling 7,102 12,023
Oil and gas production 319 415
Dry holes and abandonments 587 134
Depreciation, depletion and
amortization 1,405 1,711
General and administrative 1,011 945
----------- -----------
Total operating costs
and expenses 10,424 15,228
----------- -----------
Operating income 143 4,179
----------- -----------
Other income:
Interest 93 67
Gain on sales of assets 20 84
Other, net -- 948
----------- -----------
Total other income 113 1,099
----------- -----------
Net income before income
tax provision 256 5,278
Provision for income taxes (5) (110)
----------- -----------
Net income $ 251 $ 5,168
=========== ===========
See accompanying notes to financial statements.
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<PAGE> 8
TMBR/SHARP DRILLING, INC.
STATEMENTS OF OPERATIONS
Six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands, except per share data)
Six months ended
September 30,
-----------------------------
1998 1997
----------- -----------
Net income per common share:
Basic $ .05 $ 1.14
Diluted .05 1.02
=========== ===========
Weighted average number of
common shares outstanding:
Basic 4,710,886 4,523,826
Diluted 5,311,259 5,050,339
=========== ===========
See accompanying notes to financial statements.
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<PAGE> 9
TMBR/SHARP DRILLING, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
Six Months Ended September 30, 1998 (Unaudited) and
Year Ended March 31, 1998 (Audited)
(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, 1998 5,980 $ 598 $ 69,429 $(49,917) 1,270 $(150) $19,960
Net income -- -- -- 251 -- -- 251
----- ----- -------- -------- ------- ----- -------
Balance,
September 30,
1998 5,980 $ 598 $ 69,429 $(49,666) 1,270 $(150) $20,211
===== ===== ======== ======== ======= ===== =======
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 10
TMBR/SHARP DRILLING, INC.
STATEMENTS OF CASH FLOWS
For the six months ended September 30, 1998 and 1997 (Unaudited)
(In thousands)
Six months ended September 30,
------------------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 251 $ 5,168
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation, depletion and
amortization 1,405 1,711
Dry holes and abandonments 587 134
Gain on sales of assets (20) (84)
Changes in assets and liabilities:
Trade receivables 1,963 (2,795)
Deposits (31) (32)
Inventories and other assets 50 (39)
Trade payables (81) 2,314
Accrued interest and other liabilities (958) (583)
-------- --------
Total adjustments 2,915 626
-------- --------
Net cash provided by
operating activities 3,166 5,794
Cash flows from investing activities:
Additions to property and equipment (2,196) (4,661)
Proceeds from sales of property and
equipment 69 171
-------- --------
Net cash required by
investing activities (2,127) (4,490)
Cash flows from financing activities:
Issuance of common stock -- 730
-------- --------
Net cash provided by
financing activities -- 730
-------- --------
Net increase in cash
and cash equivalents 1,039 2,034
Cash and cash equivalents at beginning
of period 1,623 1,048
-------- --------
Cash and cash equivalents at end of
period $ 2,662 $ 3,082
======== ========
See accompanying notes to financial statements.
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<PAGE> 11
TMBR/SHARP DRILLING, INC.
NOTES TO FINANCIAL STATEMENTS
The amounts presented in the balance sheet as of March 31, 1998 were
derived from the Company's audited financial statements included in its
Form 10-K Report filed for the year then ended. The notes to such
statements are incorporated herein by reference.
(1) Management's Representation
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are of a normal recurring
nature) necessary to present fairly the Company's financial position as of
September 30, 1998 and March 31, 1998, the results of operations for the
three and six months ended September 30, 1998 and 1997, and the cash flows
for the six month periods ended September 30, 1998 and 1997.
While the Company believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the related notes in the Company's Annual Report on Form 10-
K for the fiscal year ended March 31, 1998.
(2) Summary of Significant Accounting Policies
Marketable Securities
Under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", marketable securities, such as those owned by the
Company, are classified as available-for-sale securities and are to be
reported at market value, with unrealized gains and losses, net of income
taxes, excluded from earnings and reported as a separate component of
stockholders' equity. The market value of these securities at September
30, 1998 was not materially different from the historical cost, and
therefore, no unrealized gains or losses have been recorded.
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
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<PAGE> 12
useful lives of three to seven years.
Oil and gas properties are accounted for using the successful efforts
method. Accordingly, the costs incurred to acquire property (proved and
unproved), all development costs and successful exploratory costs are
capitalized, whereas the costs of unsuccessful exploratory wells are
expensed. Geological and geophysical costs, including seismic costs, are
charged to expense when incurred. In cases where the Company provides
contract drilling services related to oil and gas properties in which it
has an ownership interest, the Company's proportionate share of costs
related to these properties is capitalized as stated above, net of the
Company's working interest share of profits from the related drilling
contracts. Capitalized costs of undeveloped properties, which are not
depleted until proved reserves can be associated with the properties, are
periodically reviewed for possible impairment.
Depletion, depreciation and amortization of capitalized oil and gas
property costs was provided using the units-of-production method based on
estimated proved or proved developed oil and gas reserves, as applicable,
of the respective property units.
Major renewals and betterments are capitalized in the appropriate
property accounts while the cost of repairs and maintenance is charged to
operating expense in the period incurred. For assets sold or otherwise
retired, the cost and related accumulated depreciation amounts are removed
from the accounts and any resulting gain or loss is recognized.
Net Income (Loss) Per Common Share
On April 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share" which
superseded Accounting Principles Board Opinion No. 15 ("APB 15") "Earnings
Per Share". SFAS 128 simplifies earnings per share ("EPS") calculations by
replacing previously reported primary EPS with basic EPS which is
calculated by dividing reported earnings available to common shareholders
by the weighted average shares outstanding. No dilution for potentially
dilutive securities is included in basic EPS. Previously reported fully
diluted EPS is called diluted EPS which includes all potentially dilutive
securities.
(3) Debt
Line of Credit
On January 16, 1996, the Company entered into a loan agreement with
Norwest Bank Texas, N.A. ("Norwest") that provided 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 bore interest at the Norwest Bank Minnesota, National Association
base rate and the interest was payable monthly. The loan agreement had an
extended maturity date of April 15, 1998, at which time, the outstanding
principal and all of the accrued and unpaid interest were due and payable.
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<PAGE> 13
In August, 1996, the Company entered into a second loan agreement with
Norwest. The second loan agreement provided 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 bore interest at
the Norwest base rate and the interest was payable monthly. The line of
credit had an extended maturity date of April 15, 1998, at which time, the
principal amount outstanding was due and payable, plus any accrued and
unpaid interest. The borrowings under both loan agreements were paid in
full in February, 1997.
On May 26, 1998, the Company renewed and extended the prior loan
agreements with Norwest. The amended and restated loan agreement provides
for a revolving line of credit equal to the lesser of $5,000,000 or one-
third of the "borrowing base amount". The borrowing base is redetermined
by Norwest within 45 days after the end of each fiscal quarter of the
Company. At September 30, 1998, the borrowing base was $21,249,950.
Borrowings under the line of credit are secured by the Company's drilling
rigs and related equipment, accounts receivable and inventory. Borrowings
bear interest at Norwest's base rate and interest is payable monthly. The
Company did not have any borrowings outstanding at September 30, 1998. All
amounts outstanding under the loan agreement mature on May 26, 2000.
(4) Stockholders' Equity
1984 Stock Option Plan
In August 1984, the Company adopted the 1984 Stock Option Plan (the
"Plan") which initially authorized 375,000 shares of the Company's common
stock to be issued as either incentive stock options or nonqualified stock
options. This Plan was amended in August 1986 to increase the authorized
shares to 475,000 shares of the Company's common stock. In January 1988,
the Plan was amended to reduce the option price on certain options issued
prior to March 31, 1986, to reflect the then current fair market value of
the Company's common stock. The Plan provides that options may be granted
to key employees or directors for various terms at a price not less than
the fair market value of the shares on the date of the grant. Options to
purchase 100,000 shares of common stock are currently outstanding under the
Plan. All of these options are earned and exercisable at September 30,
1998. No additional shares are available for grant as the Plan expired by
its own terms in August 1994. The options that were granted prior to the
expiration of the Plan, and which are outstanding, remain subject to the
terms of the Plan.
1994 Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan") which authorized the grant of options to purchase up to
750,000 shares of the Company's common stock. These options may be issued
as either incentive or nonqualified stock options. The 1994 Plan provides
that options may be granted to key employees (including officers and
directors who are also key employees) for various terms at a price not less
than the fair market value of the shares on the date of grant. The 1994
Plan was ratified and approved by the stockholders at the Company's annual
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<PAGE> 14
meeting of stockholders held on August 30, 1994. In September 1998,
options outstanding under the plan were amended to reduce the option price
to $4.125 per share.
On September 3, 1996, the Company granted 465,000 shares of
nonqualified stock options to key employees under the 1994 Plan. The
following sets forth certain information concerning these nonqualified
options.
Number Option Price
of -------------------
Shares Per Share Total
------ -------------------
Outstanding March 31, 1998 337,500 $ 7.75 $ 2,615,625
Forfeited (5,000) $ 7.75 $ (38,750)
Reduction in option price -- $(3.625) $(1,205,312)
------- ----- ---------
Outstanding September 30,
1998 332,500 $4.125 $1,371,563
======= ===== =========
All of the nonqualified stock options granted on September 3, 1996 are
earned and exercisable as of May 1, 1997.
On September 1, 1998, the Company granted 240,000 shares of incentive
stock options at a price of $4.125 to key employees under the 1994 Plan.
On March 9, 1999, 140,000 shares will be earned and exercisable. The
remaining 100,000 shares will become earned and exercisable over a three
year period.
1998 Stock Option Plan
In September 1998, the Company adopted, subject to shareholder
approval, its 1998 Stock Option Plan (the "1998 Plan") which authorizes the
grant of options to purchase up to 750,000 shares of the Company's common
stock. These options may be issued as either incentive or nonqualified
stock options. The 1998 Plan provides that options may be granted to key
employees or directors from various terms at a price not less than the fair
market value of the shares on the date of grant. The Company granted
options to purchase 50,000 shares of common stock to two outside directors
under the 1998 Plan. These nonqualified options were granted at $4.125 per
share and are exercisable on the date on which the shareholders of the
Company approve and adopt the 1998 Plan.
In connection with a private placement completed in February 1997, the
Company issued and currently has outstanding a warrant to purchase 36,250
common shares with an exercise price of $13.20 per share. This warrant
became exercisable on February 17, 1998 and expires on February 17, 2002.
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<PAGE> 15
(6) Employee Benefits
Effective May 1, 1995, the Company established the TMBR/Sharp
Drilling, Inc. Employee Retirement Plan which is a 401(K) profit sharing
plan. Company contributions are discretionary and have been currently set
at 25% for each dollar contributed by each eligible employee, limited,
however, to a maximum of 5% of the employee's compensation.
(7) Contingencies
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
(8) Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for the way public enterprises are to report information about
operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for periods
beginning after December 15, 1997, at which time the Company will adopt the
provision. This statement is not anticipated to have a material impact on
the Company's financial disclosures.
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<PAGE> 16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to historical information, this discussion contains
certain forward-looking statements that involve risks and uncertainties
about the business, long-term strategy, financial condition and future of
the Company. Factors that may affect future results are included in the
discussion below and in Part I, Items 1 and 2 of the Company's Form 10-K
for the year ended March 31, 1998. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to have been
correct, and actual results could differ materially from those forward-
looking statements.
Results of Operations
Total revenues were $3,799,000 and $10,567,000 for the three and six
months ended September 30, 1998 which represents a 61% and 46% decrease
from the same periods in 1997. Operating expenses as a percent of revenues
were 113% and 99% for the three and six months ended September 30, 1998
versus 81% and 78% for the same periods of the prior year. The operating
results were negatively affected by a decrease in demand for the Company's
contract drilling services which resulted in a decrease in rig utilization
rates. The Company has also experienced a decrease in the average price
received for its contract drilling services. Rig utilization rates were
29% and 38% for the three and six months ended September 30, 1998 compared
to 83% and 82% in the same periods in 1997.
Oil and gas revenues increased by approximately 19% for the three
months ended September 30, 1998 and increased by approximately 5% for the
six months ended September 30, 1998. In fiscal 1998, the Company sold a
group of fourteen wells in Ector County, Texas. These wells had high
lifting costs on an equivalent barrel of oil ("EBO") basis. As a result of
this sale, oil and gas production expenses for the three and six months
ended September 30, 1998 decreased by 33% and 23%, respectively, when
compared to the same periods in the prior year.
In fiscal 1998, the Company recognized a non-cash charge of
approximately $3.1 million due to a writedown of the carrying value of its
oil and gas properties. As a result of this writedown, depreciation,
depletion and amortization expense decreased by approximately 22% and 18%
respectively when compared to the three and six months ended September 30,
1997.
In September 1997, the Company recognized approximately $659,000 as
miscellaneous income relating to the settlement of a lawsuit. In addition,
the Company recorded approximately $236,000 of miscellaneous income from
the sale of junk drill bits in the same quarter.
Net working capital was $6.1 million at September 30, 1998 compared to
$6.0 million at March 31, 1998.
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<PAGE> 17
Liquidity and Capital Resources
In January 1996, the Company entered into a loan agreement with
Norwest providing for a revolving credit facility (the "Credit Facility")
originally maturing on January 15, 1998. The aggregate principal amount of
the Company's borrowings outstanding at any one time under the revolving
facility was limited to the lesser of $3.0 million or one-third of the
borrowing base amount then in effect. The borrowing base amount was
redetermined by Norwest monthly. The Credit Facility was established to
finance the Company's purchases of drill pipe and oil and gas exploration
activities. Interest only was payable monthly and the entire principal
amount was due and payable on January 15, 1998, which was extended to April
15, 1998. The Credit Facility bore interest at Norwest's base rate and was
secured by substantially all of the Company's accounts receivable, drilling
rigs and related equipment.
In August 1996, the Company entered into a second loan agreement with
Norwest. This second loan agreement provided 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 bore interest at
Norwest's base rate, with interest only to be paid monthly. The original
maturity date of February 15, 1998, was extended to April 15, 1998. At
that time the principal amount then outstanding was due and payable, plus
any accrued and unpaid interest.
On May 26, 1998, the Company renewed, extended and consolidated the
prior loan facilities with Norwest. The amended and restated loan
agreement provides for a revolving line of credit equal to the lesser of
$5.0 million or one-third of the "borrowing base amount". The borrowing
base is redetermined by Norwest within 45 days after the end of each fiscal
quarter of the Company. At September 30, 1998, the borrowing base was
$21.2 million. Borrowings under the line of credit are secured by the
Company's drilling rigs and related equipment, accounts receivable and
inventory. Borrowings bear interest at Norwest's base rate and interest is
payable monthly. The Company did not have any borrowings outstanding at
September 30, 1998. All amounts outstanding under the loan facility mature
on May 26, 2000.
The Company anticipates that funds for its capital expenditures in
fiscal 1999 will be available from a combination of sources, including (i)
borrowings under the line of credit, (ii) funds raised through issuances of
equity or debt securities in public or private transactions, and (iii)
internally generated funds.
Trends and Prices
Although the Company achieved record growth, profitability and rig
utilization in fiscal 1998, the contract drilling industry is currently
experiencing decreased demand and declining prices for contract drilling
services due to the declines in oil and gas prices. The Company has and
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<PAGE> 18
will continue to be affected by oil and gas industry conditions but cannot
predict either the future level of demand for its contract drilling
services or future conditions in the contract drilling industry.
In recent years, oil and gas prices have been extremely volatile.
Prices are affected by market supply and demand factors as well as by
actions of state and local agencies, the U.S. and foreign governments and
international cartels. The Company has no way of accurately predicting the
supply of and demand for oil and gas, domestic or international political
events or the effects of any such factors on the prices received by the
Company for its oil and gas.
Year 2000 Issues
The Company has reviewed the effect of the year 2000 issues relating
to its information systems. At September 30, 1998, the Company had
completed updating and testing its information systems for year 2000
compliance and has determined that the year 2000 issues directly related
to its information systems will not have a material impact on its business,
operations nor its financial position. The cost of planning, implementing
and testing the Company's information systems was minimal and immaterial to
its operations as a whole.
The Company believes that its greatest risk for year 2000 issues that
may adversely effect the Company's operations is in the area of third party
computer systems that are not year 2000 compliant and which, as a result,
may cause interruptions in the Company's normal business operations. The
Company does not currently have any information concerning the year 2000
compliance status of its vendors, customers and local, state, federal and
other U.S. government entities. In the event that any of the Company's
significant vendors, customers and local, state, federal and other U.S.
government entities do not successfully and timely achieve year 2000
compliance, the Company's business, operations or financial position could
be adversely affected. With respect to the uncertainty of the impact on the
Company of third party vendors, suppliers and customers not being year 2000
compliant, the Company intends to send inquiries to third parties having
significant relationships with the Company. Depending upon the responses
to the inquiries and the outcome of the Company's assessment of such third
parties' state of readiness for the year 2000, the Company will then
address remediation alternatives. The Board of Directors has formed a
committee to assist the Company in its year 2000 efforts.
PART TWO - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
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<PAGE> 19
Item 4. Submission of matters to a vote of security holders.
The Company's annual meeting of stockholders was held on August 28,
1998. At the meeting, the following persons were elected to serve as
Directors of the Company until the 1999 annual meeting of stockholders and
until their respective successors are duly qualified and elected: (1)
Thomas C. Brown, (2) Donald L. Evans, (3) David N. Fitzgerald and (4) Joe
G. Roper.
Set forth below is a tabulation of votes with respect to each nominee
for Director:
<TABLE>
<CAPTION>
Votes Votes
Cast Cast Votes Broker
Name For Against Withheld Abstentions Non-Votes
---- ----- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Thomas C. Brown 4,156,633 18,171 -- -- --
Donald L. Evans 4,156,659 18,145 -- -- --
David N. Fitzgerald 4,156,659 18,145 -- -- --
Joe G. Roper 4,156,659 18,145 -- -- --
</TABLE>
No other matters were voted upon at the annual meeting.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibits:
10.1 - 1998 Stock Option Plan
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
-19-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TMBR/SHARP DRILLING, INC.
November 12, 1998 By: /s/ Patricia R. Elledge
----------------- -------------------------
Date Patricia R. Elledge
Controller/Treasurer
(Ms. Elledge is the Chief Financial
Officer and has been duly authorized
to sign on behalf of the Registrant)
-20-
<PAGE> 21
Exhibit Index
Exhibit
Number Description
------- -----------
10.1 1998 Stock Option Plan
27 Financial Data Schedule
-21-
<PAGE> 22
TMBR/SHARP DRILLING, INC.
1998 STOCK OPTION PLAN
I. Purpose of the Plan
The TMBR/Sharp Drilling, Inc. 1998 Stock Option Plan (the "Plan") is
intended to provide a means whereby certain key employees (including
officers and directors who are also key employees) and directors who are
not employees ("Nonemployee Directors"), of TMBR/Sharp Drilling, Inc., a
Texas corporation (the "Company"), and its subsidiaries may develop a sense
of proprietorship and personal involvement in the development and financial
success of the Company, and to encourage them to remain with and devote
their best efforts to the business of the Company, thereby advancing the
interests of the Company and its shareholders. Accordingly, the Plan
provides for granting certain key employees and Nonemployee Directors (in
each case, "Optionee") the option ("Option") to purchase shares of the
common stock of the Company ("Stock"), as hereinafter set forth. Options
granted under the Plan to key employees may be either incentive stock
options ("Incentive Stock Options") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or options
which do not constitute Incentive Stock Options. Options granted under the
Plan to Nonemployee Directors will be options which do not constitute
Incentive Stock Options.
II. Administration
The Plan shall be administered by the Board of Directors of the
Company (the "Board") or by a committee (the "Committee") of two or more
directors of the Company appointed by the Board. If a Committee is not
appointed by the Board, the Board shall act as and be deemed to be the
Committee for all purposes of the Plan. The Committee shall have sole
authority (within the limitations described herein) to select the key
employees and Nonemployee Directors who are to be granted Options from
among those eligible hereunder and to establish the number of shares which
may be issued to key employees and Nonemployee Directors under each Option
and to prescribe the form of the agreement embodying awards of Options.
The Committee is authorized to interpret the Plan and may from time to time
adopt such rules and regulations, consistent with the provisions of the
Plan, as it may deem advisable to carry out the Plan. All decisions made
by the Committee in selecting the key employees and Nonemployee Directors
to whom Options shall be granted, in establishing the number of shares
which may be issued to key employees and Nonemployee Directors under each
Option and in construing the provisions of the Plan shall be final. No
member of the Board shall be liable for anything done or omitted to be done
by such member or by any other member of the Board in connection with the
Plan, except for such member s own willful misconduct.
-22-
<PAGE> 23
III. Option Agreements; Terms and Conditions
Each Option granted under the Plan shall be evidenced by a written
stock option agreement and shall contain such terms and conditions, and may
be exercisable for such periods, as the Committee shall prescribe from time
to time in accordance with this Plan, and shall comply with the following
terms and conditions:
(a) The Option exercise price shall be the fair market value of the
Stock subject to the Option on the date the Option is granted. For all
purposes under the Plan, the fair market of a share of Stock on a
particular date shall be equal to the average of the high and low sales
prices of the Stock on the date of grant as reported on the Nasdaq National
Market tier of The Nasdaq Stock Market ("NMS"), or on the stock exchange
composite tape if the Stock is traded on a national stock exchange on that
date, or if no prices are reported on that date, on the last preceding date
on which such prices of the Stock are so reported. If the Stock is not
traded on the NMS or other stock exchange on that date, but is otherwise
traded over the counter at the time a determination of its fair market
value is required to be made hereunder, its fair market value shall be
deemed to be equal to the average between the reported high and low or
closing bid and asked prices of the Stock on the most recent date on which
the Stock was publicly traded. If the Stock is not publicly traded at the
time a determination of its value is required to be made hereunder, the
determination of its fair market value shall be made by the Committee in
such manner as it deems appropriate.
(b) Each Option and all rights granted thereunder shall not be
transferable otherwise than by will or the laws of descent and
distribution, and may be exercised only by the Optionee during the
Optionee s lifetime and while the Optionee remains employed by the Company
or as a director of the Company, as the case may be, except that: (i) if
the Optionee ceases to be an employee or director of the Company, as the
case may be, because of disability, the Option may be exercised in full by
the Optionee (or the Optionee s estate or the person who acquires the
Option by will or the laws of descent and distribution or otherwise by
reason of the death of the Optionee) at any time during the period of one
year following such termination; (ii) if the Optionee dies while he is an
employee or director of the Company, as the case may be, the Optionee s
estate, or the person who acquires the Option by will or the laws of
descent and distribution or otherwise by reason of the death of the
Optionee, may exercise the Option in full at any time during the period of
one year following the date of the Optionee s death; and (iii) if the
Optionee ceases to be an employee or director of the Company for any reason
other than as described in clause (i) or (ii) above, unless the Optionee is
removed for cause, the Option may be exercised by the Optionee at any time
during the period of three months following the date the Optionee ceases to
be an employee or director of the Company, as the case may be, or by the
Optionee s estate (or the person who acquires the Option by will or the
laws of descent and distribution or otherwise by reason of the death of the
Optionee) during a period of one year following the Optionee s death if the
Optionee dies during such three-month period, but in each case only as to
-23-
<PAGE> 24
the number of shares the Optionee was entitled to purchase hereunder upon
exercise of the Option as of the date the Optionee ceases to be an employee
or director of the Company, as the case may be.
(c) The Option shall not be exercisable in any event after the
expiration of ten years from the date of grant.
(d) The purchase price of shares as to which the Option is exercised
shall be paid in full at the time of exercise (a) in cash, (b) by
delivering to the Company shares of Stock having a fair market value on the
date of delivery equal to the purchase price, or (c) any combination of
cash or Stock, as shall be established by the Committee. Unless and until
a certificate or certificates representing such shares shall have been
issued by the Company to the Optionee, the Optionee (or the person
permitted to exercise the Option in the event of the Optionee s death)
shall not be or have any of the rights or privileges of a shareholder of
the Company with respect to shares acquirable upon an exercise of the
Option.
(e) The terms and conditions of the respective stock option
agreements need not be identical.
IV. Eligibility of Optionee
(a) Subject to the provisions of paragraph (b) below, Options may be
granted to individuals who are key employees (including officers and
directors who are also key employees) and Nonemployee Directors of the
Company or any parent or subsidiary corporation (as defined in Section 424
of the Code) of the Company at the time the Option is granted. Options may
be granted to the same Optionee on more than one occasion.
(b) No Incentive Stock Option shall be granted to an individual if,
at the time the Option is granted, such individual owns stock possessing
more than 10% of the total combined voting power of all classes of stock of
the Company or of its parent or subsidiary corporation, within the meaning
of Section 422(b)(6) of the Code, unless (i) at the time such Option is
granted the option price is at least 110% of the fair market value of the
Stock subject to the Option and (ii) such Option by its terms is not
exercisable after the expiration of five years from the date of grant. To
the extent that the aggregate fair market value (determined at the time the
respective Incentive Stock Option is granted) of stock with respect to
which Incentive Stock Options are exercisable for the first time by an
individual during any calendar year under all incentive stock option plans
of the Company and its parent and subsidiary corporations exceeds $100,000,
such Incentive Stock Options shall be treated as options which do not
constitute Incentive Stock Options. The Committee shall determine, in
accordance with applicable provisions of the Code, Treasury Regulations and
other administrative pronouncements, which of an employee Optionee's
Incentive Stock Options will not constitute Incentive Stock Options because
of such limitation and shall notify the employee Optionee of such
determination as soon as practicable after such determination.
-24-
<PAGE> 25
V. Shares Subject to the Plan
The aggregate number of shares which may be issued under Options
granted under the Plan shall not exceed 750,000 shares of Stock. Such
shares may consist of authorized but unissued shares of Stock or previously
issued shares of Stock reacquired by the Company. Any of such shares which
remain unissued and which are not subject to outstanding Options at the
termination of the Plan shall cease to be subject to the Plan, but, until
termination of the Plan, the Company shall at all times make available a
sufficient number of shares to meet the requirements of the Plan. Should
any Option hereunder expire or terminate prior to its exercise in full, the
shares theretofore subject to such Option may again be subject to an Option
granted under the Plan. The aggregate number of shares which may be issued
under the Plan shall be subject to adjustment in the same manner as
provided in Article VII hereof with respect to shares of Stock subject to
Options then outstanding. Exercise of an Option in any manner shall result
in a decrease in the number of shares of Stock which may thereafter be
available, both for purposes of the Plan and for sale to any one
individual, by the number of shares as to which the Option is exercised.
Separate stock certificates shall be issued by the Company for those shares
acquired pursuant to the exercise of an Incentive Stock Option and for
those shares acquired pursuant to the exercise of any Option which does not
constitute an Incentive Stock Option.
VI. Options Exchanged for Prior Options
An Option may granted in exchange for an individual's right and option
to purchase shares of Stock pursuant to the terms of an agreement that
existed prior to the date such Option is granted ("Prior Option"). An
Option agreement that grants an Option in exchange for a Prior Option shall
provide for the surrender and cancellation of the Prior Option. The
purchase price of Stock issued under an Option granted in exchange for a
Prior Option shall be determined by the Committee and, such purchase price
may, without limitation, be equal to the price for which the Optionee could
have purchased Stock under the Prior Option.
VII. Term of Plan
(a) The Plan shall be effective upon the date of its approval and
adoption by the Board, but no Option granted under the Plan shall become
exercisable, and no shares of Stock shall be issued, unless and until the
Plan shall have been approved by the Company's shareholders. If such
shareholder approval is not obtained within twelve months after the date of
the Board's adoption of the Plan, then all Options previously granted under
the Plan shall terminate and no further Options shall be granted. Subject
to such limitation, the Committee may grant Options under the Plan at any
time after the effective date and before the date fixed herein for
termination of the Plan.
(b) Except with respect to Options then outstanding, if not sooner
-25-
<PAGE> 26
terminated under the provisions of Subparagraph (a) above or Article IX,
the Plan shall terminate upon and no further Options shall be granted after
the expiration of ten years from the date of its adoption by the Board.
VIII. Recapitalization or Reorganization
(a) The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of debt or
equity securities ahead of or affecting the Stock or the rights thereof,
the dissolution or liquidation of the Company or any sale, lease, exchange
or other disposition of all or any part of its assets or business or any
other corporate act or proceeding.
(b) The shares with respect to which Options may be granted are
shares of Stock as presently constituted, but if, and whenever, prior to
the expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Stock or the payment of a stock
dividend on Stock without receipt of consideration by the Company, the
number of shares of Stock with respect to which such Option may thereafter
be exercised (i) in the event of an increase in the number of outstanding
shares shall be proportionately increased, and the purchase price per share
shall be proportionately reduced, and (ii) in the event of a reduction in
the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore granted
the Optionee shall be entitled to purchase under such Option, in lieu of
the number of shares of Stock as to which such Option shall then be
exercisable, the number and class of shares of stock and securities to
which the Optionee would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to such recapitalization, the
Optionee had been the holder of record of the number of shares of Stock as
to which such Option is then exercisable. If (i) the Company shall not be
the surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of
the Company), (ii) the Company sells, leases or exchanges or agrees to
sell, lease or exchange all or substantially all of its assets to any other
person or entity (other than a wholly-owned subsidiary of the Company),
(iii) the Company is to be dissolved and liquidated, (iv) any person or
entity, including a "group" as contemplated by Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of
the outstanding shares of Stock, or (v) as a result of or in connection
with a contested election of directors, the persons who were directors of
the Company before such election shall cease to constitute a majority of
the Board (each such event, a "Corporate Change"), then effective as of a
date selected by the Committee, the Committee acting in its sole discretion
without the consent or approval of any Optionee, shall effect one or more
-26-
<PAGE> 27
of the following alternatives with respect to the then outstanding Options
held by Optionees, which may vary among individual Optionees: (1)
accelerate the time at which such Options may be exercised so that such
Options may be exercised in full on or before a specified date (before or
after such Corporate Change) fixed by the Committee, after which specified
date all unexercised Options and all rights of Optionees thereunder shall
terminate, (2) require the mandatory surrender to the Company by selected
Optionees of some or all of such Options (irrespective of whether such
Options are then exercisable under the provisions of the Plan) as of a
date, before or after such Corporate Change, specified by the Committee, in
which event the Committee shall thereupon cancel such Options and pay to
each Optionee an amount of cash per share equal to the excess of the amount
calculated in Subparagraph (d) below (the "Change of Control Value") of the
shares subject to such Option over the exercise price(s) under such Options
for such shares, (3) make such adjustments to such Options as the Committee
deems appropriate to reflect such Corporate Change, (4) make no adjustments
to such Options as the Committee may determine in its sole discretion or
(5) provide that thereafter upon any exercise of an Option theretofore
granted the Optionee shall be entitled to purchase under such Option, in
lieu of the number of shares of Stock as to which such Option shall then be
exercisable, the number and class of shares of stock or other securities or
property to which the Optionee would have been entitled pursuant to the
terms of the agreement of merger, consolidation or sale of assets and
dissolution if, immediately prior to such merger, consolidation or sale of
assets and dissolution, the Optionee had been the holder of record of the
number of shares of Stock as to which such Option is then exercisable.
(d) For the purposes of clause (2) in paragraph (c) above, the
"Change of Control Value" shall equal the amount determined in clause (i),
(ii) or (iii), whichever is applicable, as follows: (i) the per share
price offered to shareholders of the Company in any such merger,
consolidation, sale of assets or dissolution transaction, (ii) the price
per share offered to shareholders of the Company in any tender offer or
exchange offer whereby a Corporate Change takes place, or (iii) if such
Corporate Change occurs other than pursuant to a tender or exchange offer,
the fair market value per share of the shares into which such Options being
surrendered are exercisable, as determined by the Committee as of the date
determined by the Committee to be the date of cancellation and surrender of
such Options. In the event that the consideration offered to shareholders
of the Company in any transaction described in this Subparagraph (d) or
Subparagraph (c) above consists of anything other than cash, the Committee
shall determine the fair cash equivalent of the portion of the
consideration offered which is other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above
shall be subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into
shares of stock of any class, for cash, property, labor or services, upon
direct sale, upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Company convertible into
such shares or other securities, and in any case whether or not for fair
-27-
<PAGE> 28
value, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number of shares of Stock subject to Options
theretofore granted or the purchase price per share.
IX. Amendment or Termination of the Plan
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted.
The Board shall have the right to alter or amend the Plan or any part
thereof from time to time, provided, that no change in any Option
theretofore granted may be made which would impair the rights of the
Optionee without the consent of such Optionee.
X. Miscellaneous Provisions
(a) Neither the Plan nor any action taken hereunder shall be
construed as giving any key employee or Nonemployee Director any right to
be retained in the service of the Company or the right to have an Option
granted to such person.
(b) An Optionee's rights and interest under the Plan may not be
assigned or transferred in whole or in part either directly or by operation
of law or otherwise (except in the event of an Optionee s death or
disability, by will or the laws of descent and distribution, all as
provided in Article III), including, but not by way of limitation,
execution, levy, garnishment, attachment, pledge, bankruptcy, or in any
other manner, and no such right or interest of any participant in the Plan
shall be subject to any obligation or liability of such participant.
(c) No shares of Stock shall be issued hereunder unless counsel for
the Company shall be satisfied that such issuance will be in compliance
with applicable Federal, state, and other securities laws and regulations.
(d) It shall be a condition to the obligation of the Company to issue
shares of Stock upon exercise of an Option, that the Optionee (or any
beneficiary or person entitled to act under or through Optionee as provided
herein) pay to the Company, upon its demand, such amount as may be
requested by the Company for the purpose of satisfying any liability to
withhold Federal, state, local, or foreign income or other taxes. If the
amount requested is not paid, the Company may refuse to issue shares of
Stock.
(e) By accepting any Option under the Plan, each Optionee and each
person claiming under or through such person shall be conclusively deemed
to have indicated his or her acceptance and ratification of, and consent
to, any action taken under the Plan by the Company, the Board or the
Committee.
-28-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2662
<SECURITIES> 87
<RECEIVABLES> 6186
<ALLOWANCES> 1135
<INVENTORY> 123
<CURRENT-ASSETS> 9734
<PP&E> 69448
<DEPRECIATION> 55496
<TOTAL-ASSETS> 23860
<CURRENT-LIABILITIES> 3649
<BONDS> 0
0
0
<COMMON> 598
<OTHER-SE> 19613
<TOTAL-LIABILITY-AND-EQUITY> 23860
<SALES> 0
<TOTAL-REVENUES> 3799
<CGS> 0
<TOTAL-COSTS> 4298
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (432)
<INCOME-TAX> 9
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (423)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
