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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended March 31, 1998 Commission File Number 0-12757
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(No Fee Required)
TMBR/SHARP DRILLING, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
(State of Incorporation) (I.R.S. Employer Identification No.)
4607 WEST INDUSTRIAL BLVD., MIDLAND, TEXAS 79703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (area code) (915) 699-5050
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (X)
The aggregate market value of voting stock held by nonaffiliates of
the registrant at June 10, 1998 was approximately $36,429,232.
At June 10, 1998, there were 4,710,886 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 28, 1998.
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TMBR/SHARP DRILLING, INC.
FORM 10-K
TABLE OF CONTENTS
Part I Page
Item 1. Business . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 18
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . 19
Item 6. Selected Financial Data . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data . . 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 54
Part III
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . 54
Item 11. Executive Compensation . . . . . . . . . . . . . 55
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 55
Item 13. Certain Relationships and Related Transactions . 55
Part IV and signatures
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . 56
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 60
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PART I
Item 1. BUSINESS
General
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the
laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In
August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The principal executive offices of the Company are located at 4607
West Industrial Blvd., Midland, Texas, 79703 and its telephone number is
(915) 699-5050.
The Company is engaged in two lines of business, which include the
domestic onshore contract drilling of oil and gas wells, and the
acquisition, exploration for, development, production and sale of oil and
natural gas.
The Company provides domestic onshore contract drilling services to
major and independent oil and gas companies. The Company focuses its
operations in the Permian Basin of west Texas and eastern New Mexico. In
addition to its drilling rigs, the Company provides the crews and most of
the ancillary equipment used in the operation of its drilling rigs. Rig
utilization for the fiscal year ended March 31, 1998 was approximately 78%
compared to 52% for the year ended March 31, 1997.
The Company owns 17 drilling rigs, of which 2 were operating on behalf
of the Company for its own account, 6 of which were operating for non-
affiliated oil producers, and 9 were "stacked" (non-operating) at June 22,
1998. All of the Company's rigs are operational and actively marketed in
the Permian Basin of west Texas and eastern New Mexico. The Company
markets its contract drilling services to both major oil companies and
independent oil producers. The depth capabilities of the Company's rigs
range from 8,500 feet to 30,000 feet.
An onshore drilling rig consists of engines, drawworks, mast, pumps to
circulate drilling fluids, blowout preventers, the drillstring and related
equipment. The size and type of rig utilized for each drilling project
depends upon the location of the well, the well depth and equipment
requirements specified in the drilling contract, among other factors.
The Company believes it has established a reputation for reliability,
high quality equipment and well-trained crews. The Company continually
seeks to modify and upgrade its equipment to maximize the performance and
capabilities of its drilling rig fleet, which the Company believes provides
it with a competitive advantage. The Company has the capability to design,
repair and modify its drilling rig fleet from its principal support and
storage facilities in Midland, Texas, and an additional storage yard in
Odessa, Texas.
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The Company's oil and gas exploration and production operations
complement its onshore drilling operations. These activities are focused
in the mature producing regions in the Permian Basin. Oil and gas
operations comprised approximately 6% of the Company's revenues for the
fiscal year ended March 31, 1998. The Company's proved reserves, all of
which were proved developed producing, were approximately 919 MBOE (million
barrels of oil equivalent) and had a present value of future net revenues
of approximately $4.7 million at March 31, 1998. At March 31, 1998, the
Company owned interests in approximately 18,818 gross (2,464 net) acres of
developed oil and gas properties, and approximately 7,207 gross (454 net)
acres of undeveloped properties.
The Company has no material patents, licenses, franchises, or
concessions which it considers significant to its operations.
The nature of the Company's business is such that it does not maintain
or require a "backlog" of products, customer orders, or inventory.
The Company's operations are not subject to renegotiation of profits
or termination of contracts at the election of the federal government.
The Company has not been a party to any bankruptcy, receivership,
reorganization, adjustment, or similar proceeding.
Generally, the Company's business activities are not seasonal in
nature. However, weather conditions can hinder drilling activities.
CONTRACT DRILLING OPERATIONS
Drilling Rigs
The following table sets forth the type and depth capabilities of the
Company's 17 onshore drilling rigs.
Rig No. Depth Capacity Type
2 8,500 Weiss W-45
3* 8,500 Weiss W-45
4 8,500 Unit 15
6 12,500 National 75A
7 10,000 Unit 15
10 12,500 National 75A
12 11,500 National 50A
14 12,500 BDW 650
17* 9,500 Unit 15
22* 13,500 Brewster N-75
23* 13,500 National 75A
24* 13,500 Gardner Denver 700
27* 13,500 Gardner Denver 700
28* 16,000 Gardner Denver 800
29 16,000 Gardner Denver 800
55* 30,000 Gardner Denver DW-2100
56 20,000 National 110-M
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*In active operation at June 22, 1998.
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Major overhauls, repairs and general maintenance for the drilling rigs
are primarily conducted at the Company's principal support and storage
facilities in Midland, Texas. The Company emphasizes the maintenance and
periodic improvement of its drilling equipment and believes that its rigs
are generally in good condition. See "Item 2. Properties".
Drilling Contracts
The Company's drilling contracts are usually obtained through
competitive bidding or as a result of direct negotiations with customers.
Drilling contracts typically obligate the Company to pay all expenses
associated with drilling an oil or gas well, including wages of drilling
personnel, maintenance expenses and incidental purchases of rig supplies
and equipment. The majority of the Company's contracts are "footage"
contracts with the remainder being "daywork" or "turnkey" contracts. Under
a footage contract, the Company charges an agreed price per foot of hole
drilled, whereas a day-work contract permits the Company to charge a per
diem fixed rate for each day the rig is in operation. A turnkey contract
specifies a total price for drilling a well plus providing other services,
materials or equipment which are typically the responsibility of the
operator under footage or daywork contracts. Prices for all contracts vary
depending on the location, depth, duration, complexity of the well to be
drilled, operating conditions and other factors peculiar to each proposed
well. Under footage and turnkey contracts, the Company manages the
drilling operation and the type of equipment to be used, subject to certain
customer specifications. The Company also bears the risk and expense of
mechanical malfunctions, equipment shortages, and other delays arising from
problems caused in drilling a well. Daywork contracts permit the operator
of the well to manage drilling operations and to specify the type of
equipment to be used. Under daywork contracts, the Company generally bears
none of the risk due to time delays caused by unforeseeable circumstances
such as stuck or broken drill pipe or blowouts. Of the 8 rigs working at
June 22, 1998, 5 were subject to daywork contracts, 2 were subject to
footage contracts, and one was subject to a turnkey contract.
The Company's operations are subject to many hazards, including well
blowouts and fires that could cause personal injury, suspension of drilling
operations, damage to or destruction of equipment and damage to producing
formations and surrounding areas. The Company believes it is adequately
insured for public liability and damage to the property of others resulting
from its operations.
Rig Utilization
The Company's contract drilling revenues depend upon the utilization
of its drilling rigs and the contract rates received for its drilling
operations. These two factors are affected by a number of variables,
including competitive conditions in the drilling industry and the level of
exploration and development activity conducted by oil and gas producers at
any given time. The level of domestic drilling activity has historically
fluctuated and cannot be accurately predicted because of numerous factors
affecting the petroleum industry, including oil and gas prices and the
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degree of government regulation of the industry. Contract drilling
revenues and rig utilization rates for the past five years are set forth
below.
Contract Drilling
Year Ended Revenues Number of Percent of
March 31, (in thousands) Rigs Owned Utilization
1994 $ 18,359 15 47.6%
1995 18,357 15 43.5%
1996 21,298 15 45.1%
1997 18,483 15 51.6%
1998 34,891 17(a) 78.2%
____________________
(a) Of the total number of rigs owned, one was owned only for a
portion of the fiscal year ended March 31, 1998.
Customers
During the fiscal year ended March 31, 1998, the Company drilled a
total of 157 wells for approximately 29 customers. The following table
sets forth certain information with respect to the principal customers for
the Company's contract drilling services during such period.
Percent of Number of
Wells
Name of Customer Total Revenues Drilled
Titan Resources I, Inc. 13% 15
Penwell Energy, Inc. 12% 8
Rand Paulson Oil Company, Inc. 9% 12
The loss of any one or more of the above customers could have a
material adverse effect on the Company, depending upon the demand for the
Company's drilling rigs at the time of such loss and the Company's ability
to attract new customers.
Competition
The Company encounters substantial competition from other drilling
contractors in its contract drilling operations. The Company's principal
market areas of west Texas and eastern New Mexico are highly fragmented and
competitive. Companies compete primarily on the basis of contract rates,
suitability and availability of equipment and crews, experience of drilling
in certain areas, and reputation. The Company believes it competes
favorably with respect to all of these factors. Competition is primarily
on a well-by-well basis and may vary significantly at any particular time.
Drilling rigs can be moved from one region to another in response to
perceived long-term changes in levels of activity. In recent years,
competition within the industry has been intense due to the oversupply of
rigs which resulted from the rig overbuilding during the peak drilling
years of 1980 and 1981, and the depressed demand resulting from lower oil
and gas prices and excess deliverability of natural gas.
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Employees
At June 5, 1998, the Company had 45 salaried employees and
approximately 182 hourly paid employees. Employees of the Company are not
covered by any collective bargaining agreements and the Company has never
experienced a strike or work stoppage. The Company considers its employee
relations to be satisfactory.
REGULATION
Oil and Gas
The Company's operations are regulated by certain federal and state
agencies. In particular, oil and gas production and related operations are
or have been subject to price controls, taxes and other laws relating to
the oil and gas industry. The Company cannot predict how existing laws and
regulations may be interpreted by enforcement agencies or court rulings,
whether additional laws and regulations will be adopted, or the effect such
changes may have on its business, financial condition or results of
operations.
The Company's oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by
federal, state and local agencies. Failure to comply with such rules and
regulations can result in substantial penalties. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business and
affects its profitability. Because such rules and regulations are
frequently amended or reinterpreted, the Company is unable to predict the
future cost or impact of complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of oil and
gas. Such states also have statutes or regulations addressing conservation
matters, including provisions for the unitization or pooling of oil and gas
properties, the establishment of maximum rates of production from oil and
gas wells and the regulation of spacing, plugging and abandonment of such
wells.
Sales of gas by the Company are not regulated and are made at market
prices. However, the Federal Energy Regulatory Commission ("FERC")
regulates interstate and certain intrastate gas transportation rates and
service conditions, which affect the marketing of gas produced by the
Company, as well as the revenues received by the Company for sales of such
production. Since the mid-1980s, FERC has issued a series of orders,
culminating in Order Nos. 636,636-A and 636-B ("Order 636"), that have
significantly altered the marketing and transportation of gas. Order 636
mandates a fundamental restructuring of interstate pipeline sales and
transportation service, including the unbundling by interstate pipelines of
the sales, transportation, storage and other components of the city-gate
sales services such pipelines previously performed. One of FERC's purposes
in issuing the orders was to increase competition within all phases of the
gas industry. Order 636 and subsequent FERC orders issued in individual
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pipeline restructuring proceedings have been the subject of appeals, the
results of which have generally been supportive of the FERC's open-access
policy. In 1996, the United States Court of Appeals for the District of
Columbia Circuit largely upheld Order No. 636, et seq. Because further
review of certain of these orders is still possible, and other appeals
remain pending, it is difficult to predict the ultimate impact of the
orders on the Company and its gas marketing efforts. Generally, Order 636
has eliminated or substantially reduced the interstate pipelines'
traditional role as wholesalers of gas, and has substantially increased
competition and volatility in gas markets. While significant regulatory
uncertainty remains, Order 636 may ultimately enhance the Company's ability
to market and transport its gas, although it may also subject the Company
to greater competition.
The sale of oil by the Company is not regulated and is made at market
prices. The price the Company receives from the sale of oil is affected by
the cost of transporting the product to market. Effective as of January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for interstate common carrier oil pipelines, which,
generally, would index such rates to inflation, subject to certain
conditions and limitations. These regulations could increase the cost of
transporting oil by interstate pipelines, although the most recent
adjustment generally decreased rates. These regulations have generally
been approved on judicial review. The Company is not able to predict with
certainty what effect, if any, these regulations will have on it, but,
other factors being equal, the regulations may, over time, tend to increase
transportation costs or reduce wellhead prices for oil.
The Company is required to comply with various federal and state
regulations regarding plugging and abandonment of oil and gas wells.
Environmental
Various federal, state and local laws and regulations governing the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, health and safety, affect the Company's
operations and costs. These laws and regulations sometimes require
governmental authorization before certain activities, limit or prohibit
other activities because of protected areas or species, impose substantial
liabilities for pollution related to Company operations or properties, and
provide penalties for noncompliance. In particular, the Company's
exploration and production operations, its activities in connection with
storage and transportation of oil and other liquid hydrocarbons, and its
use of facilities for treating, processing or otherwise handling
hydrocarbons and related exploration and production wastes are subject to
stringent environmental regulation. As with the industry generally,
compliance with existing and anticipated regulations increases the
Company's overall cost of business. While these regulations affect the
Company's capital expenditures and earnings, the Company believes that such
regulations do not affect its competitive position in the industry because
its competitors are similarly affected by environmental regulatory
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programs. Environmental regulations have historically been subject to
frequent change and, therefore, the Company is unable to predict the future
costs or other future impacts of environmental regulations on its future
operations. A discharge of hydrocarbons or hazardous substances into the
environment could subject the Company to substantial expense, including the
cost to comply with applicable regulations that require a response to the
discharge, such as containment or cleanup, claims by neighboring landowners
or other third parties for personal injury, property damage or their
response costs and penalties assessed, or other claims sought by regulatory
agencies for response cost or for natural resource damages.
The following are examples of some environmental laws that potentially
impact the Company and its operations.
Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends
provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and
other statutes as they pertain to prevention of and response to major oil
spills. The OPA subjects owners of facilities to strict, joint and
potentially unlimited liability for removal costs and certain other
consequences of an oil spill, where such spill is into navigable waters, or
along shorelines. In the event of an oil spill into such waters,
substantial liabilities could be imposed upon the Company. States in which
the Company operates have also enacted similar laws. Regulations are
currently being developed under the OPA and similar state laws that may
also impose additional regulatory burdens on the Company.
The FWPCA imposes restrictions and strict controls regarding the
discharge of produced waters, other oil and gas wastes, any form of
pollutant, and, in some instances, storm water runoff, into waters of the
United States. The FWPCA provides for civil, criminal and administrative
penalties for any unauthorized discharges and, along with the OPA, imposes
substantially potential liability for the costs of the removal, remediation
or damages resulting from an unauthorized discharge. State laws for the
control of water pollution also provide for civil, criminal and
administrative penalties and liabilities in the case of an unauthorized
discharge into state waters. The cost of compliance with the OPA and the
FWPCA have not historically been material to the Company's operations, but
there can be no assurance that changes in federal, state or local water
pollution control programs will not materially adversely effect the Company
in the future. Although no assurances can be given, the Company believes
that compliance with existing permits and compliance with foreseeable new
permit requirements will not have a material adverse effect on the
Company's financial condition or results of operations.
Air Emissions. Amendments to the Federal Clean Air Act enacted in
late 1990 (the "1990 CAA Amendments") require or will require most
industrial operations in the United States to incur capital expenditures in
order to meet air emissions control standards developed by the
Environmental Protection Agency ("EPA") and state environmental agencies.
Although no assurances can be given, the Company believes implementation of
the 1990 CAA Amendments will not have a material adverse effect on the
Company's financial condition or results of operations.
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Solid Waste. The Company generates non-hazardous solid wastes that
are subject to the requirements of the Federal Resource Conservation and
Recovery Act ("RCRA") and comparable state statutes. The EPA and the
states in which the Company operates are considering the adoption of
stricter disposal standards for the type of non-hazardous wastes generated
by the Company. RCRA also governs the generation, management, and disposal
of hazardous wastes. At present, the Company is not required to comply
with a substantial portion of the RCRA requirements because the Company's
operations generate minimal quantities of hazardous wastes. However, it is
anticipated that additional wastes, which could include wastes currently
generated during operations, could in the future be designated as
"hazardous wastes". Hazardous wastes are subject to more rigorous and
costly disposal and management requirements than are non-hazardous wastes.
Such changes in the regulations may result in additional capital
expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"), also known as "Superfund", imposes liability,
without regard to fault or the legality of the original act, on certain
classes of persons in connection with the release of a "hazardous
substance" into the environment. These persons include the current owner
or operator of any site where a release historically occurred and companies
that disposed or arranged for the disposal of the hazardous substances
found at the site. CERCLA also authorizes the EPA and, in some instances,
third parties to act in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons
the costs they incur. In the course of its ordinary operations, the
Company may have managed substances that may fall within CERCLA's
definition of a "hazardous substance". the Company may be jointly and
severally liable under CERCLA for all or part of the costs required to
clean up sites where the Company disposed of or arranged for the disposal
of these substances. This potential liability extends to properties that
the Company owned or operated, as well as to properties owned and operated
by others at which disposal of the Company's hazardous substances occurred.
The Company may also fall into the category of a "current owner or
operator". The Company currently owns or leases numerous properties that
for many years have been used for the exploration and production of oil and
gas. Although the Company believes it has utilized operating and disposal
practices that were standard in the industry at the time, hydrocarbons or
other wastes may have been disposed of or released by the Company on or
under the properties owned or leased by the Company. In addition, many of
these properties have been previously owned or operated by third parties
who may have disposed of or released hydrocarbons or other wastes at these
properties. Under CERCLA, and analogous state laws, the Company could be
subject to certain liabilities and obligations, such as being required to
remove or remediate previously disposed wastes (including wastes disposed
of or released by prior owners or operators), to clean up contaminated
property (including contaminated groundwater) or to perform remedial
plugging operations to prevent future contamination.
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OIL AND GAS OPERATIONS
The Company's oil and gas operations involve the acquisition,
exploration for, development and production of oil and natural gas. During
the fiscal year ended March 31, 1998, the Company's exploration efforts
were conducted in west Texas and eastern New Mexico.
The Company is actively investing in oil and gas properties for the
purpose of exploration, development and production of oil and gas. The
Company acquires or participates in these arrangements as a working
interest owner and usually provides the contract drilling services for such
ventures.
Exploration for oil and natural gas requires substantial expenditures,
especially for exploration in more remote areas. As is customary in the
oil and gas industry, the drilling of oil and gas wells is usually
accomplished through participation with other third parties. One of the
parties experienced with operations in the area is usually designated as
the operator of the property and is responsible for the direct supervision,
administration and accounting for wells drilled and completed pursuant to
an operating agreement between the parties. The Company typically serves
as operator of oil and gas prospects assembled by the Company and
participates as a non-operating working interest owner in prospects
assembled and generated by third parties. As operator, the Company
supervises the drilling and completion of wells and production therefrom
and the further development of surrounding properties. The operator of a
well has significant control over its location and the timing of its
drilling. In addition, the operator of a well receives fees from other
working interest owners as reimbursement for the general and administrative
expenses attendant to the operation of the wells. The operator will
normally receive revenues and pay expenses equal to more than its ownership
interest in the wells, and then must remit or collect all but its share to
or from the other respective participants in the well. At June 5, 1998 the
Company was operator of 19 wells.
Oil and Gas Reserves
Information concerning the Company's estimated proved oil and gas
reserves is included in Note (9) to the Company's financial statements.
See "Item 8 - Financial Statements and Supplementary Data".
The reserve information is only an estimate. There are numerous
uncertainties inherent in estimating oil and gas reserves and their
estimated values, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers often vary.
In addition, estimates of reserves are subject to revision due to the
results of drilling, testing and production subsequent to the date of such
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estimates. Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered. The accuracy of
such estimates is highly dependent upon the accuracy of the underlying
assumptions upon which they are based.
In general, the volume of production from oil and gas properties
declines as reserves are depleted. Except to the extent the Company
acquires properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of,
and volumes of production by, the Company will decline as reserves are
produced. The Company's future oil and gas production is therefore highly
dependent upon its level of success in acquiring or finding additional
reserves.
The Company has no reserves outside the United States.
No major discovery or other favorable or adverse event has occurred
since March 31, 1998 which is believed to have caused a significant change
in the estimated proved oil and gas reserves of the Company.
The Company's oil and gas reserves and production are not subject to
any long-term supply or similar agreements with foreign governments or
authorities.
The Company's estimate of reserves has not been filed with or included
in reports to any federal agency other than the Securities and Exchange
Commission.
Productive Wells and Acreage
The following tables set forth the gross and net productive oil and
gas wells and developed and undeveloped acreage in which the Company owned
a working interest as of March 31, 1998. Excluded from the table is
acreage in which the Company's interest is limited to royalty or similar
interests.
Productive Wells
Gross Net
Oil Gas Oil Gas
Texas................................... 75 10 10.401 1.485
New Mexico.............................. 12 2 3.021 .144
--- --- ------ -----
Total......................... 87 12 13.422 1.629
=== === ====== =====
Acreage
Developed Undeveloped
Gross Net Gross Net
Texas............................ 16,647 2,093 6,887 406
New Mexico....................... 2,171 371 320 48
------ ----- ----- -----
Total.................. 18,818 2,464 7,207 454
====== ===== ===== =====
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Generally, the terms of developed oil and gas leaseholds are
continuing and such leases remain in force by virtue of, and so long as,
production from lands under lease is maintained. Undeveloped oil and gas
leaseholds are generally for a primary term, such as five or ten years,
subject to maintenance with the payment of specified minimum delay rentals
or extension by production.
In addition to the Company's developed and undeveloped acreage shown
above, on September 5, 1995, the Company entered into a 10 year License
Agreement with the Government of the Republic of Palau and the State of
Kayangel which will allow the Company to explore for oil and natural gas
offshore. The license covers approximately 1.1 million acres within the
waters of Palau. Any exploration activities in the license area will be
conducted jointly with other third parties under a carried interest,
farmout or other similar arrangements which would allow the Company to
retain an ownership interest without incurring the initial costs of
exploration.
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Drilling Activity
The following table sets forth certain information concerning the
number of gross and net exploratory and development wells drilled for the
Company's account during the periods indicated.
Years Ended March 31,
1998 1997 1996
Type of Well Gross Net Gross Net Gross Net
Exploratory (1)
Oil 3 .913 3 .700 7 1.340
Gas -- -- 2 .433 1 .250
Dry 6 .956 5 1.077 11 2.067
Development (2)
Oil 9 1.592 7 1.835 6 .480
Gas -- -- -- -- -- --
Dry 3 .355 2 .625 3 .510
--------------------------
(1) An exploratory well is a well drilled to find and produce oil or gas
in an unproved area, to find a new reservoir in a field previously
found to be productive of oil or gas in another reservoir, or to
extend a known reservoir.
(2) A development well is a well drilled within the proved area of a oil
or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
At June 22, 1998, the Company was participating in the drilling of 2
gross (.56 net) exploratory well in Reeves County, Texas and Lea County,
New Mexico.
Substantially all of the equipment used in the Company's drilling
operations is owned by the Company; however, certain insignificant items of
drilling equipment are leased or rented as needed as such equipment either
cannot be purchased or is only necessary for the drilling of certain types
of wells located in certain areas.
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Production, Prices and Costs. The following table sets forth certain
information regarding the volumes of the Company's net production of oil
and gas, the average sales prices received associated with its sales of oil
and gas, and the average production (lifting) cost per equivalent barrel of
oil ("EBO").
Years Ended March 31,
1998 1997 1996
Net Production
Oil (Bbls) 72,880 76,266 70,941
Gas (Mcf) 439,711 361,745 212,062
EBO (1) 146,165 136,557 106,285
Sales Prices
Oil ($/Bbl) 18.24 23.93 17.67
Gas ($/Mcf) 1.80 1.81 1.52
EBO 14.55 18.24 15.83
Production (Lifting) Costs
per EBO $ 6.46 $ 6.77 $ 5.20
--------------------
(1) An EBO is one equivalent barrel of oil using the ratio of six Mcf
of gas to one barrel of oil.
Title to Properties
As is customary in the oil and gas industry, a preliminary title
examination is conducted at the time oil or gas properties believed to be
suitable for drilling are acquired by the operator. Prior to the
commencement of operations, curative work determined to be appropriate as a
result of a title search is performed with respect to significant defects
before the operator commences development. Title examinations have been
performed with respect to substantially all of the Company's interests in
its producing properties. The Company believes that title to its
properties is good and defensible in accordance with standards generally
acceptable in the oil and gas industry, subject to such exceptions which,
in the Company's opinion, are not so material as to detract substantially
from the value of such properties. The Company's properties are subject to
royalty, overriding royalty, and other outstanding interests customary in
the industry, and are also subject to burdens such as liens incident to
operating agreements, current taxes not yet due, development obligations
under oil and gas leases, and other encumbrances, easements and
restrictions. The Company does not believe that any of these burdens will
materially interfere with the use of its properties in the operation of the
Company's business.
Markets and Customers
The Company sells its oil and gas at the wellhead on an "as-produced"
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<PAGE> 16
basis and does not refine petroleum products. Other than normal production
facilities, the Company does not own an interest in any bulk storage
facilities or pipelines. As is customary in the industry, the Company
sells its production in any one area to relatively few purchasers,
including transmission companies that have pipelines near the Company's
producing wells. Gas purchase contracts are generally on a short-term
"spot market" basis and usually contain provisions by which the prices and
delivery quantities for future deliveries will be determined. During the
year ended March 31, 1998, Titan Resources I, Inc. and Amoco Production
Company accounted for approximately 16% and 15%, respectively, of the
Company's oil and gas revenues for such period. The loss of either one of
these purchasers could cease or delay the Company's production and sale of
its oil and gas reserves to the extent that alternative purchasers having
adequate gathering facilities are not found to replace such purchaser's
volume of oil or gas purchased. However, in the event of a loss of any
purchaser, the Company believes that, under present circumstances, it would
be able to find other purchasers for its oil and gas production.
Competition
The Company encounters strong competition from major oil companies and
independent producers and operators in acquiring properties and leases for
exploration for oil and gas. Competition is particularly intense with
respect to the acquisition of desirable undeveloped oil and gas leases.
The principal competitive factors in the acquisition of undeveloped oil and
gas leases include the staff and data necessary to acquire and develop such
leases, as well as the amount of consideration and terms offered. Many of
the Company's competitors have financial resources, staffs and facilities
substantially greater than those of the Company. In addition, the
producing and marketing of natural gas and oil is affected by a number of
factors which are beyond the control of the Company, the effect of which
cannot be accurately predicted. Of significant importance recently has
been the domination and control of oil markets and prices by foreign
producers.
The principal raw materials and resources necessary for the
exploration and development of oil and gas are leasehold prospects under
which oil and gas reserves may be discovered, drilling rigs and related
equipment to explore for such reserves and knowledgeable personnel to
conduct all phases of oil and gas operations. The Company must compete for
such raw materials and resources with both major oil companies and
independent operators, and the continued availability, without periodic
interruption, of such materials and resources to the Company cannot be
assured.
Item 2. PROPERTIES
In addition to its drilling rigs and related equipment and its oil and
gas properties, the Company owns a 31 acre tract of land in Midland, Texas
on which the Company's executive offices are located and on which the
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<PAGE> 17
principal support and storage facilities for its contract drilling
operations are located. Such facilities include an office building and
fabrication and maintenance shop. The facility allows for open storage of
drilling equipment and drill pipe.
The Company also owns a 78 acre tract of land in Odessa, Texas, which
is presently being utilized as a secondary storage location. From time to
time, the Company's rigs are stored and stacked in the field at the rig's
last location site.
The Company owns a warehouse and yard facility situated on
approximately 4 acres in Midland, Texas. This additional storage is being
used to complement the existing Midland yard facility. The Company
believes that the support and storage facilities for its drilling rigs and
related equipment are more than adequate.
Item 3. LEGAL PROCEEDINGS
In March, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by
order of the 201st District Court of Travis County, Texas, on March 12,
1992 in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance
Company and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The
State of Texas vs. Standard Financial Indemnity Corporation. Approximately
two months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the approximate amount of $646,476. On July
22, 1993 the special deputy receiver of SFIC billed the Company
approximately $1,061,000 for retrospective premiums, but adjusted the
amount to $854,153 on January 12, 1994.
In November, 1995, the Company was notified that a lawsuit had been
filed in Travis County, Texas styled Texas property and Casualty Insurance
Guaranty Association vs. TMBR/Sharp Drilling, Inc. (Cause No. 95-12318).
The Texas Property and Casualty Insurance Guaranty Association ("Guaranty
Association") was seeking a recovery of past workers' compensation claims
advanced by the Guaranty Association related to the Company's workers
compensation insurance program with SFIC. The Guaranty Association was
seeking to recover a total of $803,057.11.
On September 9, 1997, the Company entered into a settlement agreement
with the Guaranty Association. The Company agreed to pay to the Guaranty
Association the sum of $375,000 in full satisfaction of any liability
relating the Company's workers compensation insurance program with SFIC and
Sir Lloyd's Insurance Company and the lawsuit brought by the Guaranty
Association. The Company originally accrued $854,153 relating to the
Guaranty Association's claim for reimbursement. As a result of the
settlement, the Company has eliminated the accrual of $854,153 and the
difference between the accrued amount and the settlement amount ($479,153)
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<PAGE> 18
has been recognized as miscellaneous income in the Company's financial
statements.
In addition, the Company has entered into a settlement agreement with
the insurance agent that represented the Company at the time the workers
compensation insurance policies were purchased from Sir Lloyd's and SFIC.
The agent has paid the Company the sum of $180,000 in full settlement of
all claims and liabilities relating to SFIC and Sir Lloyd's Insurance
Company. This amount has been recognized as miscellaneous income in the
Company's financial statements.
The Company provides for its workers' compensation claims prior to
September 1997 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. For claims incurred November 1993 to
September 1997, the Company is generally responsible for the first $10,000
($100,000 prior to November 1993) in claim costs for each workers'
compensation injury. Currently the Company is covered by a fully insured
workers compensation policy.
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no meeting of security holders of the Company during the
fourth quarter of the fiscal year ended March 31, 1998, and no matters were
submitted to a vote of security holders during such period.
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<PAGE> 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market
System under the symbol "TBDI". The following table sets forth, on a per
share basis for the periods indicated, the range of high and low last
reported sales prices as reported by NASDAQ. The quotations are inter-
dealer prices without retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
Price
High Low
Fiscal 1997
First Quarter $ 8 1/4 $ 6 3/4
Second Quarter 12 7
Third Quarter 12 8
Fourth Quarter 13 7/8 10 3/4
Fiscal 1998
First Quarter 14 1/2 9
Second Quarter 29 1/4 13 1/2
Third Quarter 33 1/4 14 3/8
Fourth Quarter 19 10 1/2
The transfer agent for the Company's Common Stock is American Stock
Transfer & Trust Company, New York, New York.
On February 13, 1997, the Company privately placed 725,000 shares of
its Common Stock to eleven accredited investors, at a per share price of
$11.00. Rauscher Pierce Refsnes, Inc. ("Rauscher") served as placement
agent for the offering. The net proceeds from the sale of the shares,
approximately $7.47 million, were used to repay all of the Company's
outstanding bank debt (approximately $4.5 million) and for general working
capital purposes. As consideration for serving as placement agent,
Rauscher received a 5% cash commission (an aggregate of $398,750), and a
non-accountable expense allowance of $25,000. The Company also issued to
Rauscher, for nominal consideration, a five-year stock purchase warrant to
purchase 36,250 shares of the Company's Common Stock at an exercise price
of $13.20 per share. The Common Stock was sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of
1933, as amended (the "Act"), and Rule 506 of Regulation D under the Act.
On June 8, 1998, the outstanding shares of the Company's Common Stock
were held of record by approximately 3,218 stockholders.
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<PAGE> 20
The Company has never declared or paid any cash dividends on its
Common Stock and has no present intention to pay cash dividends in the
future. The Company presently intends to retain all earnings to fund its
operations and future growth. Under the terms of the Company's Credit
Facility with its bank lender, the Company is prohibited from paying cash
dividends to the holders of Common Stock without the written consent of the
bank. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
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<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data
for the Company's operations for each of the five years ended March 31,
1998. The data set forth in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and the Company's Financial Statements and related
notes included elsewhere herein.
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues:
Contract drilling $ 34,891 $ 18,483 $ 21,298 $ 18,357 $ 18,359
Oil and gas 2,126 2,491 1,683 1,042 621
------ ------ ------ ------ ------
Total operating revenues 37,017 20,974 22,981 19,399 18,980
Operating costs and expenses:
Contract drilling 23,163 14,190 17,252 14,630 14,989
Oil and gas production 944 924 554 350 318
Dry holes and abandonments 476 558 945 629 656
Depreciation, depletion
and amortization 4,080 1,784 907 876 746
General and administrative 1,863 1,560 1,599 1,553 1,339
Writedown of oil and
gas properties (a) 3,120 171 2,624 -- --
------ ------ ------ ------ ------
Total operating costs
and expenses 33,646 19,187 23,881 18,038 18,048
------ ------ ------ ------ ------
Operating income (loss) 3,371 1,787 (900) 1,361 932
Other income (expenses):
Interest 133 (278) (139) (154) (89)
Other 1,180 52 117 359 258
------ ------ ------ ------ ------
Total other income (expense) 1,313 (226) (22) 205 169
------ ------ ------ ------ ------
Net income(loss) before income
tax provision 4,684 1,561 (922) 1,566 1,101
Provision for income taxes (140) (16) (30) (30) (62)
------ ------ ------ ------ ------
Net income (loss) before
extraordinary items $ 4,544 $ 1,545 $ (952) $ 1,536 $ 1,039
====== ====== ====== ====== ======
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<PAGE> 22
Net income (loss)
before extraordinary
items per share:
Basic $0.98 $0.43 ($0.29) $0.49 $0.38
Diluted $0.91 $0.38 -- $0.38 $0.23
====== ====== ====== ====== ======
Weighted average number of
common shares outstanding:
Basic 4,615 3,608 3,254 3,109 2,762
Diluted 5,014 4,106 4,075 4,032 4,603
===== ===== ===== ===== =====
BALANCE SHEET DATA
Cash and cash equivalents $ 1,623 $ 1,048 $ 339 $ 1,590 $ 1,039
Total assets 24,648 19,761 11,660 10,040 7,648
Total debt -- -- 1,300 -- 74
Stockholders' equity 19,960 14,372 4,959 5,775 4,133
____________________
</TABLE>
(a) During fiscal years ended March 31, 1998, 1997 and 1996,
the Company recognized a non-cash charge of approximately
$3,120,000, $171,000 and $2,624,000, respectively, due
to a writedown of the carrying value of its oil and gas
properties. This charge is a result of the adoption of
Statement of Financial Accounting Standards No. 121 ("SFAS
121") "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS 121
requires the Company to assess the need for an impairment
of capitalized costs of oil and gas properties on a
property-by-property basis in contrast to the Company's
prior policy of evaluating the undiscounted future net
revenues of its oil and gas properties in total. According
to SFAS 121, if an impairment is indicated based on
undiscounted future cash flows, then it is recognized to
the extent that net capitalized costs exceed discounted
future cash flows.
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<PAGE> 23
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-K Annual Report ("Report") and the documents incorporated
by reference in this Report include certain statements that may be deemed
to be "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). All statements, other than
statements of historical facts, included in this Report that address
activities, events or developments that the Company estimates, intends,
projects, expects, believes or anticipates will or may occur in the future,
including such matters as market conditions, future capital, development
and exploration expenditures (including the amount and nature thereof),
drilling rig utilization rates, drilling of wells, reserve estimates,
business strategies and other plans and objectives, expansion and growth of
the Company's operations and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses
made by the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and
other facts it believes are appropriate in the circumstances. Such
statements are subject to a number of assumptions, risks and uncertainties,
including the risk factors discussed above, general economic and business
conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in law or regulations and
other factors, many of which are beyond the control of the Company. Such
statements are not guarantees of future performance and actual results or
developments may differ materially from those projected in the forward-
looking statements.
Overview
Since 1982, the principal business of the Company has been the contract
drilling of domestic onshore oil and gas wells. In 1987, the Company began
acquiring oil and gas properties and participating in the exploration for
and development of oil and gas reserves.
Contract Drilling Operations
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs
under footage and daywork contracts are recognized in the period they are
incurred. The Company utilizes the completed contract method to recognize
drilling revenues and expenses relating to turnkey contracts. Expected
losses on all in-process contracts are recognized in the period the loss
can reasonably be determined.
Drilling equipment is depreciated on a units-of-production method based
on the monthly utilization of the equipment. Drilling equipment which is
not utilized during a month is depreciated using a minimum utilization rate
of approximately 25%. Estimated useful lives range from four to eight
years. Other property and equipment is depreciated using the straight-line
method of depreciation with estimated useful lives of three to seven years.
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<PAGE> 24
The contract drilling industry remains highly competitive. Recently,
the demand for drilling rigs has softened due to extremely weak oil prices
and lower gas prices. The Company believes it owns a sufficient number of
drilling rigs to remain competitive within its areas of operation. In
addition, the Company believes it competes favorably with respect to the
depth capabilities of its rigs, the experience level of its personnel, its
reputation and its relationship with existing customers. However, the
Company's operating results will continue to be directly affected by the
level of drilling activity in the Company's service areas.
The following table sets forth certain information relating to the
Company's contract drilling operations for the periods indicated:
Year Ended March 31,
1998 1997 1996
(In thousands, except %s)
Contract drilling revenues $34,891 $18,483 $21,298
Contract drilling expenses 23,163 14,190 17,252
Contract drilling expenses as
a percent of drilling revenues 66.4% 76.8% 81.0%
Rig utilization 78.2% 51.6% 45.1%
Oil and Gas Operations
The Company's oil and gas producing activities are accounted for using
the successful efforts method of accounting. Accordingly, the Company
capitalizes all costs incurred to acquire oil and gas properties (proved
and unproved), all development costs, and the costs of successful
exploratory wells. 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 for oil and gas properties in which it has an ownership
interest, the Company's proportionate share of costs is capitalized as
stated above, net of its working-interest share of profits from the
related drilling contracts. Capitalized costs of undeveloped properties,
which are not depleted until proved reserves can be associated with the
properties, are periodically reviewed for possible impairment. Such
unevaluated costs totaled approximately $111,000 and $196,000 as of March
31, 1998, and March 31, 1997, respectively.
For properties with proved or proved developed oil and gas reserves,
depletion, depreciation and amortization of capitalized costs was
calculated for fiscal 1998, 1997 and 1996 by applying the units-of-
production method to the estimated amount of such reserves.
In fiscal 1998, 1997 and 1996, the Company recognized non-cash charges
of approximately $3.1 million, $171,000 and $2.6 million, respectively, due
to writedowns of the carrying value of its oil and gas properties. The
writedowns are the result of the adoption in 1996 of Statement of Financial
Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121
requires the Company to assess the need for an impairment of capitalized
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<PAGE> 25
costs of oil and gas properties on a property-by-property basis. This is in
contrast to the Company's prior policy of evaluating the undiscounted
future net revenues of its oil and gas properties in total. According to
SFAS 121, if an impairment is indicated based on undiscounted future cash
flows, then it is to be recognized to the extent that net capitalized costs
exceed discounted future cash flows.
The following table sets forth certain information relating to the
Company's oil and gas operations for the periods indicated:
Year Ended March 31,
1998 1997 1996
(In thousands)
Oil and gas revenues $2,126 $2,491 $1,683
Production expenses 944 924 554
Dry holes and abandonments 476 558 945
Depreciation, depletion and
amortization 1,891 802 468
Writedown of properties 3,120 171 2,624
The Company has not entered into hedging arrangements and does not have
any delivery commitments. While hedging arrangements reduce exposure to
losses of resulting from unfavorable price changes, they also limit the
ability to benefit from favorable market price changes.
RESULTS OF OPERATIONS
Comparison of Year Ended March 31, 1998 to Year Ended March 31, 1997
Contract drilling revenues in fiscal 1998 increased by 89% from the
previous year. During fiscal 1998, the Company experienced very strong
demand for its contract drilling services, which resulted in increased rig
utilization and higher contract prices. Rig utilization was 78% in fiscal
1998 compared to 52% in the prior fiscal year.
Contract drilling expenses represented 66% of contract drilling
revenues in fiscal 1998 versus 77% in fiscal 1997. The decrease is
attributable to the increase in the average price received for drilling
contracts.
Oil and gas revenues decreased by 15% during fiscal 1998. This
decrease was a result of weaker oil and gas prices. Oil and gas production
expenses remained relatively constant.
The Company participated as a working-interest owner in the drilling of
21 wells during fiscal 1998, of which nine were dry holes. In fiscal 1997,
the Company participated as a working-interest owner in the drilling of 19
wells, of which seven were dry holes.
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<PAGE> 26
During the year ended March 31, 1998, the Company completed the
assembly of two additional drilling rigs from its inventory of rig
components. One of the rigs is capable of drilling to a depth of
approximately 8,500 feet, the other to a depth of 10,000 feet. The
addition of these two U-15 Unit rigs brings the Company's available fleet
to 17 rigs. The increase in depreciation, depletion and amortization
expense for fiscal 1998 reflects the added equipment(the two U-15 Unit
drilling rigs, drill pipe and miscellaneous drilling equipment) as well as
the larger number of producing wells in which the Company has an ownership
interest (a total of 99 wells in fiscal 1998 versus 92 wells in 1997).
As noted above, the Company recognized a non-cash charge of $3.1 million
in fiscal 1998 and $171,000 in fiscal 1997 related to the writedown of the
carrying value of its oil and gas properties.
As described in "Item 3. Legal Proceedings", the Company was a
defendant in a lawsuit filed by Texas Property and Casualty Insurance
Guaranty Association that had resulted in the Company's accrual of
approximately $854,000 for a contingent liability. On September 9, 1997,
the Company entered into a settlement agreement with the Guaranty
Association. The Company agreed to pay to the Guaranty Association the sum
of $375,000 in full satisfaction of any liability relating to the Company's
workers compensation programs with SFIC and Sir Lloyd's Insurance Company
and the lawsuit brought by the Guaranty Association. As a result of the
settlement, the Company recognized approximately $479,000 as miscellaneous
income during the year ended March 31, 1998.
In addition, the Company entered into a settlement agreement with the
insurance agent that represented the Company at the time the workers
compensation insurance policies were purchased from Sir Lloyd's and SFIC.
The agent paid the Company the sum of $180,000 in full settlement of all
claims and liabilities relating to SFIC and Sir Lloyd's Insurance Company.
This amount was recognized as miscellaneous income in the year ended March
31, 1998. The Company also recorded approximately $236,000 of
miscellaneous income from the sale of junk drill bits.
Net working capital was $6.0 million at March 31, 1998, compared to
$2.7 million at March 31, 1997. The gain in working capital is
attributable to an increase in cash and trade receivables.
Comparison of Year Ended March 31, 1997 to Year Ended March 31, 1996
Contract drilling revenues for fiscal 1997 decreased by 13% from fiscal
1996. The decrease was due to a drop-off in the number of turnkey wells
drilled by the Company (from 12 wells in fiscal 1996 to none in fiscal
1997).The decline in turnkey contracts, however, was partially offset by an
increase from the prior year in the average prices the Company received for
footage and daywork contracts.
Rig utilization rates in fiscal 1997 and 1996 were 52% and 45%,
respectively. The fiscal 1997 rate, and therefore contract drilling
revenues, were adversely affected by extremely low utilization in the first
three months of the year. During the first quarter, drilling prices were
depressed and the Company chose to underutilize its drilling equipment
rather than subject it to additional wear and tear at unacceptable
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<PAGE> 27
operating margins. As a result, the utilization rate for the first quarter
was only 34%. In the second quarter, however, demand for the Company's
contract drilling services began to increase substantially, resulting in a
fourth-quarter utilization rate of 70%. Rig utilization in the Company's
operating market is difficult to project because of wide fluctuations in
drilling activity. In addition, the number of rigs industrywide that are
actually available for work cannot be accurately determined.
Contract drilling expenses equaled 77% and 81% of contract drilling
revenues in fiscal 1997 and 1996, respectively. The decrease is
attributable to the increase in the average price received for drilling
contracts.
Oil and gas revenues increased by 48% in fiscal 1997. Accordingly, oil
and gas production expenses increased 67% over the same period.
Depreciation, depletion and amortization expense also increased due to
the addition of drill pipe and an increase in the number of producing wells
in which the Company had an ownership interest during fiscal 1997.
Interest expense increased 100% for fiscal 1997 due to borrowings under
the Company's credit facilities with its bank lender during this period.
See "Liquidity and Capital Resources" below.
Net working capital was $2.7 million at March 31, 1997, compared to a
negative $1.2 million at March 31, 1996. The improvement in working
capital was due to an increase in accounts receivable, a decrease in
accounts payable and an increase in cash and cash equivalents.
Income Taxes
At March 31, 1998, the Company had approximately $68.3 million of
unused net operating loss ("NOL") carryforwards for tax purposes. Use of
these carryforwards is dependent upon the Company's ability to generate
taxable earnings in future periods. These carryforwards will begin to
expire in the 1998 tax year. The Company's ability to utilize its NOL
carryforwards may be substantially limited in the future under the Internal
Revenue Code of 1986, as amended (the "Code"). If the Company experiences
an ownership change under applicable provisions of the Code, the
carryforward would be limited to an annual amount determined by specified
interest rates and other variables. The Company does not believe an
ownership change has occurred to date.
The effective tax rates for fiscal 1998 and 1997 differ from the
statutory tax rate of 34% primarily due to the utilization of NOLs. Tax
expense is generally limited to alternative minimum tax.
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The Company has a deferred tax
asset primarily due to its NOL carryforwards. The Company has provided a
valuation allowance for the entire balance of deferred tax assets as it is
likely that a portion of the NOLs may expire before the Company is able to
use them.
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<PAGE> 28
Liquidity and Capital Resources
In January 1996, the Company entered into a loan agreement with its
bank lender providing for a revolving credit facility (the "Credit
Facility") 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 the bank monthly. The Credit Facility was
established to finance the Company's purchases of drill pipe and oil and
gas exploration activities. Interest only was payable monthly. 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 the
bank's base rate and was secured by substantially all of the Company's
accounts receivable, drilling rigs and related equipment. At March 31,
1998, there were no amounts outstanding under the Credit Facility.
In August 1996, the Company entered into a second loan agreement with
its bank lender. This 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 the
bank'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. At March 31, 1998, no amounts were
outstanding under the Line of Credit.
On May 26, 1998, the Company renewed, extended and consolidated the
prior loan facilities its bank lender. The amended and restated loan
agreement provides for a $5.0 million revolving line of credit secured by
the Company's drilling rigs and related equipment, accounts receivable and
inventory. Borrowings under this line of credit bear interest at the
Norwest Bank base rate and accrued interest is payable monthly. The loan
facility matures 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.
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<PAGE> 29
The following table sets forth information regarding the capital
expenditures made by the Company during the last three fiscal years.
Year Ended March 31,
1998 1997 1996
(In thousands)
Oil and gas exploration and development..... $ 3,846 $3,424 $5,553
Drilling rigs, drill pipe and
related equipment......................... 6,086 2,940 1,452
Other....................................... 249 390 11
------ ----- -----
Total.................................. $10,181 $6,754 $7,016
====== ===== =====
The Company presently anticipates making capital expenditures of
approximately $5.5 million in its 1999 fiscal year. Of this amount, the
Company expects that approximately $2.5 million will be spent for the
acquisition of drill pipe, drill collars and related equipment, and
approximately $3.0 million for oil and gas exploration and development
activities. It is the Company's policy, however, to make capital
expenditures based on prevailing economic conditions, the results of its
drilling activities, and other factors affecting its business.
Accordingly, the amounts actually spent in fiscal 1999 could differ
substantially from the amounts estimated.
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 weakening of oil and gas prices. The Company will
certainly 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. The Company 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. However,
the Company cannot determine what effect, if any, the year 2000 issues
affecting its vendors, customers and the numerous local, state, federal and
other U. S. government entities with which it conducts business or which it
is regulated or governed or taxed will have on its business or financial
position.
-29-
<PAGE> 30
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standard Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income", which requires the
presentation of comprehensive income in an entity's financial statements.
Comprehensive income represents all changes in equity of an entity during
the reporting period, including net income and charges made directly to
equity which are excluded from net income. The adoption of this statement
did not have a material impact on the Company's financial disclosures.
In June 1997, the FASB also 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.
-30-
<PAGE> 31
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 31
Balance Sheets, March 31, 1998 and 1997 32
Statements of Operations, Years ended
March 31, 1998, 1997 and 1996 34
Statements of Stockholders' Equity,
Years ended March 31, 1998, 1997 and 1996 35
Statements of Cash Flows,
Years ended March 31, 1998, 1997 and 1996 36
Notes to Financial Statements 37
-31-
<PAGE> 32
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, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended March 31, 1998. 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, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1998, 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 26, 1998
-32-
<PAGE> 33
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,623 $ 1,048
Marketable securities 87 87
Trade receivables,
net of allowance for doubtful
accounts of $1,135 in 1998
and 1997. 8,149 6,218
Inventories 82 74
Deposits 73 73
Other 664 560
------ ------
Total current assets 10,678 8,060
------ ------
Property and equipment, at cost:
Drilling equipment 48,691 42,690
Oil and gas properties, based on
successful efforts accounting 15,452 13,102
Other property and equipment 3,786 3,584
------ ------
67,929 59,376
Less accumulated depreciation,
depletion and amortization (54,132) (47,851)
------ ------
Net property and equipment 13,797 11,525
------ ------
Other assets 173 176
------ ------
Total assets $ 24,648 $ 19,761
====== ======
</TABLE>
See accompanying notes to financial statements.
-33-
<PAGE> 34
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Trade payables $ 2,622 $ 2,739
Accrued workers' compensation 411 1,245
Other 1,655 1,405
------ ------
Total current liabilities 4,688 5,389
------ ------
Total liabilities 4,688 5,389
------ ------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 5,979,625 shares at
March 31, 1998 and 5,696,825 at
March 31, 1997 598 570
Additional paid-in capital 69,429 68,413
Accumulated deficit (49,917) (54,461)
Treasury stock-common, 1,268,739 shares
at March 31, 1998 and 1997, at cost (150) (150)
------ ------
Total stockholders' equity 19,960 14,372
------ ------
Total liabilities and
stockholders' equity $ 24,648 $ 19,761
====== ======
</TABLE>
See accompanying notes to financial statements.
-34-
<PAGE> 35
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 1998, 1997 and 1996
(In thousands, except share data)
1998 1997 1996
---- ---- ----
Revenues:
Contract drilling $ 34,891 $ 18,483 $ 21,298
Oil and gas 2,126 2,491 1,683
------ ------ ------
Total revenues 37,017 20,974 22,981
------ ------ ------
Operating costs and expenses:
Contract drilling 23,163 14,190 17,252
Oil and gas production 944 924 554
Dry holes and abandonments 476 558 945
Depreciation, depletion and
amortization 4,080 1,784 907
Writedown of oil and gas
properties 3,120 171 2,624
General and administrative 1,863 1,560 1,599
------ ------ ------
Total operating costs
and expenses 33,646 19,187 23,881
------ ------ ------
Operating income (loss) 3,371 1,787 (900)
------ ------ ------
Other income (expense):
Interest 133 (278) (139)
Gain on sales of assets 179 65 26
Other, net 1,001 (13) 91
------ ------ ------
Total other income
(expense), net 1,313 (226) (22)
------ ------ ------
Net income (loss) before
income tax provision 4,684 1,561 (922)
Provision for income taxes (140) (16) (30)
------ ------ ------
Net income (loss) $ 4,544 $ 1,545 $ (952)
====== ====== ======
Net income (loss) per common share:
Basic $ 0.98 $ 0.43 $ (0.29)
Diluted 0.91 0.38 --
========= ========= =========
Weighted average number of
common shares outstanding:
Basic 4,614,959 3,607,925 3,254,262
Diluted 5,013,981 4,105,882 4,074,567
========= ========= =========
See accompanying notes to financial statements.
-35-
<PAGE> 36
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity
Years Ended March 31, 1998, 1997 and 1996
(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,
1995 4,394 $ 439 $ 60,540 $(55,054) 1,270 $(150) $ 5,775
Exercise of Stock
Options 222 22 114 -- -- -- 136
Net Loss -- -- -- (952) -- -- (952)
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1996 4,616 $ 461 $ 60,654 $(56,006) 1,270 $(150) $ 4,959
Issuance of
Common Stock 750 76 7,704 -- -- -- 7,780
Exercise of Stock
Options 331 33 55 -- -- -- 88
Net Income -- -- -- 1,545 -- -- 1,545
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1997 5,697 $ 570 $ 68,413 $(54,461) 1,270 $(150) $14,372
Exercise of
Stock Options 283 28 1,016 -- -- -- 1,044
Net Income -- -- -- 4,544 -- -- 4,544
----- ----- -------- -------- ----- ----- -------
Balance, March 31,
1998 5,980 $ 598 $ 69,429 $ (49,917) 1,270 $(150) $19,960
===== ===== ======== ======== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
-36-
<PAGE> 37
TMBR/SHARP DRILLING, INC.
Statements of Cash Flows
Years Ended March 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 4,544 $ 1,545 $ (952)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 4,080 1,784 907
Dry holes and abandonments 476 558 945
Gain on sales of assets (179) (65) (26)
Writedown of properties 3,120 171 2,624
Changes in assets and liabilities:
Trade receivables (1,931) (3,276) (374)
Deposits -- 350 90
Inventories and other assets (109) (262) (65)
Trade payables (117) (597) 1,497
Accrued payables and other
current liabilities (584) 585 117
-------- -------- --------
Total adjustments 4,756 (752) 5,715
-------- -------- --------
Net cash provided
by operating activities 9,300 793 4,763
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (10,181) (6,754) (7,016)
Proceeds from sales of property
and equipment 412 102 44
-------- -------- --------
Net cash required
by investing activities (9,769) (6,652) (6,972)
-------- -------- --------
Cash flows from financing activities:
Repayments of capital lease -- -- (92)
Proceeds from issuance of common stock -- 7,780 --
Proceeds from exercise of stock options 1,044 88 136
Proceeds from bank loan -- 3,200 1,300
Repayments of bank loan -- (4,500) --
Leasehold borrowings and repayments
of leasehold borrowings -- -- (386)
-------- -------- --------
Net cash provided by
financing activities 1,044 6,568 958
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents 575 709 (1,251)
Cash and cash equivalents at beginning of year 1,048 339 1,590
-------- -------- --------
Cash and cash equivalents at end of year $ 1,623 $ 1,048 $ 339
======== ======== ========
See accompanying notes to financial statements.
-37-
<PAGE> 38
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(1) Organization, Nature of Business and Summary of Significant Accounting
Policies
Nature of Operations
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the
laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In
August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The Company's principal businesses are the domestic onshore contract
drilling of oil and gas wells for major and independent oil and gas
producers, and, to a lesser extent, the exploration for, development and
production of oil and natural gas. The Company's drilling activities are
primarily conducted in the Permian Basin of west Texas and eastern New
Mexico.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers
highly liquid debt instruments which have an original maturity of three
months or less to be cash equivalents. Cash payments for interest expense
were approximately $0 in 1998, $278,000 in 1997 and $139,000 in 1996. Cash
payments for taxes due totaled $29,000, $0 and $23,000 during 1998, 1997
and 1996, respectively.
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 March 31,
1998 was not materially different from the historical cost, and therefore,
no unrealized gains or losses have been recorded.
-38-
<PAGE> 39
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Inventories
Inventories consist primarily of casing and tubing. The Company
values its inventories at the lower of cost or estimated net recoverable
value using the specific identification method.
Property and Equipment
Drilling equipment is depreciated on a units-of-production method
based on the monthly utilization of the equipment. Drilling equipment
which is not utilized during a month is depreciated using a minimum
utilization rate of approximately twenty-five percent. Estimated useful
lives range from four to eight years. Other property and equipment is
depreciated using the straight-line method of depreciation with estimated
useful lives of three to seven years.
Oil and gas properties are accounted for using the successful efforts
method of accounting. Accordingly, the costs incurred to acquire property
(proved and unproved), all development costs and successful exploratory
costs are capitalized, whereas the costs of unsuccessful exploratory wells
are expensed. Geological and geophysical costs, including seismic costs,
are charged to expense when incurred. In cases where the Company provides
contract drilling services related to oil and gas properties in which it
has an ownership interest, the Company's proportionate share of costs
related to these properties is capitalized as stated above, net of the
Company's working interest share of profits from the related drilling
contracts. Capitalized costs of undeveloped properties, which are not
depleted until proved reserves can be associated with the properties, are
periodically reviewed for possible impairment. Such unevaluated costs
totaled approximately $111,000 and $196,000 as of March 31, 1998 and 1997,
respectively.
Depletion, depreciation and amortization of capitalized oil and gas
property costs is provided using the units-of-production method based on
estimated proved or proved developed oil and gas reserves, as applicable,
of the respective property units.
-39-
<PAGE> 40
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Prior to 1996, the Company provided impairments for significant proved
oil and gas properties to the extent that net capitalized costs exceeded
aggregated undiscounted future net cash flows. During 1996, the Company
adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 121 requires the Company to assess the
need for an impairment of capitalized costs of oil and gas properties on a
property-by-property basis. According to SFAS 121, if an impairment is
indicated based on undiscounted expected future cash flows, then it is
recognized to the extent that net capitalized costs exceed discounted
future cash flows. In connection with the adoption of SFAS 121, the
Company provided an impairment of $2,624,000 in 1996. Additional
impairments of $3,120,000 and $171,000 were recorded in 1998 and 1997,
respectively. Management's estimate of future cash flows is based on their
estimate of reserves and prices. It is reasonably possible that a change
in reserve or price estimates could occur in the near term and adversely
impact management's estimate of future cash flows and consequently the
carrying value of properties.
Major renewals and betterments are capitalized in the appropriate
property accounts while the cost of repairs and maintenance is charged to
operating expense in the period incurred. For assets sold or otherwise
retired, the cost and related accumulated depreciation amounts are removed
from the accounts and any resulting gain or loss is recognized.
Drilling Revenues and Costs
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs on
footage and daywork contracts are recognized in the period incurred. The
Company utilizes the completed contract method to recognize drilling
revenues and expenses relating to turnkey contracts. Expected losses on
all in-process contracts are recognized in the period the loss can
reasonably be determined.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates with regard to these financial statements
include the estimate of proved oil and gas reserve volumes and the related
present value of estimated future net revenues therefrom (see Note 8), and
the valuation allowance for deferred taxes (see Note 4).
-40-
<PAGE> 41
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Net Income (Loss) Per Share of Common Stock
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.
Stock Based Employee Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123")
"Accounting for Stock-Based Compensation," which establishes accounting and
reporting standards for various stock based compensation plans. SFAS 123
encourages the adoption of a fair value based method of accounting for
employee stock options, but permits continued application of the accounting
method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion
25"), "Accounting for Stock Issued to Employees." The Company has elected
to continue to apply the provisions of Opinion 25. Under Opinion 25, if
the exercise price of the Company's stock options equals the market value
of the underlying stock on the date of grant, no compensation expense is
recognized. SFAS 123 requires disclosure of pro forma information
regarding net income and earnings per share as if the Company had accounted
for its employee stock options under the fair value method of the
statement. See Note 3 "Stockholders' Equity."
(2) Debt
Line of Credit
On January 16, 1996, the Company entered into a loan agreement with
Norwest Bank Texas, Midland, N.A. (Norwest) that 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.
-41-
<PAGE> 42
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In August, 1996, the Company entered into a second loan agreement with
Norwest. The second loan agreement 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 Bank Texas, N.A.. The amended and restated loan
agreement provides for a $5,000,000 revolving line of credit secured by the
Company's drilling rigs and related equipment, accounts receivable and
inventory. Borrowings under the renewed and extended line of credit bear
interest at the Norwest Bank base rate and the interest is payable monthly.
The renewed and extended loan agreement matures on May 26, 2000.
Leasehold Purchase Obligation
On December 9, 1994, the Company entered into an agreement with
Paladin Exploration Co., Inc. ("Paladin") to acquire certain oil and gas
leases. The Company agreed to reimburse Paladin an aggregate amount of
approximately $629,000 (including imputed interest at a rate of 9.5% per
annum) for leasehold acquisition, legal and seismic costs incurred by
Paladin associated with the acquisition of such leases. At March 31, 1996,
the obligation outstanding to Paladin had been satisfied.
(3) Stockholders' Equity
(a) Common Stock
On February 13, 1997, the Company closed a private placement of
725,000 shares of common stock at a price of $11.00 per share. The net
proceeds from the placement were approximately $7.4 million.
(b) Stock Option Plans
1984 Stock Option Plan
In August of 1984, the Company adopted the 1984 Stock Option Plan (the
"Plan") which initially authorized 375,000 shares of the Company's common
stock to be issued as either incentive stock options or nonqualified stock
options. This Plan was amended in August 1986 to increase the authorized
shares to 475,000 shares of the Company's common stock. In January 1988,
-42-
<PAGE> 43
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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 exercisable and
outstanding under the Plan. No additional shares are available for grant
as the Plan expired by its own terms in August 1994. The options that
were granted prior to the expiration of the Plan, and which are
outstanding, remain subject to the terms of the Plan.
1994 Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the
"1994 Plan") which authorized the grant of options to purchase up to
750,000 shares of the Company's common stock. These options may be issued
as either incentive or nonqualified stock options. The 1994 Plan provides
that options may be granted to key employees or directors for various terms
at a price not less than the fair market value of the shares on the date of
grant. The 1994 Plan was ratified and approved by the stockholders at the
Company's annual meeting of stockholders held on August 30, 1994.
On September 3, 1996, the Company granted 465,000 shares of
nonqualified stock options to key employees under the 1994 Plan. The
following sets forth certain information concerning these nonqualified
options.
Number Option Price
of ---------------------
Shares Per Share Total
------ ---------------------
Outstanding March 31, 1996 -- -- --
Granted 465,000 $7.75 $3,603,750
------- ---- ---------
Outstanding March 31, 1997 465,000 $7.75 $3,603,750
Exercised 127,500 7.75 988,125
------- ---- ---------
Outstanding March 31, 1998 337,500 $7.75 $2,615,625
======= ==== =========
All of the nonqualifed stock options granted on September 3, 1996 are
earned and exercisable as of May 1, 1997.
-43-
<PAGE> 44
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In addition to the aforementioned options, during fiscal year 1989, an
additional 500,000 shares of nonqualified stock options were granted to
another director who is also an officer. These options were granted at an
exercise price of $0.25 per share (estimated fair market value at date of
grant). On April 4, 1990, the Board of Directors also approved an
additional 500,000 shares of nonqualified stock options granted to another
director at an exercise price of $0.25 per share (estimated fair market
value at date of grant).
The following sets forth certain information concerning these
nonqualified options:
Option Price
Number ------------
of Shares Per Share Total
--------- --------- -----
Outstanding March 31, 1996 698,000 $0.25 $174,500
Exercised (329,200) 0.25 (82,300)
--------- -------
Outstanding March 31, 1997 368,800 $0.25 $ 92,200
Exercised (149,300) 0.25 (37,325)
--------- -------
Outstanding March 31, 1998 219,500 $0.25 $ 54,875
========= =======
All nonqualified options outstanding were earned and exercisable as of
March 31, 1998.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that statement. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1997: no
dividend yield, expected volatility of 68.32% and a risk free interest rate
of 6.7%.
Year of Option Exercise Expected Fair
Grant Shares Price Life Value
------- ------ -------- -------- -----
1997 465,000 $7.75 5.0 $4.87
-44-
<PAGE> 45
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1998 1997
-------------------- --------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
(In thousands, except share amounts)
Net income (loss) from
continuing operations $4,544 $4,261 $1,545 $(436)
Net income (loss) from
continuing operations
per share (basic) $0.98 $0.92 $0.43 $(0.10)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts, as SFAS 123 does not apply to awards prior to
1995 and additional awards are anticipated in future years.
(4) Income Taxes
At March 31, 1998, the Company had approximately $68,297,000 of net
operating loss carryforwards for tax purposes. Realization of the benefits
of these carryforwards is dependent upon the Company's ability to generate
taxable earnings in future periods. If these carryforwards are not
utilized, they will begin to expire in 1998. The Company's ability to
utilize its net operating loss carryforwards may be substantially limited
in the future under Section 382 of the Internal Revenue Code (IRC). If the
Company encounters a change of control as defined in IRC Section 382, the
carryforward would be limited to an annual amount calculated based on
market value. The Company does not believe a change of control, as
defined, has occurred to date.
-45-
<PAGE> 46
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company utilizes an asset and liability approach for financial
accounting and reporting for income taxes. The major components of
deferred tax assets and liabilities follows:
March 31, 1998 March 31, 1997
-------------- --------------
Deferred Tax Assets (Liabilities)
Federal NOL Carryforwards $ 23,220,964 $ 24,372,057
Allowance for Bad Debts 385,803 385,803
Book over tax depreciation
and amortization 739,967 112,171
Accrued Workers Compensation 139,574 423,170
Other accrued expenses 27,353 40,689
---------- ----------
Total deferred tax assets 24,513,661 25,333,890
Valuation allowance (24,513,661) (25,333,890)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
The Company has provided a valuation allowance for the entire balance
of deferred tax assets at March 31, 1998 and March 31, 1997, 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, 1998, 1997 and
1996 differ from the statutory tax rate of 34% primarily due to utilization
of net operating loss carryforwards. Tax expense is generally limited to
alternative minimum tax.
-46-
<PAGE> 47
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following table sets forth a reconciliation of the tax provision
using statutory rates to the actual tax provision provided in the
statements of operations:
1998 1997 1996
---- ---- ----
Tax provision (benefit)
utilizing statutory rates $ 1,545 $ 525 $(313)
Utilization of NOL (1,405) (509) 343
----- --- ---
Tax provision $ 140 $ 16 $ 30
===== === ===
(5) Related Parties
During 1998, 1997 and 1996, the Company sold $113,000, $190,000 and
$791,000 and purchased $139,000, $119,000 and $427,000, respectively, of
goods and services from entities affiliated with individuals serving as
officers and/or directors of the Company. These purchases and sales are
transacted using market rates. These transactions are included in
"contract drilling revenue" and "contract drilling expense" or "other
income or expense" in the accompanying statements of operations.
The related party transactions discussed in the preceding paragraph
are noninterest-bearing and are settled in the normal course of business.
-47-
<PAGE> 48
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(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,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Revenues:
Contract drilling $ 34,891 $ 18,483 $ 21,298
Oil and gas 2,126 2,491 1,683
-------- -------- --------
$ 37,017 $ 20,974 $ 22,981
======== ======== ========
Net income (loss) (a):
Contract drilling $ 8,838 $ 1,937 $ 2,245
Oil and gas (4,427) (114) (3,058)
-------- -------- --------
4,411 1,823 (813)
Corporate income
(expenses) (b) 133 (278) (139)
-------- -------- --------
$ 4,544 $ 1,545 $ (952)
======== ======== ========
Identifiable assets:
Contract drilling $ 17,775 $ 11,711 $ 6,415
Oil and gas 4,325 6,179 4,322
-------- -------- --------
22,100 17,890 10,737
Corporate assets (c) 2,548 1,871 923
-------- -------- --------
$ 24,648 $ 19,761 $ 11,660
======== ======== ========
Depreciation, depletion and
amortization:
Contract drilling $ 2,188 $ 982 $ 439
Oil and gas 1,892 802 468
-------- -------- --------
$ 4,080 $ 1,784 $ 907
======== ======== ========
Capital expenditures:
Contract drilling $ 6,334 $ 3,330 $ 1,463
Oil and gas 3,847 3,424 5,553
-------- -------- --------
$ 10,181 $ 6,754 $ 7,016
======== ======== ========
-48-
<PAGE> 49
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(a) General and administrative costs and other income are allocated
between segments based on identifiable assets.
(b) Corporate income and expenses consist of interest income and
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, 1998, 1997 and 1996, contract drilling
revenues earned from individual customers constituting 10% or more of total
contract drilling revenues were:
(a) two customers in 1998 individually represented approximately
14%, and 12% of drilling revenues,
(b) four customers in 1997 individually represented approximately
21%, 18%, 12% and 10% of drilling revenues,
(c) three customers in 1996 individually represented approximately
19%, 18% and 14% of drilling revenues.
The loss of one or more of the above customers could have a material
adverse effect on the Company, depending upon the demand for drilling rigs
at the time of such loss and the Company's ability to find new customers.
(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 in liquidation by
order of the 201st District Court of Travis County, Texas, on March 12,
1992 in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance
Company and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The
State of Texas vs. Standard Financial Indemnity Corporation. Approximately
two months before being ordered into liquidation, SFIC requested that the
Company pay policy premiums in the approximate amount of $646,476. On July
22, 1993 the special deputy receiver of SFIC billed the Company
approximately $1,061,000 for retrospective premiums, but adjusted the
amount to $854,153 on January 12, 1994.
In November, 1995, the Company was notified that a lawsuit had been
filed in Travis County, Texas styled Texas property and Casualty Insurance
-49-
<PAGE> 50
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Guaranty Association vs. TMBR/Sharp Drilling, Inc. (Cause No. 95-12318).
The Texas Property and Casualty Insurance Guaranty Association ("Guaranty
Association") was seeking a recovery of past workers' compensation claims
advanced by the Guaranty Association related to the Company's workers
compensation insurance program with SFIC. The Guaranty Association was
seeking to recover a total of $803,057.11.
On September 9, 1997, the Company entered into a settlement agreement
with the Guaranty Association. The Company agreed to pay to the Guaranty
Association the sum of $375,000 in full satisfaction of any liability
relating the Company's workers compensation insurance program with SFIC and
Sir Lloyd's Insurance Company and the lawsuit brought by the Guaranty
Association. The Company originally accrued $854,153 relating to the
Guaranty Association's claim for reimbursement. As a result of the
settlement, the Company has eliminated the accrual of $854,153 and the
difference between the accrued amount and the settlement amount ($479,153)
has been recognized as miscellaneous income in the Company's financial
statements.
In addition, the Company has entered into a settlement agreement with
the insurance agent that represented the Company at the time the workers
compensation insurance policies were purchased from Sir Lloyd's and SFIC.
The agent has paid the Company the sum of $180,000 in full settlement of
all claims and liabilities relating to SFIC and Sir Lloyd's Insurance
Company. This amount has been recognized as miscellaneous income in the
Company's financial statements.
The Company provides for its workers' compensation claims prior to
September 1997 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. For claims incurred November 1993 to
September 1997, the Company is generally responsible for the first $10,000
($100,000 prior to November 1993) in claim costs for each workers'
compensation injury. Currently the Company is covered by a fully insured
workers compensation policy.
The Company is a defendant in various lawsuits generally incidental to
its business. The Company does not believe that the ultimate resolution of
such litigation will have a significant effect on the Company's financial
position or results of operations.
-50-
<PAGE> 51
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(8) Supplemental Information Related to Oil and Gas Activities
The Company's capitalized cost of oil and gas properties is as
follows:
March 31,
---------
1998 1997
---- ----
(In thousands)
Oil and gas properties $15,452 $13,102
Accumulated depreciation,
depletion and amortization (11,127) (6,923)
------- -------
$ 4,325 $ 6,179
======= =======
The Company's costs incurred related to oil and gas property
acquisition, exploration and development activities are as follows:
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
(In thousands)
Property acquisition costs $ 275 $ 194 $ 970
Exploration costs 1,430 920 3,969
Development costs 2,141 2,310 614
------- ------- -------
$ 3,846 $ 3,424 $ 5,553
======= ======= =======
-51-
<PAGE> 52
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company's results of operations from oil and gas producing
activities are as follows:
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
(In thousands)
Revenues $ 2,126 $ 2,491 $ 1,683
Production costs 944 924 554
Dry holes and abandonments 476 558 945
Depreciation, depletion and
amortization 1,892 802 468
Writedown of oil and gas
properties 3,120 171 2,624
Income tax provision -- -- --
------- ------- -------
Results of operations from
producing activities
(excluding corporate
overhead and interest costs) $(4,306) $ 36 $(2,908)
======= ======= =======
(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.
-52-
<PAGE> 53
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following sets forth proved oil and gas reserves at March 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Oil Gas Oil Gas Oil Gas
MBbls MMcf MBbls MMcf MBbls MMcf
------- --------- ------- --------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Proved Reserves:
Beginning of Year 484.6 2,413.7 368.6 2,815.6 275.6 1,129.4
Revisions of previous
estimates (159.3) 1,069.3 103.5
Improved recovery -- -- 3.7 (5.6) -- -
Purchases of minerals in
place and extensions 131.9 247.5 85.0 85.7 190.8 1,647.4
Sales of minerals in place (13.9) (1.9) -- -- -- --
Production (72.9) (439.7) (76.2) (361.7) (70.9) (212.1)
----- ------- ----- ------- ----- -------
End of year 370.4 3,288.9 484.6 2,413.7 368.6 2,815.6
===== ======= ===== ======= ===== =======
Proved Developed Resources:
Beginning of year 484.6 2,413.7 368.6 2,815.6 275.6 1,129.4
----- ------- ----- ------- ----- -------
End of year 370.4 3,288.9 484.6 2,413.7 368.6 2,815.6
===== ======= ===== ======= ===== =======
</TABLE>
-53-
<PAGE> 54
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31,
-----------------------
1998 1997
---- ----
(In thousands)
Standardized Measure
Future cash inflows $10,065 $12,848
Future production and
development costs (3,205) (4,201)
------- -------
Future net cash flows 6,860 8,647
10% discount factor (2,200) (2,982)
------- -------
Discounted future net cash flows 4,660 5,665
Discounted income taxes -- --
------- -------
Standardized Measure $ 4,660 $ 5,665
======= =======
1998 1997 1996
---- ---- ----
(In thousands)
Standardized measure,
beginning of year $ 5,665 $ 4,954 $ 2,879
Revisions
Prices and costs (1,889) 813 235
Accretion of discount 567 495 288
------- ------- --------
Net revisions (1,322) 1,308 523
Discoveries and additions 1,499 970 2,681
Production (1,182) (1,567) (1,129)
------- ------- -------
Standardized measure,
end of year $ 4,660 $ 5,665 $ 4,954
======= ======= =======
-54-
<PAGE> 55
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company at June 10, 1998 are as
follows:
Director
or Officer
Name Age Position with Company since
Thomas C. Brown 71 Chairman of the Board of Directors
and Chief Executive Officer 1982
Joe G. Roper 69 Director and President 1982
Donald L. Evans (1) 51 Director 1982
David N. Fitzgerald (1) 75 Director 1984
Don H. Lawson 59 Vice President - Operations 1992
Jeffrey D. Phillips 37 Vice President - Production 1997
Patricia R. Elledge 40 Controller/Treasurer 1994
James M. Alsup 61 Secretary 1982
--------------------------
(1) Member of Compensation and Audit Committees
Directors of the Company serve until the annual meeting of
stockholders to be held in August, 1998, and until their successors in
office are elected and qualified. Each officer is appointed annually by
the Company's Board of Directors to serve at the Board's discretion and
until his successor in office is elected and qualified.
Mr. Brown has served as a Director of the Company since the Company's
formation in 1982. He is presently Chairman of the Board of Directors and
Chief Executive Officer of the Company and has served in such capacities
since 1990. Mr. Brown is also a Director of Tom Brown, Inc., the former
parent of the Company.
Mr. Roper has served as a Director of the Company since the Company's
formation in 1982. He served as Chairman of the Board of Directors and
Chief Executive Officer of the Company from 1982 until 1990 when he became
President of the Company.
-55-
<PAGE> 56
Mr. Evans has been a Director of the Company since the Company's
formation in 1982. He served as President of the Company from 1982 until
1990 when Mr. Roper was elected to the office of President. Mr. Evans is
currently the Chairman of the Board of Directors and Chief Executive
Officer of Tom Brown, Inc., positions he has held since 1990 and 1985,
respectively.
Mr. Fitzgerald has served as a Director of the Company since his
initial election to the Board of Directors in 1984. He is the President
and a shareholder of Dave Fitzgerald, Inc., a privately held oilfield
equipment sales company that Mr. Fitzgerald has owned and operated since
1963. Mr. Fitzgerald is also a Director of Mineral Development, Inc.
Mr. Lawson has been employed by the Company since 1967. He has been
the Vice President - Operations of the Company since 1992.
Mr. Phillips has been employed by the Company since 1995. He has been
the Vice President - Production since 1997. From 1993 to 1995 he was
Operations Manager for Staley Operating Co., a privately held exploration
and production company.
Ms. Elledge was employed by the Company from September, 1989 to
December, 1993 when she resigned to relocate. Ms. Elledge returned to the
employ of the Company in September, 1994 in her current capacity as
Controller - Treasurer.
Mr. Alsup has been the Secretary of the Company since the Company's
formation in 1982. He has been a partner in the law firm of Lynch,
Chappell & Alsup since 1970.
There are no family relationships between any of the Directors or
officers of the Company, except that Patricia R. Elledge is the daughter of
Joe G. Roper.
Item 11. EXECUTIVE COMPENSATION
The discussion under "Executive Compensation" in the Company's
definitive proxy statement for the 1998 annual meeting of shareholders is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Principal Shareholders" and the information
appearing under "Election of Directors" in the Company's definitive proxy
statement for the 1998 annual meeting of shareholders is incorporated
herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Executive Compensation - Certain Transactions"
in the Company's definitive proxy statement for the 1998 annual meeting of
stockholders is incorporated herein by reference.
-56-
<PAGE> 57
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a)1. See Index to Financial Statements at Item 8 30
(a)2. Financial Statement Schedules
Years ended March 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts . . . . 59
All other schedules are omitted as the
required information is inapplicable or the
information is presented in the Financial
Statements or related notes.
(a)3. Exhibits:
Exhibit 3.1 - Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 3.1 in Registrant's Annual
Report on Form 10-K dated June 28, 1991)
Exhibit 3.2 - Bylaws of the Registrant, as amended. (Incorporated
by reference to Exhibit 3.2 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Executive Compensation Plans and Arrangements
(Exhibits 10.1 through and including Exhibit 10.9 constitute
executive compensation plans and arrangements of the Registrant)
Exhibit 10.1 - Incentive Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 in Registrant's Registration Statement
on Form 10 as amended, effective October 9, 1984)
Exhibit 10.2 - Nonqualified Stock Option Agreement dated August
29, 1990, between Thomas C. Brown and the Registrant.
(Incorporated by reference to Exhibit 10.15 in Registrant's Annual
Report on form 10-K dated June 25, 1993)
Exhibit 10.3 - Nonqualified Stock Option Agreement dated August
30, 1988, between Joe G. Roper and the Registrant. (Incorporated
by reference to Exhibit 10.17 in Registrant's Annual Report on
Form 10-K dated June 25, 1993)
-57-
<PAGE> 58
Exhibit 10.4 - Incentive Stock Option Agreement dated November 16,
1993 between Joe G. Roper and the Registrant. (Incorporated by
reference to Exhibit 10.5 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Exhibit 10.5 - Incentive Stock Option Agreement dated December 4,
1992 between Patricia R. Elledge and the Registrant.
(Incorporated by reference to Exhibit 10.20 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.6 - Incentive Stock Option Agreement dated December 4,
1992 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.21 in Registrant's Annual Report on Form
10-K dated June 25, 1993)
Exhibit 10.7 - Incentive Stock Option Agreement dated November 16,
1993 between Don H. Lawson and the Registrant. (Incorporated by
reference to Exhibit 10.10 in Registrant's Annual Report on Form
10-K dated June 27, 1994)
Exhibit 10.8 - 1994 Stock Option Plan. (Incorporated by reference
to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated
June 28, 1995)
Exhibit 10.9 - TMBR/Sharp Drilling, Inc. Employee Retirement Plan.
(Incorporated by reference to Exhibit 10.11 in Registrant's Annual
Report on Form 10-K dated June 28, 1995)
Exhibit 10.10 - Form of Stock Purchase Agreement, dated as of
February 13, 1997, between the Registrant and the stockholders
named therein (Incorporated by reference to Exhibit 10.1 in the
Registrant's Registration Statement on Form S-3, No. 333-23391)
Exhibit 10.11 - Bonus Agreement dated October 2, 1997, between Joe
G. Roper and the Registrant. (Incorporated by reference to Exhibit
10.1 in Registrant's Quarterly Report on Form 10-Q dated February
11, 1998)
Exhibit 10.12 - Bonus Agreement dated October 2, 1997, between
Thomas C. Brown and the Registrant. (Incorporated by reference
to Exhibit 10.2 in Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.13 - Bonus Agreement dated October 2, 1997, between David
N. Fitzgerald and the Registrant. (Incorporated by reference to
Exhibit 10.3 in Registrant's Quarterly Report on Form 10-Q dated
February 11, 1998)
Exhibit 10.14 - Bonus Agreement dated October 2, 1997, between
Donald L. Evans and the Registrant. (Incorporated by reference to
Exhibit 10.4 in Registrant's Quarterly Report on Form 10-Q dated
February 11, 1998)
-58-
<PAGE> 59
Exhibit 10.15 - Bonus Agreement dated October 2, 1997, between
Patricia R. Elledge and the Registrant. (Incorporated by
reference to Exhibit 10.5 in Registrant's Quarterly Report on Form
10-Q dated February 11, 1998)
Exhibit 10.16 - Bonus Agreement dated October 2, 1997, between Don
H. Lawson and the Registrant. (Incorporated by reference to
Exhibit 10.6 in Registrant's Quarterly Report on Form 10-Q dated
February 11, 1998)
Exhibit 10.17 - Bonus Agreement dated October 2, 1997, between
Jeffrey D. Phillips and the Registrant. (Incorporated by
reference to Exhibit 10.7 in Registrant's Quarterly Report on
Form 10-Q dated February 11, 1998)
*Exhibit 10.18 - Loan Agreement dated May 26, 1998 between Norwest
Bank, Texas N. A. and the Registrant.
*Exhibit 23.1 - Consent of Arthur Andersen LLP
*Exhibit 23.2 - Consent of Joe C. Neal & Associates
*Exhibit 27 - Financial Data Schedule
----------------------------------
*Filed herewith
(b) No reports on Form 8-K were filed during the last quarter of fiscal
1998.
-59-
<PAGE> 60
Schedule II
-----------
TMBR/SHARP DRILLING, INC.
Valuation and Qualifying Accounts
Years ended March 31, 1998, 1997 and 1996
(In thousands)
Recoveries
Balance at Additions or other Balance
beginning charged to reserve at end
Description of year operations reductions of year
--------------------- ---------- ---------- ---------- -------
Allowance for
doubtful accounts:
1998 $ 1,135 $ -- $ -- $ 1,135
1997 $ 1,225 $ -- $ 90 $ 1,135
1996 $ 1,225 $ -- $ -- $ 1,225
-60-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TMBR/SHARP DRILLING, INC.
June 26, 1998 By /s/ Thomas C. Brown
Thomas C. Brown, Chairman
of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.
June 26, 1998 /s/ Thomas C. Brown
Thomas C. Brown, Chairman
of the Board of Directors
(Principal Executive Officer)
June 26, 1998 /s/ Joe G. Roper
Joe G. Roper, President and
Director
June 26, 1998 /s/ Patricia R. Elledge
Patricia R. Elledge, Controller/
Treasurer (Principal Financial
Officer)
June 26, 1998 /s/ David N. Fitzgerald
David N. Fitzgerald, Director
June 26, 1998 /s/ Donald L. Evans
Donald L. Evans, Director
-61-
<PAGE> 62
INDEX TO EXHIBITS
Description Page No.
----------- --------
Exhibit 3.1 Articles of Incorporation of the Company, as
amended. (Incorporated by reference to
Exhibit 3.1 in Registrant's Annual Report on
Form 10-K dated June 28, 1991)
Exhibit 3.2 Bylaws of the Company, as amended. (Incor-
porated by reference to Exhibit 3.2 in
Registrant's Annual Report on Form 10-K dated
June 27, 1994)
Executive Compensation Plans and Arrangements
(Exhibits 10.1 through and including Exhibit
10.9 constitute executive compensation plans
and arrangements of the Registrant)
Exhibit 10.1 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 10.3 in Registrant's
Registration Statement on Form 10, as
amended, effective October 9, 1984)
Exhibit 10.2 Nonqualified Stock Option Agreement dated
August 29, 1990, between Thomas C. Brown and
the Registrant. (Incorporated by reference
to Exhibit 10.15 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.3 Nonqualified Stock Option Agreement dated
August 30, 1988, between Joe G. Roper and the
Registrant. (Incorporated by reference to
Exhibit 10.17 in Registrant's Annual Report
on Form 10-K dated June 25, 1993)
Exhibit 10.4 Incentive Stock Option Agreement dated
November 16, 1993 between Joe G. Roper and
the Registrant. (Incorporated by reference
to Exhibit 10.5 in Registrant's Annual Report
on Form 10-K dated June 27, 1994)
Exhibit 10.5 Incentive Stock Option Agreement dated
December 4, 1992 between Patricia R. Elledge
and the Registrant. (Incorporated by
reference to Exhibit 10.20 in Registrant's
Annual Report on Form 10-K dated June 25,
1993)
-62-
<PAGE> 63
Exhibit 10.6 Incentive Stock Option Agreement dated
December 4, 1992 between Don H. Lawson and
the Registrant. (Incorporated by reference
to Exhibit 10.21 in Registrant's Annual
Report on Form 10-K dated June 25, 1993)
Exhibit 10.7 Incentive Stock Option Agreement dated
November 16, 1993 between Don H. Lawson and
the Registrant. (Incorporated by reference
to Exhibit 10.10 in Registrant's Annual
Report on Form 10-K dated June 27, 1994)
Exhibit 10.8 1994 Stock Option Plan. (Incorporated by
reference to Exhibit 10.10 in Registrant's
Annual Report on Form 10-K dated June 28,
1995)
Exhibit 10.9 TMBR/Sharp Drilling, Inc. Employee Retirement
Plan. (Incorporated by reference to Exhibit
10.11 in Registrant's Annual Report on Form
10-K dated June 28, 1995)
Exhibit 10.10 Form of Stock Purchase Agreement, dated as of
February 13, 1997, between the Registrant and
the stockholders named therein (Incorporated
by reference to Exhibit 10.1 in the
Registrant's Registration Statement on Form
S-3, No. 333-23391)
Exhibit 10.11 Bonus Agreement dated October 2, 1997, between
Joe G. Roper and the Registrant.
(Incorporated by reference to Exhibit 10.1 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.12 Bonus Agreement dated October 2, 1997, between
Thomas C. Brown and the Registrant.
(Incorporated by reference to Exhibit 10.2 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.13 Bonus Agreement dated October 2, 1997, between
David N. Fitzgerald and the Registrant.
(Incorporated by reference to Exhibit 10.3 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.14 Bonus Agreement dated October 2, 1997, between
Donald L. Evans and the Registrant.
(Incorporated by reference to Exhibit 10.4 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
-63-
<PAGE> 64
Exhibit 10.15 Bonus Agreement dated October 2, 1997, between
Patricia R. Elledge and the Registrant.
(Incorporated by reference to Exhibit 10.5 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.16 Bonus Agreement dated October 2, 1997, between
Don H. Lawson and the Registrant.
(Incorporated by reference to Exhibit 10.6 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
Exhibit 10.17 Bonus Agreement dated October 2, 1997, between
Jeffrey D. Phillips and the Registrant.
(Incorporated by reference to Exhibit 10.7 in
Registrant's Quarterly Report on Form 10-Q
dated February 11, 1998)
*Exhibit 10.18 Loan Agreement dated May 26, 1998 between Norwest
Bank, Texas N. A. and the Registrant.
*Exhibit 23.1 Consent of Arthur Andersen LLP 64
*Exhibit 23.2 Consent of Joe C. Neal & Associates 65
*Exhibit 27 Financial Data Schedule 66
--------------------
*Filed herewith
-64-
<PAGE> 65
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report included in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8
(registration no. 33-46699 and no. 33-89878) and the Company's previously
filed registration statement on Form S-3, No. 333-23391.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
May 26, 1998
-65-
<PAGE> 66
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the
incorporation by reference of our report included in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8
(registration no. 33-46699 and no. 33-898878) and the Company's previously
filed registration statement on Form S-3, No. 333-23391.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas
June 26, 1998
-66-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
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<PAGE> 1
FIRST AMENDED AND RESTATED LOAN AGREEMENT
This First Amended and Restated Loan Agreement, dated as of
May 26, 1998, is made by and between TMBR/SHARP DRILLING, INC., a
Texas corporation (the "Borrower"), and NORWEST BANK TEXAS, N.A.,
a national banking association (the "Bank").
RECITALS
WHEREAS, the Borrower and the Bank are parties to that
certain Loan Agreement, dated as of January 16, 1996, providing
for the loans and the other matters set forth therein (the "Prior
Loan Agreement").
WHEREAS, the Borrower has issued and delivered to the Bank
(i) that certain Revolving Line of Credit Promissory Note, dated
January 16, 1996, in the original principal amount of $3,000,000
and having a maturity date of January 16, 1998, and (ii) that
certain Promissory Note, dated August 15, 1996, in the original
principal amount of $2,000,000 and having a maturity date, as
extended, of April 15, 1998 (collectively, the "Prior Notes").
WHEREAS, the payment and performance of the Borrower s
obligations under the Prior Loan Agreement and the Prior Notes
are secured by that certain Security Agreement, dated as of
January 16, 1996, between the Borrower and the Bank and the
related financing statements filed with the Secretary of State of
Texas and the Secretary of State of New Mexico (the "Prior
Security Instruments").
WHEREAS, the Prior Notes have matured and all amounts
outstanding thereunder have been repaid in their entirety.
WHEREAS, the Borrower has requested that the Bank (i) renew
and reinstate the lending commitments of the Bank under the Prior
Loan Agreement, (ii) renew, extend and consolidate the Prior
Notes and (iii) make additional loans to the Borrower.
WHEREAS, the Bank is agreeable to the Borrower's requests
but only upon and subject to the terms and provisions which are
hereinafter specified.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, the parties hereto hereby
agree as follows:
ARTICLE 1
<PAGE> 2
DEFINITIONS
Section 1.01 Certain Definitions. As used in this
Agreement, terms defined in the preamble and recitals shall have
the meanings set forth therein and the following terms shall have
the following meanings:
"Affiliate" as to any Person, shall mean any other
Person (other than a Subsidiary) which, directly or
indirectly, is in "control" of, is controlled by, or is
under common control with, such Person. For purposes
of this definition, control of a Person means the
power, directly or indirectly, either to (i) vote 10%
or more of the securities having ordinary voting power
for the election of directors of such Person or (ii)
direct or cause the direction of the management and
policies of such Person, whether by contract or
otherwise.
"Agreement" shall mean this First Amended and
Restated Loan Agreement, as amended, supplemented or
otherwise modified from time to time.
"Base Rate" shall mean that variable rate of
interest per annum established by the Bank from time to
time as its "base rate". Such rate is set by the Bank
as a general reference rate of interest, taking into
account such factors as the Bank may deem appropriate,
it being understood that many of the Bank s commercial
or other loans are priced in relation to such rate,
that it is not necessarily the lowest or best rate
actually charged to any customer and that the Bank may
make various commercial or other loans at rates of
interest having no relationship to such rate.
"Borrowing Base Amount" shall mean at any date,
the amount determined pursuant to Section 2.04 under
this Agreement at such date.
"Borrowing Base Assets" shall mean the Borrower's
accounts receivable, drilling in progress, inventory,
equipment, drill pipe, drilling rigs and related
equipment which is subject to the Liens, privileges,
priorities and security interests existing and to exist
under the terms of the Security Instruments from the
Borrower or any other Person to or in favor of the
Bank.
"Borrowing Base Report" shall have the meaning set
forth in Section 2.04(b).
"Borrowing Date" shall mean any Business Day
specified in a notice pursuant to Section 2.03 as a
-2-
<PAGE> 3
date on which the Borrower requests the Bank to make
Revolving Credit Loans hereunder.
"Business Day" shall mean a day other than a
Saturday, Sunday or legal holiday for commercial banks
under the laws of the State of Texas.
"EBITDA" shall mean, with respect to any period of
calculation thereof, the sum of (i) the net income (or
loss) from continuing operations of Borrower during
such period (excluding extraordinary income but
including extraordinary expenses), plus (ii) interest
expense, income taxes, depreciation, depletion and
amortization expenses of Borrower during such period.
"Change in Control" shall mean the occurrence
after the date of this Agreement of any circumstance or
event in which (i) a Person shall cause or bring about
(through solicitation of proxies or otherwise) the
removal or resignation of a majority of the members of
the Board of Directors of the Borrower serving in such
capacity on the date of this Agreement or a Person
causes or brings about (through solicitation of proxies
or otherwise) an increase in the size of the existing
Board of Directors of the Borrower such that the
existing members of the Board of Directors thereafter
represent a minority of the total number of persons
comprising the entire Board; or (ii) a Person,
including a "group" as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, becomes the
beneficial owner of shares of any class of stock of the
Borrower having twenty percent (20%) or more of the
total number of votes that may be cast for the election
of directors of the Borrower.
"Closing Date" shall mean the date on which the
conditions precedent set forth in Section 7.01 shall be
satisfied.
"Commitment" shall mean the obligation of the Bank
to make Revolving Credit Loans to the Borrower
hereunder in an aggregate principal amount at any one
time outstanding not to exceed the amount provided for
in accordance with the provisions of this Agreement,
including, without limitation, Section 2.01 of this
Agreement.
"Commitment Period" shall mean the period from and
including the date hereof to but not including the
Termination Date or such earlier date on which the
Commitments shall terminate as provided herein.
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<PAGE> 4
"Contractual Obligation" shall mean, as to any
Person, any provision of any security issued by such
Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which
it or any of its property is bound.
"Current Ratio" shall mean the ratio of (i) the
sum of the current assets of Borrower to (ii) the sum
of the current liabilities (excluding, however, current
liabilities attributable to the Note) of Borrower.
"Debt to Worth Ratio" shall mean the ratio of (i)
the sum of the total liabilities of the Borrower to
(ii) the sum of the Borrower's Net Worth.
"Environmental Laws" shall mean any and all
foreign, Federal, state, local or municipal laws,
rules, orders, regulations, statutes, ordinances,
codes, decrees, requirements of any Governmental
Authority or other Requirements of Law (including
common law) regulating, relating to or imposing
liability or standards of conduct concerning protection
of human health or the environment, as now or may at
any time hereafter be in effect.
"Environmental Complaint" shall mean any written
complaint, order, citation, notice or other written
communication from any Person with respect to the
existence or alleged existence of a violation of any
Environmental Law in connection with or with respect to
any air emission, water discharge, noise emission,
asbestos, hazardous substance or any other
environmental matter regulated under Environmental Laws
at, upon, under or within any of the property owned,
leased or used by the Borrower.
"Event of Default" shall mean the occurrence of
any of the events specified in Section 6.01 hereof.
"Excepted Liens" shall mean (i) Liens for taxes,
assessments or other governmental charges or levies not
yet due or which are being contested in good faith by
appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the
books of Borrower in conformity with GAAP; (ii) pledges
or deposits in connection with workers' compensation,
unemployment insurance or other social security
legislation, old age pension or public liability
obligations; (iii) vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's or
other like Liens arising in the ordinary course of
business which are not overdue for a period of more
-4-
<PAGE> 5
than 60 days or which are being contested in good faith
by appropriate proceedings; (iv) Liens arising under
customary oil and gas operating agreements entered into
in the ordinary course of business with respect to
obligations which are not overdue for a period of more
than 60 days or which are being contested in good faith
by appropriate proceedings; (v) restrictions,
easements, reservations, exceptions, encroachments,
rights-of-way, and other similar encumbrances incurred
in the ordinary course of business and other similar
irregularities in title which, in the aggregate, are
not substantial in amount and which do not in any case
materially detract from the value of the property
subject thereto or materially interfere with the
conduct of the business of Borrower; and (vi) deposits
to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds
and other obligations of a like nature incurred in the
ordinary course of business.
"GAAP" shall mean generally accepted accounting
principles in the United States of America in effect
from time to time.
"Governmental Authority" shall mean any nation or
government, any state or other political subdivision
thereof and any entity exercising executive,
legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Highest Lawful Rate" shall mean the maximum
nonusurious interest rate, if any, that at any time or
from time to time may be contracted for, taken,
reserved, charged or received on the Note or on other
Indebtedness owing to the Bank, as the case may be,
under laws applicable to the Note or other Indebtedness
owing to the Bank which are presently in effect or, to
the extent allowed by applicable law, under such
applicable laws which may hereafter be in effect and
which allow a higher maximum nonusurious interest rate
than applicable laws now allow.
"Indebtedness" of any Person at any date shall
mean (i) all obligations, liabilities and indebtedness
of such Person for borrowed money or for the deferred
purchase price of property or services (other than
current trade liabilities incurred in the ordinary
course of business and which are not in excess of 90
days past the invoice or billing date) for which such
Person is liable, contingently or otherwise, as
obligor, guarantor, surety or otherwise, or in respect
-5-
<PAGE> 6
of which such Person otherwise assures a creditor
against loss; (ii) any other indebtedness of such
Person which is evidenced by a note, bond, debenture or
similar instrument; (iii) all obligations of such
Person under leases which shall have been, or should
have been, in accordance with GAAP, recorded as capital
leases for which such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in
respect of which such Person otherwise assures a
creditor against loss; and (iv) unfunded vested
benefits under each employee benefit plan.
"Intangible Assets" shall mean all assets of the
Borrower that would be classified as intangible assets,
but in any event including, without limitation, (i)
deferred assets, other than prepaid insurance and
prepaid taxes; (ii) patents, copyrights, trademarks,
tradenames, franchises, goodwill, experimental expenses
and other similar assets which would be classified as
intangible assets on a balance sheet of such Person;
(iii) unamortized debt discount and expense; and (iv)
assets located, and notes and receivables due from
obligors domiciled, outside of the United States.
"Lien" shall mean any mortgage, encumbrance,
pledge, hypothecation, assignment, charge, security
agreement, lien (statutory or other), deposit
agreement, conditional sale or trust receipt or a
lease, consignment or bailment for security purposes,
and reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances
affecting property. For purposes of this Agreement,
Borrower shall be deemed to be the owner of any
property which it has acquired or holds subject to a
conditional sale agreement, financing lease or other
arrangement pursuant to which title to the property has
been retained by or vested in some other Person for
security purposes.
"Loan Documents" shall mean, collectively, this
Agreement, the Note, the Security Instruments, and all
other agreements, documents, certificates, letters and
instruments of whatever nature ever delivered or
executed pursuant to, or in connection with, this
Agreement, whether existing on the date hereof or
thereafter created, as any of the same may hereafter be
amended, supplemented, extended or restated.
"Material Adverse Effect" shall mean a material
adverse effect on (i) the business, operations,
property, condition (financial or otherwise), results
-6-
<PAGE> 7
of operations, assets, liabilities or prospects of the
Borrower, (ii) the ability of the Borrower to perform
any of its obligations under the Loan Documents or
(iii) the validity or enforceability of this or any of
the other Loan Documents or the rights or remedies of
the Bank hereunder or thereunder.
"Material Environmental Amount" shall mean an
amount not otherwise covered by insurance payable by
the Borrower in excess of $75,000.00 for remedial
costs, compliance costs, compensatory damages, punitive
damages, fines, penalties or any combination thereof.
"Materials of Environmental Concern" shall mean
any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any
Environmental Law, including, without limitation,
petroleum and its derivatives and polychlorinated
biphenyls.
"Net Worth" shall mean as of the date of
determination all amounts included under stockholders'
equity on a balance sheet of the Borrower at such date.
"Note" shall have the meaning set forth in Section
2.02.
"Person" shall mean any individual, corporation,
partnership, joint venture, joint stock company,
business trust, trust, unincorporated association,
Governmental Authority, or any other form of entity of
whatever nature.
"Properties" shall have the meaning set forth in
Section 3.11(a).
"Requirement of Law" shall mean, as to any Person,
the certificate or articles of incorporation and bylaws
or other organizational or governing documents of such
Person, and any law, statute, code, ordinance, order,
treaty, rule, regulation or determination of an
arbitrator or a court or other Governmental Authority,
in each case applicable to or binding upon such Person
or any of its property or to which such Person or any
of its property is subject.
"Revolving Credit Loan" or "Revolving Credit
Loans" shall have the meaning set forth in Section
2.01.
"Security Instruments" shall mean, without
limitation, the agreements or instruments described or
-7-
<PAGE> 8
referenced in Section 7.01(a) hereof and any and all
other instruments heretofore, now or hereafter executed
and delivered by the Borrower or any other Person to
secure or guarantee the payment or performance of the
Note or this Agreement, as any such agreement or
instrument may be amended or supplemented from time to
time.
"Subsidiary" shall mean, as to any Person, a
corporation, partnership or other entity of which
shares of stock or other ownership interests having
ordinary voting power (other than stock or such other
ownership interests having such power only by reason of
the happening of a contingency) to elect a majority of
the board of directors or other managers of such
corporation, partnership or other entity are at the
time owned, or the management of which is otherwise
controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person. Unless
otherwise qualified, all references to "Subsidiary" or
to "Subsidiaries" in this Agreement shall refer to a
Subsidiary or Subsidiaries of Borrower.
"Tangible Net Worth" shall mean at a particular
date (i) the sum of the stockholders' equity of
Borrower, less (ii) the sum of the aggregate book value
of the Intangible Assets of Borrower.
"Termination Date" shall mean May 26, 2000.
Section 1.02 Other Definitional Provisions. (a) Unless
otherwise specified therein, all terms defined in this Agreement
shall have the defined meanings when used in the Note or the
Security Instruments or any certificate or other Loan Document
made or delivered pursuant hereto.
(b) As used herein and in the Note, and any
certificate or other document made or delivered pursuant hereto,
accounting terms relating to the Borrower not defined in Section
1.01 and accounting terms partly defined in Section 1.01, to the
extent not defined, shall have the respective meanings given to
them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision
of this Agreement, and Section, subsection, Schedule and Exhibit
references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall
be equally applicable to both the singular and plural forms of
such terms.
-8-
<PAGE> 9
Section 1.03 Accounting Principles. Where the character
or amount of any asset or liability or item of income or expense
is required to be determined or any consolidation or other
accounting computation is required to be made for the purposes of
this Agreement, such determination, consolidation or computation
shall be made in accordance with GAAP consistently applied,
except where such principles are inconsistent with the
requirements of this Agreement.
ARTICLE 2
AMOUNT AND TERMS OF COMMITMENTS
Section 2.01 Revolving Credit Loans. Subject to the terms
and conditions hereof, the Bank agrees to make revolving credit
loans (individually, a "Revolving Credit Loan"; collectively, the
"Revolving Credit Loans") to the Borrower from time to time
during the Commitment Period in an aggregate principal amount at
any one time outstanding not to exceed the lesser of (i)
$5,000,000.00 or (ii) one-third (1/3) of the Borrowing Base
Amount. During the Commitment Period, the Borrower may use the
Commitment by borrowing, prepaying the Revolving Credit Loans in
whole or in part, and reborrowing, all in accordance with the
terms and conditions hereof.
Section 2.02 Revolving Credit Note. The Revolving Credit
Loans made by the Bank shall be evidenced by a promissory note of
the Borrower, substantially in the form of Exhibit A (the
"Note"). The Bank shall maintain in accordance with its usual
practice an account or other record evidencing the Indebtedness
of the Borrower to the Bank resulting from each Revolving Credit
Loan made by the Bank from time to time, including the amounts of
principal and interest payable and paid to the Bank from time to
time under this Agreement and the Note. The entries made in such
account or record of the Bank shall be prima facie evidence of
the existence and amounts of the obligations of the Borrower
therein recorded; provided, however, that the failure of the Bank
to maintain any such account or record, or any error therein,
shall not in any manner affect the absolute and unconditional
obligation of the Borrower to repay (with applicable interest)
the Revolving Credit Loans made to the Borrower in accordance
with the terms of this Agreement. The Note shall (x) be dated
the Closing Date, (y) be stated to mature two years from the
Closing Date and (z) bear interest on the unpaid principal amount
thereof from time to time outstanding at the applicable interest
rate per annum as provided in the Note. Interest on the Note
shall be payable on the dates specified in the Note.
Section 2.03 Procedure for Revolving Credit Borrowing.
The Borrower may borrow under the Commitment during the
Commitment Period on any Business Day, provided that the Borrower
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<PAGE> 10
shall give the Bank irrevocable notice specifying (A) the amount
to be borrowed and (B) the requested Borrowing Date; provided,
that such notice shall be waived by the Bank in the case of, and
only in the case of, the initial Revolving Credit Loan made on
the Closing Date. Each borrowing pursuant to the Commitment
shall be in an aggregate principal amount of the lesser of (i)
$50,000.00 or a whole multiple thereof, or (ii) the then
remaining unadvanced portion of the available Commitment.
Section 2.04 Borrowing Base Amount. The Borrowing Base
Amount shall be determined as follows:
(a) Initial Borrowing Base Amount. The Borrowing Base
Amount shall be $25,445,743 during the period from the date
hereof to the date on which the Borrower receives notice of the
first determination of the Borrowing Base Amount by the Bank
pursuant to Section 2.04(b) and thereafter the Borrowing Base
Amount shall be the Borrowing Base Amount most recently
determined pursuant to Section 2.04(b).
(b) Determinations of the Borrowing Base Amount. (i)
No later than 45 days after the end of each fiscal quarter of the
Borrower throughout the Commitment Period, the Borrower shall, at
its own expense, furnish to the Bank a borrowing base report
("Borrowing Base Report"), in the form attached hereto as Exhibit
B, which Borrowing Base Report shall be dated as of the end of
each such quarter and shall set forth, by category, the Borrowing
Base Assets and the Borrowing Base Amount as therein provided.
(ii) Within 15 days after it receives each
Borrowing Base Report, the Bank shall make a determination of the
Borrowing Base Amount, and shall notify the Borrower of the new
Borrowing Base Amount, if any; provided, that if the Bank does
not so notify the Borrower of a new Borrowing Base Amount, then
the Borrowing Base Amount set forth in the Borrowing Base Report
furnished to the Bank by the Borrower pursuant to Section
2.04(b)(i) shall be deemed to be the Borrowing Base Amount until
a new Borrowing Base Amount is determined by the Bank and notice
of such new Borrowing Base Amount is given to the Borrower. Each
determination of the Borrowing Base Amount shall be made by the
Bank in the exercise of its sole discretion in accordance with
the then current standards and practices of the Bank for similar
oil and gas/contract drilling equipment loans, taking into
account such factors as the Bank may deem appropriate, including,
without limitation the nature and extent of the Borrower's
interest in the Borrowing Base Assets and the anticipated timing
and extent of net operating income therefrom. The Bank may in
its sole discretion discount the value of any Borrowing Base
Asset set forth in a Borrowing Base Report by the same factors
utilized by it in discounting the value of comparable borrowing
base assets in comparable transactions for comparable borrowers.
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<PAGE> 11
(iii) The Borrower agrees to pay or reimburse
the Bank for all reasonable out-of-pocket costs and expenses
incurred by the Bank in connection with (a) the examination of
each Borrowing Base Report furnished to the Bank by the Borrower,
(b) any redetermination by the Bank of the Borrowing Base Amount
pursuant to such Borrowing Base Report (including independent
appraisals of the Borrowing Base Assets which the Bank may, but
shall not be required to, obtain in connection with any
redetermination of the Borrowing Base Amount by the Bank), and
(c) the notification of the Borrower of such redetermined
Borrowing Base Amount.
(iv) Each delivery by the Borrower to the Bank of
a Borrowing Base Report shall be deemed to constitute a
representation and warranty by the Borrower to the Bank that the
Borrower has good and marketable title to the Borrowing Base
Assets and any other property rights or interests described in
such report, and that none of such Borrowing Base Assets or other
property rights or interests is subject to any Lien other than as
permitted by Section 5.02.
Section 2.05 Optional and Mandatory Prepayments. (a) The
Borrower may at any time and from time to time prepay the
Revolving Credit Loans, in whole or in part, without premium or
penalty, upon at least four Business Days' irrevocable notice to
the Bank, specifying the date and amount of prepayment. If any
such notice is given, the amount specified in such notice shall
be due and payable on the date specified therein. Partial
prepayments shall be in an aggregate principal amount of
$50,000.00 or a whole multiple thereof.
(b) If the aggregate unpaid principal amount of the
Revolving Credit Loans shall at any time exceed one-third (1/3)
of the Borrowing Base Amount at such time, the Bank shall so
notify the Borrower, and the Borrower shall, within 30 days after
such notification, prepay the principal of the Revolving Credit
Loans in an aggregate amount at least equal to such excess,
together with accrued interest on the amount prepaid to the date
of such prepayment.
Section 2.06 Payment Procedure. All payments and
prepayments made by the Borrower under the Note or this Agreement
shall be made without setoff or counterclaim to the Bank at its
office at 500 West Texas Avenue, Midland, Texas 79701, and shall
be made in immediately available funds, prior to 1:00 p.m.,
Midland, Texas time, on the date that such payment is required or
permitted to be made. Any payment received by the Bank after
1:00 p.m. on any date shall be considered for all purposes
(including the calculation of interest, to the extent permitted
by applicable law) as having been made on the next following
Business Day. If the date of any payment or prepayment of the
Note falls on a day which is not a Business Day, then for all
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<PAGE> 12
purposes of the Note and this Agreement such date shall be deemed
to have fallen on the next following Business Day, and such
extension of time shall in such case be included in the
computation of payment of interest.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement and to make
the Revolving Credit Loans, the Borrower hereby represents and
warrants to the Bank (which representations and warranties will
survive the delivery of the Note and the making of the Revolving
Credit Loans hereunder) that:
Section 3.01 Corporate Existence; Compliance with Law.
Borrower (i) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization,
(ii) has the corporate power and authority, and the legal right,
to own and operate its property (including, without limitation,
the Borrowing Base Assets), to lease the property it operates as
lessee and to conduct the business in which it is currently
engaged, (iii) is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its
business requires such qualification and (iv) is in compliance
with all Requirements of Law except to the extent that the
failure to comply therewith could not, in the aggregate,
reasonably be expected to have a Material Adverse Effect.
Section 3.02 Corporate Power; Authorization; Enforceable
Obligations. Borrower has the corporate power and authority, and
the legal right, to make, deliver and perform the Loan Documents
to which it is a party and to borrow hereunder and has taken all
necessary corporate action to authorize the borrowings on the
terms and conditions of this Agreement and the Note and to
authorize the execution, delivery and performance of the Loan
Documents to which it is a party. No consent or authorization
of, filing with, notice to or other act by or in respect of, any
Governmental Authority or any other Person is required in
connection with the borrowings hereunder or with the execution,
delivery, performance, validity or enforceability of the Loan
Documents to which the Borrower is a party. This Agreement has
been, and each other Loan Document to which it is a party will
be, duly executed and delivered on behalf of the Borrower. This
Agreement constitutes, and each other Loan Document to which it
is a party when executed and delivered will constitute, a legal,
valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.
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<PAGE> 13
Section 3.03 No Legal Bar. The execution, delivery and
performance of the Loan Documents to which the Borrower is a
party, the borrowings hereunder and the use of the proceeds
thereof will not violate any Requirement of Law or Contractual
Obligation of the Borrower and will not result in, or require,
the creation or imposition of any Lien (other than as permitted
hereby) on any of Borrower's properties or revenues pursuant to
any such Requirement of Law or Contractual Obligation.
Section 3.04 No Default. Borrower is not in default under
or with respect to any of its Contractual Obligations in any
respect which could have a Material Adverse Effect. No Event of
Default has occurred and is continuing.
Section 3.05 Ownership of Property; Liens. Borrower has
good record and marketable title in fee simple to, or a valid
leasehold interest in, all its real property and good title to,
or a valid leasehold interest in, all its other property
(including, without limitation, the Borrowing Base Assets), and
none of such property is subject to any Lien except as permitted
by Section 5.02.
Section 3.06 No Burdensome Restrictions. No Requirement
of Law or Contractual Obligation of Borrower could reasonably be
expected to have a Material Adverse Effect.
Section 3.07 Taxes. Borrower has filed or caused to be
filed all tax returns which, to the knowledge of the Borrower,
are required to be filed and has paid all taxes shown to be due
and payable on said returns or on any assessments made against it
or any of its property and all other taxes, fees or other charges
imposed on it or any of its property by any Governmental
Authority (other than any the amount or validity of which are
currently being contested in good faith by appropriate
proceedings and with respect to which reserves in conformity with
GAAP have been provided on the books of the Borrower); no tax
Lien has been filed, and, to the knowledge of the Borrower, no
claim is being asserted, with respect to any such tax, fee or
other charge.
Section 3.08 Federal Regulations. No part of the proceeds
of any Revolving Credit Loan will be used for "purchasing" or
"carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulation G or Regulation U of
the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect. If requested by the Bank,
the Borrower will furnish to the Bank a statement to the
foregoing effect in conformity with the requirements of FR Form
G-1 or FR Form U-1 referred to in said Regulation G or Regulation
U, as the case may be.
Section 3.09 Investment Company Act; Public Utility
Holding Company Act; Other Regulations. Borrower is not (a) an
"investment company", or a company "controlled" by an "investment
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company", within the meaning of the Investment Company Act of
1940, as amended or (b) a "holding company" as defined in, or
otherwise subject to regulation under, the Public Utility Holding
Company Act of 1935. Borrower has not made an election to be
treated as a utility (as defined in subdivision (2) of subsection
(a) of Section 35.01 of the Texas Business and Commerce Code.
Borrower is not primarily engaged in the transmission of goods or
gas by pipeline, and does not hold itself out to the public as
having facilities for the transmission of goods or gas by
pipeline which are available for hire by the general public.
Section 3.10 Purpose of Loan. The proceeds of the
Revolving Credit Loans shall be used by the Borrower to purchase
drill pipe and related equipment necessary for the drilling of
oil and gas wells, for purchases of undeveloped and developed oil
and gas properties and for general corporate purposes.
Section 3.11 Environmental Matters. Except for
environmental matters which, in the aggregate, could not
reasonably be expected to either (i) result in the existence of
an unsatisfied liability in excess of a Material Environmental
Amount or (ii) have a Material Adverse Effect:
(a) to the best of the Borrower's knowledge, the
facilities and properties (real or personal) owned, leased
or operated by the Borrower (the "Properties") do not
contain, and have not previously contained, any Materials of
Environmental Concern in amounts or concentrations which (i)
constitute or constituted a violation of, or (ii) could give
rise to liability under, any Environmental Law;
(b) to the best of the Borrower's knowledge, the
Properties and all operations at the Properties are in
compliance, and have in the last five years been in
compliance, with all applicable Environmental Laws, and
there is no contamination at, under or about the Properties
or violation of any Environmental Law with respect to the
Properties or the business operated by Borrower;
(c) Borrower has not received any notice of violation,
alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with
Environmental Laws with regard to any of the Properties or
the business of the Borrower, nor does the Borrower have
knowledge or reason to believe that any such notice will be
received or is being threatened;
(d) to the best of the Borrower's knowledge, materials
of Environmental Concern have not been transported or
disposed of from the Properties in violation of, or in a
manner or to a location which could reasonably be expected
to give rise to liability under, any Environmental Law, nor
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<PAGE> 15
have any Materials of Environmental Concern been generated,
treated, stored or disposed of at, on or under any of the
Properties in violation of, or in a manner that could give
rise to liability under, any applicable Environmental Law;
(e) no judicial proceeding or governmental or
administrative action is pending or, to the knowledge of the
Borrower, threatened, under any Environmental Law to which
Borrower is or will be named as a party with respect to the
Properties or the business of Borrower, nor are there any
consent decrees or other decrees, consent orders,
administrative orders or other orders, or other
administrative or judicial requirements outstanding under
any Environmental Law with respect to the Properties or the
business of Borrower; and
(f) to the best of the Borrower's knowledge, there has
been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising
from or related to the operations of the Borrower in
connection with the Properties or otherwise in connection
with the business of the Borrower, in violation of or in
amounts or in a manner that could give rise to liability
under Environmental Laws.
Section 3.12 Insurance. The Borrower maintains with
financially sound and reputable insurance companies insurance in
at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured
against in the same general area by companies engaged in the same
or a similar business and such insurance is otherwise in
compliance with the Loan Documents.
Section 3.13 Financial Condition. The balance sheet of
the Borrower as of December 31, 1997 and the related statements
of income and of cash flows for the nine-month period then ended,
copies of which have been delivered to the Bank, are true and
correct in all material respects and present fairly the financial
condition of Borrower as at such date and the results of its
operations and cash flows for the periods stated (subject to
normal year-end audit adjustments). Borrower did not have, at
the date of the most recent balance sheet referred to above, any
guaranty obligation, contingent liability or liability for taxes,
or any long-term lease or unusual forward or long-term
commitment, which is not reflected in the foregoing financial
statements or in the notes thereto. During the period from
December 31, 1997 to and including the date hereof there has been
no sale, transfer or other disposition by Borrower of any
material part of its business or property and no purchase or
other acquisition of any business or property (including any
capital stock of any other Person) material in relation to the
financial condition of Borrower at December 31, 1997. Since
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<PAGE> 16
December 31, 1997, no change, either in any case or in the
aggregate, has occurred in the condition, financial or otherwise,
of Borrower which would have a Material Adverse Effect.
Section 3.14 Investments and Guaranties. At the date of
this Agreement, Borrower has not made any material investments
in, advances to or guaranties of the obligations of any Person.
Section 3.15 No Litigation. There is no litigation,
legal, administrative or arbitral proceeding, investigation or
other action of any nature pending or, to the knowledge of the
Borrower, threatened against or affecting Borrower which involves
the possibility of any judgment or liability not fully covered by
insurance, and which would have a Material Adverse Effect; and,
to the best of Borrower's knowledge, since December 31, 1997,
Borrower has not committed any act, or failed to take any action,
in connection with the conduct of its business or with respect to
any Contractual Obligation which is likely to result in the
assertion of any adverse claim of any nature whatsoever by any
Person against Borrower or its properties, revenues or assets.
Section 3.16 Licenses and Permits. Borrower has not
failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of
its properties or the conduct of its business, which violation or
failure would have (in the event that such violation or failure
were asserted by any Person through appropriate action) a
Material Adverse Effect.
Section 3.17 ERISA. Each employee benefit plan which
Borrower has sponsored, maintained or contributed to has complied
in all material respects with the applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code of 1986, as amended.
Section 3.18 No Material Misstatements. No information,
exhibit, schedule or report furnished to the Bank by the Borrower
in connection with this Agreement contains any untrue statement
of a material fact or omits to state any material fact necessary
to make the statements contained therein not misleading.
ARTICLE 4
AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitment
remains in effect or any Indebtedness is owing to the Bank
hereunder or under the Note or any other Loan Document, the
Borrower shall:
Section 4.01 Financial Statements and Reports. Furnish or
cause to be furnished to the Bank from time to time (i) such
information regarding the business and affairs and financial
condition of the Borrower as the Bank may reasonably request, and
(ii) without request, the following:
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<PAGE> 17
(a) Annual Financial Statements - promptly after
becoming available, but in any event within 90 days
after March 31 of each year, a copy of the audited
balance sheet of the Borrower as at the end of such
year, and the related statements of income and retained
earnings and of cash flows of the Borrower for such
year, setting forth in each case in comparative form
the corresponding figures for the preceding year,
accompanied by the report of the Borrower's independent
certified public accountants;
(b) Quarterly Financial Statements - promptly
after becoming available, but in any event within 45
days after the end of each of the first three fiscal
quarters of the Borrower, the unaudited balance sheet
of the Borrower as at the end of such quarter, and the
related unaudited statements of income and retained
earnings and of cash flows of the Borrower for such
quarter and for the period from the beginning of the
most recent fiscal year to the end of such quarter,
setting forth in each case in comparative form the
corresponding figures for the corresponding period of
the preceding year, accompanied by the report of the
principal financial officer of the Borrower, which
report shall be to the effect that such statements are
true and correct in all material respects necessary for
a fair presentation (subject to normal year-end
adjustments);
(c) Accounts Receivable Reports - promptly after
becoming available, but in any event within 45 days
after the end of each fiscal quarter of the Borrower, a
list of accounts receivable of Borrower, and an aging
of all such receivables on the basis of 30-60-90 and
over 90 days from date of invoice;
(d) Calculation of Ratios - promptly after
becoming available, but in any event within 45 days
after the end of each fiscal quarter of the Borrower,
the calculations of Current Ratio, Tangible Net Worth,
Interest Expense Coverage and Debt to Worth Ratio
pursuant to Sections 5.16, 5.17, 5.18 and 5.19,
respectively, hereof; and
(e) Shareholder Communications; Regulatory
Filings - promptly after their availability, but in any
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<PAGE> 18
event within five Business Days after the same are
sent, copies of all financial statements, reports and
other communications furnished by Borrower to its
shareholders, and within five Business Days after the
same are filed, copies of all forms, reports and other
filings made by the Borrower with the Securities and
Exchange Commission.
Section 4.02 Certificates of Compliance. Concurrently
with the furnishing of the annual financial statements pursuant
to Section 4.01(a) hereof and the calculation of the ratios
pursuant to Section 4.01(d) hereof, furnish or cause to be
furnished to the Bank certificates in the form attached hereto as
Exhibit C and Exhibit D, respectively, signed by the principal
financial officer of the Borrower to the effect (i) that a review
of the activities of the Borrower has been made under such
officer's supervision with a view to determining whether the
Borrower has fulfilled all of its obligations under this
Agreement, the Note and the Security Instruments; (ii) that the
Borrower has fulfilled its obligations under such instruments and
that all representations made herein or therein continue to be
true and correct in all material respects except as otherwise
stated therein, or if there is then in existence an Event of
Default, specifying such Event of Default and the nature and
status thereof; and (iii) to the extent requested from time to
time by the Bank, specifically affirming compliance by the
Borrower with any covenants under this Agreement or any Security
Instrument and accompanied by such financial or other details,
information and material as the Bank may reasonably request to
evidence such compliance.
Section 4.03 Payment of Taxes and Other Charges. Pay and
discharge or cause to be paid and discharged promptly all taxes,
assessments and governmental charges or levies, other than any
the amount or validity of which are currently being contested in
good faith by appropriate proceedings and with respect to which
reserves in conformity with GAAP have been provided on the books
of the Borrower.
Section 4.04 Maintenance of Existence; Conduct of
Business. (i) Maintain its separate corporate existence, rights
and franchises; (ii) observe and comply (to the extent necessary
so that any failure would not have a Material Adverse Effect)
with all Contractual Obligations and Requirements of Law; (iii)
maintain its properties in good and workable condition at all
times and make all repairs, replacements, additions, betterments
and improvements to its properties as are needful and proper so
that the business carried on in connection therewith may be
conducted properly and efficiently at all times; and (iv) take
all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal course of its
business.
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<PAGE> 19
Section 4.05 Further Assurances. Cure promptly any
defects in the creation and issuance of the Note and the
execution and delivery of this Agreement, any Security Instrument
or other Loan Document to which the Borrower is a party, and
promptly execute and deliver to the Bank upon request all such
other and further documents, agreements and instruments in
compliance with or accomplishment of the covenants and agreements
of the Borrower in this Agreement and the Security Instruments or
to further evidence and more fully describe the collateral
intended as security for the Note, or to correct any omissions in
any Security Instrument, or more fully to state the security
obligations set out herein or in any Security Instrument, or to
perfect, protect or preserve any Liens created pursuant to any
Security Instrument, or to make any recordings, to file any
notices, or obtain any consents, all as may be necessary or
appropriate in connection therewith as determined by the Bank.
Section 4.06 Performance of Obligations. Perform every
act and discharge all of its obligations provided to be performed
and discharged by it under this Agreement and under the Security
Instruments and other Loan Documents at the time or times and in
the manner specified.
Section 4.07 Reimbursement of Expenses. Pay all
reasonable legal fees and out-of-pocket expenses incurred by the
Bank in connection with the negotiation, preparation and
administration of this Agreement, the Note, the Security
Instruments and any and all other Loan Documents (including any
amendments hereto or thereto or consents or waivers hereunder or
thereunder) and all reasonable fees, charges or taxes for the
recording or filing of the Security Instruments, and promptly
reimburse the Bank for all amounts expended, advanced or incurred
by the Bank to satisfy any obligation of the Borrower under this
Agreement or any other Person under any Security Instrument, or
to collect the Note, or to enforce the rights of the Bank under
this Agreement or any Security Instrument, which amounts will
include all court costs, reasonable attorneys' fees (including,
without limitation, for trial, appeal or other proceedings),
reasonable fees of auditors and accountants, and investigation
expenses reasonably incurred in connection with any such matters.
Section 4.08 Insurance. Maintain with financially sound
and reputable insurance companies insurance against such
liabilities, casualties, risks and contingencies and in such
types and amounts as is customary in the case of Persons engaged
in the same or similar businesses and similarly situated; and
furnish or cause to be furnished to the Bank, upon request, full
information as to the insurance carried, including copies of the
applicable policies; and apply the proceeds of such policies, if
any, to the prepayment of the Indebtedness then owing to the
Bank. Notwithstanding anything in this Section 4.08 to the
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<PAGE> 20
contrary, Borrower shall not be required to maintain insurance on
its drilling rigs.
Section 4.09 Accounts and Records. Keep proper books of
record and account in which full, true and correct entries will
be made of all dealings or transactions in relation to its
business and activities.
Section 4.10 Right of Inspection. Permit any officer,
employee, agent or representative of the Bank to visit and
inspect any of the properties of the Borrower, examine its books
of record and accounts, take copies and extracts therefrom, and
to discuss the business, operations, properties, finances and
accounts of the Borrower with the Borrower's officers, employees,
engineers, accountants and auditors, all at such reasonable times
and as often as the Bank may reasonably desire.
Section 4.11 Notice of Certain Events. Promptly notify
the Bank of the occurrence of (i) any event which constitutes an
Event of Default, together with a detailed statement by the Chief
Executive Officer of the Borrower of the steps being taken to
cure such Event of Default; (ii) the receipt of any notice from,
or the taking of any other action by, the holder of any
promissory note, debenture or other evidence of indebtedness with
respect to a claimed default, together with a detailed statement
specifying the notice given or other action taken by such holder
and the nature of the claimed default and what action the
Borrower is taking or proposes to take with respect thereto;
(iii) any legal, judicial or regulatory proceedings affecting
Borrower or any of its properties in which the amount involved is
material and is not covered by insurance or which, if adversely
determined, would have a Material Adverse Effect; (iv) any
dispute between the Borrower and any Governmental Authority or
any other Person which, if adversely determined, would have a
Material Adverse Effect; (v) any event or condition having a
Material Adverse Effect; and (vi) each Environmental Complaint.
Section 4.12 Borrowing Base Reports. Provide the Bank
with Borrowing Base Reports required by and in accordance with
Section 2.04(b)(i) of this Agreement.
Section 4.13. Pledge of Additional Collateral. If
Revolving Credit Loans in excess of $500,000.00 are used by the
Borrower for the purpose of acquiring oil and gas properties, and
interests therein, whether developed or undeveloped, and whether
in one transaction or a series of transactions, the Borrower
shall, upon written request by the Bank, promptly execute and
deliver to the Bank such deeds of trust, mortgages, assignments,
security agreements, financing statements and other security
documents and instruments as may be requested by the Bank, in
form and substance satisfactory to the Bank, granting and
conveying to the Bank first and prior security interests and
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<PAGE> 21
Liens in and to all oil and gas properties purchased by the
Borrower with proceeds of Revolving Credit Loans.
ARTICLE 5
NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitment
remains in effect or any Indebtedness is owing to the Bank
hereunder or under the Note or any other Loan Document, the
Borrower shall not, directly or indirectly:
Section 5.01 Limitation on Indebtedness. Incur, create,
assume or suffer to exist any Indebtedness, except:
(a) Indebtedness of the Borrower to the Bank;
(b) Indebtedness existing on the date of this
Agreement which is set forth in the financial
statements referred to in Section 3.13 of this
Agreement, but not any increases thereof;
(c) obligations for the payment of rent or hire
of property under leases or lease agreements which
would not cause the aggregate amount of all payments
made by the Borrower pursuant to such leases or lease
agreements to exceed $250,000.00 during the terms
thereof; and
(d) additional Indebtedness of the Borrower not
to exceed $250,000.00 in aggregate principal amount at
any one time outstanding.
Section 5.02 Limitation on Liens. Create, incur, assume
or permit to exist any Lien on any of its property, assets or
revenues, whether now owned or hereafter acquired, except for:
(a) Liens securing the payment of any
Indebtedness of the Borrower to the Bank; and
(b) Excepted Liens.
Section 5.03 Limitation on Investments, Acquisitions,
Loans and Advances. Make any loan, advance, extension of credit
or capital contribution to, or purchase any stock, bonds, notes,
debentures or other securities of or any assets constituting a
business unit of, or make any other investments in, any Person,
except:
(a) the outstanding investments, loans or
advances set forth in the financial statements referred
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<PAGE> 22
to in Section 3.13 of this Agreement, but not any
increases thereof;
(b) investments in (i) direct obligations of the
United States of America or any agency thereof; (ii)
certificates of deposit of the Bank of maturities less
than one year, or issued by other commercial banks in
the United States of America having capital and surplus
in excess of $50,000,000; or (iii) commercial paper of
maturities less than six months if at the time of
purchase such paper is rated in either of the two
highest rating categories of Standard & Poors
Corporation, Moody's Investors Service, Inc. or any
other rating agency satisfactory to the Bank;
(c) extensions of trade credit in the ordinary
course of business;
(d) investments in and acquisitions of oil and
gas properties and related assets, provided that such
investments or acquisitions are made in the ordinary
course of Borrower's business and not otherwise
prohibited by this Agreement;
(e) other investments, capital contributions,
loans or advances not to exceed the aggregate amount of
$250,000.00 at any one time outstanding; and
(f) loans and advances to employees of the
Borrower for travel, entertainment and similar expenses
in the ordinary course of business.
Section 5.04 Limitation on Dividends, Distributions and
Redemptions. Declare or pay any dividend (other than dividends
payable solely in common stock of the Borrower) on, or purchase,
redeem, retire or otherwise acquire for value, any shares of any
class of Borrower's capital stock now or hereafter outstanding,
or return any capital to its shareholders, or make any other
distribution in respect thereof, whether in cash or property on
in obligations of the Borrower or any Subsidiary.
Section 5.05 Limitation on Sales and Leasebacks. Enter
into any arrangement with any Person whereby it shall sell or
transfer any property, whether now owned or hereafter acquired,
and whereby it shall then or thereafter rent or lease as lessee
such property or any part thereof or other property which it
intends to use for substantially the same purpose or purposes as
the property sold or transferred.
Section 5.06 Limitation on Fundamental Changes. Enter
into any merger, consolidation or amalgamation, or liquidate,
wind up or dissolve itself (or suffer any liquidation or
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<PAGE> 23
dissolution), or convey, sell, lease, assign, transfer or
otherwise dispose of (whether in one transaction or in a series
of related transactions), all or substantially all of its
property, business or assets (whether now owned or hereafter
acquired), or make any material change in its present method of
conducting business.
Section 5.07 Limitation on Leases. Create, incur, assume
or suffer to exist any obligation for the payment of rent or hire
of property of any kind whatsoever (real or personal), under
leases or lease agreements (other than leases or lease agreements
which constitute Indebtedness and which are permitted by Section
5.01(c) of this Agreement, or oil and gas leases) which would
cause the aggregate amount of all payments made by the Borrower
pursuant to such leases or lease agreements to exceed $75,000 in
any period of twelve consecutive calendar months.
Section 5.08 Limitation on Negative Pledge Clauses. Enter
into with any Person any agreement, other than (a) this Agreement
and (b) the Loan Documents, which prohibits or limits the ability
of the Borrower to create, incur, assume or suffer to exist any
Lien upon any of its property, assets or revenues, whether now
owned or hereafter acquired.
Section 5.09 Limitation on Use of Proceeds. Permit the
proceeds of the Note to be used for any purpose other than as
permitted by Section 3.10 hereof.
Section 5.10 Limitation on Lines of Business. Enter into
any business, either directly or through any Subsidiary, except
for those businesses in which the Borrower is engaged on the date
of this Agreement or which are directly related thereto.
Section 5.11 Limitation on Sale of Assets. Convey, sell,
lease, assign, transfer or otherwise dispose of any of its
property, business or assets (including, without limitation,
receivables and leasehold interests), whether now owned or
hereafter acquired, except:
(a) obsolete, worn out, depleted or "uneconomic"
property disposed of in the ordinary course of
business;
(b) the sale of petroleum produced by the
Borrower in the ordinary course of Borrower's business;
(c) undeveloped, undrilled leasehold acreage held
in inventory, provided that in any fiscal year of the
Borrower the gross proceeds of such property so
disposed of shall not exceed $250,000.00; and
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<PAGE> 24
(d) the sale of any other assets or properties of
the Borrower, provided that in any fiscal year of the
Borrower the gross proceeds of such property so
disposed of shall not exceed $250,000.00.
Section 5.12 Limitation on Changes in Fiscal Year. Permit
its fiscal year to end on a day other than March 31.
Section 5.13 Limitation on Transactions with Affiliates.
Enter into any transaction, including, without limitation, any
purchase, sale, lease or exchange of property or the rendering of
any service, with any Affiliate unless such transaction is (a)
not otherwise prohibited under this Agreement, (b) in the
ordinary course of business and (c) upon fair and reasonable
terms no less favorable to the Borrower than it could obtain in a
comparable arm's length transaction with a Person which is not an
Affiliate.
Section 5.14 No Change in Control. Permit any Change in
Control of Borrower.
Section 5.15 Limitation on Issuance of Stock. Issue or
sell any shares of capital stock or other equity security (or any
options, warrants, rights or other convertible securities
entitling the holder thereof to acquire any such capital stock or
equity security) of any kind or class, except:
(a) the issuance and sale of capital stock or
other equity security, the proceeds of which will be
used to repay the Note in its entirety, and
(b) the issuance and sale of capital stock
pursuant to the Borrower's stock option plans and stock
options in existence on the date of this Agreement.
Section 5.16 Current Ratio. Permit the Current Ratio, as
defined herein and calculated pursuant to Exhibit E hereto, to be
less than .80 to 1.0 at the end of any fiscal quarter of the
Borrower.
Section 5.17 Tangible Net Worth. Permit the Tangible Net
Worth, as defined herein and calculated pursuant to Exhibit F
hereto, to be less than $4,500,000.00 as of the end of each
fiscal quarter of the Borrower.
Section 5.18 Interest Expense Coverage. Permit for any
fiscal quarter the ratio of (i) EBITDA (as calculated pursuant to
Exhibit G hereto) to (ii) total interest expense paid or accrued
on all Indebtedness to be less than 3.00 to 1.00.
Section 5.19 Debt to Worth Ratio. Permit the Debt to
Worth Ratio, as defined herein and calculated pursuant to Exhibit
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<PAGE> 25
H hereto, to be greater than 2.0 to 1.0 at the end of any fiscal
quarter of the Borrower.
ARTICLE 6
EVENTS OF DEFAULT
Section 6.01 Events. Any of the following events shall
constitute and be considered an "Event of Default" as that term
is used herein:
(a) Payments - default shall be made in the
payment when due of any installment of principal or
interest on the Note or any other Indebtedness owing by
the Borrower to the Bank; or
(b) Representations and Warranties - any
representation or warranty made by the Borrower herein,
or by the Borrower or any other Person in any Security
Instrument, or in any other Loan Document furnished to
the Bank pursuant to or under this Agreement, any
Security Instrument or any other Loan Document, proves
to have been incorrect in any material respect as of
the date when made or deemed made and shall continue
unremedied for a period of 30 days after the earlier of
(i) the Borrower becoming aware of such default or (ii)
the Bank giving notice thereof to the Borrower; or
(c) Loan Agreement Covenants - default shall be
made by the Borrower in the due observance or
performance of any of the covenants or agreements
contained in Articles 4 and 5 of this Agreement, and in
the case of default under Article 4 such default
continues unremedied for a period of 30 days after the
earlier of (i) the Borrower becoming aware of such
default or (ii) the Bank giving notice thereof to the
Borrower; or
(d) Security Instrument Covenants - default is
made in the due observance or performance by Borrower
of any covenant, condition or agreement contained in
any Security Instrument, and such default continues
unremedied beyond the expiration of any applicable
grace period which may be expressly allowed under such
Security Instrument; or
(e) Involuntary Bankruptcy or Other Proceedings -
an involuntary case or other proceeding shall be
commenced against Borrower which seeks liquidation,
reorganization or other relief with respect to it or
its debts or other liabilities under any bankruptcy,
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<PAGE> 26
insolvency or other similar law now or hereafter in
effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar
official of it or any substantial part of its property,
and such involuntary case or other proceeding shall
remain undismissed or unstayed for a period of 60 days;
or an order for relief against Borrower shall be
entered in any such case under the Federal Bankruptcy
Code; or
(f) Voluntary Petitions, Etc. - Borrower shall
commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with
respect to itself or its debts or other liabilities
under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment
of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its
property, or shall consent to any such relief or to the
appointment of or taking possession by any such
official in an involuntary case or other proceeding
commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail
generally to, or shall admit in writing its inability
to pay its debts generally as they become due, or shall
take any corporate action to authorize or effect any of
the foregoing; or
(g) Discontinuance of Business - Borrower
discontinues its usual business; or
(h) Default on Other Indebtedness - Borrower
shall default in any payment of principal of or
interest on any Indebtedness (other than to the Bank)
in excess of $250,000.00 in outstanding principal
amount beyond any period of grace provided with respect
thereto, or in the performance of any other agreement,
term or condition contained in any agreement or
instrument under or by which any such Indebtedness is
created, evidenced or secured if the effect of such
default is to cause such obligation to become due
before its stated maturity or to permit the holder(s)
of such obligation or the trustee(s) under any such
agreement or instrument to cause such obligation to
become due prior to its stated maturity, whether or not
such default or failure to perform should be waived by
the holder(s) of such obligation or such trustee(s); or
(i) Undischarged Judgments - Borrower shall fail
within 30 days after date of entry to pay, bond or
otherwise discharge any judgment or order for the
payment of money in excess of $250,000.00 that is not
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otherwise being satisfied in accordance with its terms
and is not stayed on appeal or otherwise being
appropriately contested in good faith; or
(j) Security Instruments - any Security
Instrument after delivery thereof shall for any reason
cease to be in full force and effect and valid, binding
and enforceable in accordance with its terms, or cease
to create a valid and perfected Lien of the priority
required thereby on any of the collateral purported to
be covered thereby, or Borrower or any other Person who
may have granted or purported to grant such Lien shall
so state in writing; or
(k) Material Adverse Effect - the occurrence of
any change or event which has a Material Adverse
Effect.
Section 6.02 Remedies. (a) Upon the occurrence of any
Event of Default described in Subsection 6.01(e) or (f) hereof,
the lending obligations of the Bank hereunder shall immediately
terminate, and the entire principal amount of all Indebtedness
then outstanding and owing to the Bank together with interest
then accrued and unpaid thereon shall become immediately due and
payable, all without demand and presentment for payment, notice
of nonpayment, protest, notice of protest, notice of dishonor,
notice of intention to accelerate maturity or notice of
acceleration of maturity, or any other notice of default of any
kind, all of which are hereby expressly waived by the Borrower.
(b) Upon the occurrence and at any time during the
continuance of any other Event of Default specified in Section
6.01 hereof, the Bank may, by written notice to the Borrower, (i)
declare the entire principal amount of all Indebtedness then
outstanding and owing to the Bank together with interest then
accrued and unpaid thereon to be immediately due and payable
without demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of
intention to accelerate maturity or notice of acceleration of
maturity, or any other notice of default of any kind, all of
which are hereby expressly waived by the Borrower, and/or (ii)
terminate the lending obligations of the Bank hereunder unless
and until the Bank shall reinstate same in writing.
Section 6.03 Right of Setoff. Upon the occurrence and
during the continuance of any Event of Default, or if Borrower
becomes insolvent, however evidenced, the Bank is hereby
authorized at any time and from time to time, without prior
notice to the Borrower (any such notice being expressly waived by
the Borrower), to setoff and apply any and all deposits (general
or special, time or demand, provisional or final) at any time
held and other Indebtedness at any time owing by the Bank to or
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for the credit or the account of Borrower against any and all of
the Indebtedness owing to the Bank, irrespective of whether or
not the Bank shall have made any demand under this Agreement or
the Note and although such obligations may be unmatured. The
Bank agrees promptly to notify the Borrower after any such setoff
and application, provided that the failure to give such notice
shall not affect the validity of such setoff and application.
The rights of the Bank under this Section 6.03 are in addition to
other rights and remedies (including, without limitation, other
rights of setoff) which the Bank may have.
ARTICLE 7
CONDITIONS PRECEDENT
Section 7.01 Conditions to Initial Revolving Credit Loan.
The obligation of the Bank to make the initial Revolving Credit
Loan is subject to the satisfaction, prior to or concurrently
with the making of such Revolving Credit Loan on the Closing
Date, of the following conditions precedent.
(a) Loan Documents - the Bank shall have received
this Agreement, the Note and the Security Instruments
described in Schedule 7.01, in each case duly executed
and delivered by a duly authorized officer of the
Borrower.
(b) Closing Certificate - the Bank shall have
received a certificate of the Chairman of the Board of
Directors of Borrower, dated the Closing Date,
substantially in the form of Exhibit I, with
appropriate insertions and attachments.
(c) Corporate Proceedings of the Borrower - the
Bank shall have received a copy of the resolutions, in
form and substance satisfactory to the Bank, of the
Board of Directors of the Borrower authorizing (i) the
execution, delivery and performance of this Agreement
and the other Loan Documents to which it is a party and
(ii) the borrowings contemplated hereunder, certified
by the Chairman of the Board of Directors of Borrower
as of the Closing Date, which certificate shall be in
form and substance satisfactory to the Bank and shall
state that the resolutions thereby certified have not
been amended, modified, revoked or rescinded.
(d) Borrower Incumbency Certificate - the Bank
shall have received a certificate of the Borrower,
dated the Closing Date, as to the incumbency and
signature of the officers of the Borrower executing any
Loan Document in substantially the form of Exhibit J,
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<PAGE> 29
executed by the Chairman of the Board of Directors and
the Secretary or any Assistant Secretary of the
Borrower.
(e) Corporate Documents - the Bank shall have
received true and complete copies of the articles of
incorporation and bylaws of the Borrower, certified as
of the Closing Date as complete and correct copies
thereof by the Chairman of the Board of Directors of
the Borrower.
(f) Consents, Licenses and Approvals - the Bank
shall have received a certificate of the Chairman of
the Board of Directors of the Borrower (i) attaching
copies of all consents, authorizations and filings
referred to in Section 3.02, and (ii) stating that such
consents, licenses and filings are in full force and
effect, and such certificate and each such consent,
authorization and filing shall be in form and substance
satisfactory to the Bank.
(g) Other - the Bank shall have received such
other documents as it may reasonably have requested at
any time at or prior to the Closing Date, including,
without limitation, a schedule of all insurance
presently maintained by the Borrower and an appraisal
of the Borrower's drilling rigs and related equipment
prepared by an independent appraiser acceptable to the
Bank and being in form and substance satisfactory to
the Bank.
Section 7.02 Conditions to Each Revolving Credit Loan.
The obligation of the Bank to make any Revolving Credit Loan
requested to be made by Borrower on any date (including, without
limitation, its initial Revolving Credit Loan) is subject to the
satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Borrower in
or pursuant to the Loan Documents shall be true and
correct in all material respects on and as of such date
as if made on and as of such date.
(b) No Event of Default. No Event of Default
shall have occurred and be continuing on such date or
after giving effect to the Revolving Credit Loans
requested to be made on such date.
(c) Maintenance of Borrowing Base.
Notwithstanding Section 2.05(b), after giving effect to
the Revolving Credit Loans requested to be made on any
date, the aggregate principal amount of the Revolving
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<PAGE> 30
Credit Loans then outstanding shall not exceed the
lesser of (i) $5,000,000.00 or (ii) one-third (1/3) of
the Borrowing Base Amount then in effect.
(d) No Material Litigation. No litigation,
investigation or proceeding of or before any arbitrator
or Governmental Authority shall be pending or, to the
knowledge of the Borrower, threatened by or against the
Borrower or the Bank with respect to any of the Loan
Documents or any of the transactions contemplated
hereby or thereby.
(e) Borrowing Base Reports. The Bank shall have
received all Borrowing Base Reports required to be
delivered by Borrower pursuant to Section 2.04(b).
(f) Additional Matters. All corporate and other
proceedings, and all documents, instruments and other
legal matters in connection with the transactions
contemplated by this Agreement and the other Loan
Documents shall be satisfactory in form and substance
to the Bank, and the Bank shall have received such
other documents and legal opinions in respect of any
aspect or consequence of the transactions contemplated
hereby or thereby as it shall reasonably request.
Each borrowing by the Borrower hereunder shall constitute a
representation and warranty by the Borrower as of the date
thereof that the conditions contained in this subsection have
been satisfied.
ARTICLE 8
MISCELLANEOUS
Section 8.01 Notices. Any notice required or permitted to
be given under or in connection with this Agreement, the Note or
the Security Instruments (except as may otherwise be expressly
required herein or therein) shall be in writing and shall be
mailed by first class or express mail, postage prepaid, or sent
by telex, telegram, telecopy or other similar form of rapid
transmission confirmed by mailing (by first class or express
mail, postage prepaid) written confirmation at substantially the
same time as such rapid transmission, or personally delivered to
any officer of the receiving party. All such communications
shall be mailed, sent or delivered,
(a) if to the Borrower: TMBR/Sharp Drilling, Inc.
4607 West Industrial Blvd.
Midland, Texas 79703
(b) if to the Bank: Norwest Bank Texas, N.A.
500 W. Texas, Suite 400
Midland, Texas 79701
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<PAGE> 31
or to such other address or individual's or department's
attention as a party may furnish to the other party in writing.
Any communication so addressed and mailed shall be deemed to be
given when so mailed. Any notice so sent by rapid transmission
shall be deemed to be given when receipt of such transmission is
acknowledged. Any communication so delivered in person shall be
deemed to be given when receipted for by, or actually received
by, an authorized officer of the Borrower or the Bank, as the
case may be.
Section 8.02 Amendments and Waivers. Any provision of
this Agreement, the Note, the Security Instruments or the other
Loan Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by each Person
which is a party to the Loan Document being amended (or with
respect to which a waiver is being obtained) and the Bank.
Section 8.03 Indemnity by Borrower. The Borrower agrees
to indemnify, save and hold harmless the Bank and its Affiliates,
directors, officers, agents, attorneys and employees
(collectively, the "Indemnitees") from and against: (a) any and
all claims, demands, actions or causes of action that are
asserted against any Indemnitee by any Person (other than the
Borrower) if the claim, demand, action or cause of action
directly or indirectly relates to a claim, demand, action or
cause of action that such Person asserts or may assert against
the Borrower, any Affiliate of the Borrower or any officer,
director or shareholder of the Borrower; (b) any and all claims,
demands, actions or causes of action that are asserted against
any Indemnitee by any Person (other than the Borrower) if the
claim, demand, action or cause of action arises out of or relates
to the Revolving Credit Loans, the use or contemplated use of
proceeds of the Revolving Credit Loans or the relationship of the
Borrower and the Bank under this Agreement; (c) any
administrative or investigative proceeding by any Governmental
Authority arising out of or related to a claim, demand, action or
cause of action described in clauses (a) or (b) above; and (d)
any and all liabilities, losses, costs or expenses (including
reasonable attorneys' fees and disbursements) that any Indemnitee
suffers or incurs as a result of any of the foregoing; provided,
that no Indemnitee shall be entitled to indemnification for any
liability, loss, cost or expense caused by its own gross
negligence or willful misconduct. If any claim, demand, action
or cause of action is asserted against any Indemnitee and such
Indemnitee intends to claim indemnification from the Borrower
under this Section 8.03, such Indemnitee shall promptly notify
the Borrower, but the failure to so promptly notify the Borrower
shall not affect the obligations of the Borrower under this
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<PAGE> 32
Section 8.03 unless such failure materially prejudices the
Borrower's right to participate, or the Borrower's rights, if
any, in the contest of such claim, demand, action or cause of
action, as hereinafter provided. Each Indemnitee may, and if
requested by the Borrower in writing shall, in good faith contest
the validity, applicability and amount of such claim, demand,
action or cause of action with counsel selected by such
Indemnitee and reasonably acceptable to the Borrower, and shall
permit the Borrower to participate in such contest. Any
Indemnitee that proposes to settle or compromise any claim or
proceeding for which the Borrower may be liable for payment of
indemnity hereunder shall give the Borrower written notice of the
terms of such proposed settlement or compromise reasonably in
advance of settling or compromising such claim or proceeding and
shall obtain the Borrower's prior written consent, which consent
shall not be unreasonably withheld. In connection with any
claim, demand, action or cause of action covered by this Section
8.03 against more than one Indemnitee, all such Indemnitees shall
be represented by the same legal counsel selected by the
Indemnitees and reasonably acceptable to the Borrower; provided,
that if such legal counsel determines in good faith and advises
the Borrower in writing that representing all such Indemnitees
would or could result in a conflict of interest under legal
requirements or ethical principles applicable to such legal
counsel or that a defense or counterclaim is available to an
Indemnitee that is not available to all such Indemnitees, then to
the extent reasonably necessary to avoid such a conflict of
interest or to permit unqualified assertion of such a defense or
counterclaim, each Indemnitee shall be entitled to separate
representation by legal counsel selected by that Indemnitee and
reasonably acceptable to the Borrower. Any obligation or
liability of the Borrower to any Indemnitee under this Section
8.03 shall survive the expiration or termination of this
Agreement and the repayment of the Revolving Credit Loans and the
payment of all other Indebtedness owing to the Bank for the
statute of limitations period applicable to such claim or
contest.
Section 8.04 Invalidity. In the event that any one or more
of the provisions contained in this Agreement, the Note, any
Security Instrument or any other Loan Document shall, for any
reason, be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement, the Note or such Security
Instrument or other Loan Document.
Section 8.05 Survival of Agreements. All representations
and warranties of the Borrower herein or in the Security
Instruments, and all covenants and agreements herein or therein
not fully performed before the effective date or dates of this
Agreement and of the Security Instruments, shall survive such
date or dates.
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<PAGE> 33
Section 8.06 Successors and Assigns. All covenants and
agreements contained by or on behalf of the Borrower in this
Agreement, the Note and the Security Instruments and other Loan
Documents shall bind its successors and assigns and shall inure
to the benefit of the Bank and its successors and assigns.
Borrower shall not, however, have the right to assign its rights
hereunder or any interest herein, without the prior written
consent of the Bank. In the event that the Bank sells
participations in or assigns the Note or other Indebtedness owing
to the Bank to other lenders (which the Bank may undertake to do
in its sole discretion), each of such other lenders shall have
the rights to setoff against such Indebtedness and similar rights
or Liens to the same extent as may be available to the Bank.
Section 8.07 Renewal, Extension or Rearrangement. All
provisions of this Agreement and of any Security Instrument or
other Loan Document relating to the Note or other Indebtedness
owing to the Bank shall apply with equal force and effect to each
and all promissory notes hereinafter executed which in whole or
in part represent a renewal, extension for any period, increase
or rearrangement of any part of the Indebtedness originally
represented by the Note or of any part of such other
Indebtedness.
Section 8.08 Waivers. No course of dealing on the part of
the Bank, its officers, employees, consultants or agents, nor any
failure or delay by the Bank with respect to exercising any
right, power or privilege of the Bank under this Agreement, the
Note or any Security Instrument or other Loan Document shall
operate as a waiver thereof, except as otherwise provided in
Section 8.02 hereof.
Section 8.09 Cumulative Rights. Rights and remedies of
the Bank under this Agreement, the Note and the Security
Instruments and the other Loan Documents shall be cumulative, and
the exercise or partial exercise of any such right or remedy
shall not preclude the exercise of any other right or remedy.
Section 8.10 Construction. THIS AGREEMENT IS, AND THE
NOTE WILL BE, A CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES OF
AMERICA AND THE STATE OF TEXAS, AS SUCH LAWS ARE NOW IN EFFECT
AND, WITH RESPECT TO USURY LAWS, IF ANY, APPLICABLE TO THE BANK
AND TO THE EXTENT ALLOWED THEREBY, AS SUCH LAWS MAY HEREAFTER BE
IN EFFECT WHICH ALLOW A HIGHER MAXIMUM NONUSURIOUS INTEREST RATE
THAN SUCH LAWS NOW ALLOW.
Section 8.11 Taxes, Etc. Any taxes (excluding income
taxes) payable or ruled payable by any Governmental Authority in
respect of this Agreement, the Note, any Security Instrument or
any other Loan Document shall be paid by the Borrower, together
with interest and penalties, if any.
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<PAGE> 34
Section 8.12 Governmental Regulation. Anything contained
herein to the contrary notwithstanding, the Bank shall not be
obligated to extend credit to the Borrower in an amount in
violation of any limitation or prohibition provided by any
applicable statute or regulation.
Section 8.13 Counterparts. This Agreement may be executed
in one or more counterparts, and it shall not be necessary that
the signatures of all parties hereto be contained on any one
counterpart hereof. Each counterpart shall be deemed an
original, but all counterparts together shall constitute one and
the same instrument.
Section 8.14 Conflicts. If there is ever a conflict
between the terms, conditions, representations, warranties and
covenants contained in this Agreement and the terms, conditions,
representations, warranties or covenants in any of the other Loan
Documents executed by the Borrower, the provisions of this
Agreement shall control; provided, however, the fact that any
term, condition, representation, warranty or covenant contained
in such other Loan Document is not contained herein shall not be,
or be deemed to be, a conflict.
Section 8.15 Exhibits. The exhibits, annexes and
schedules attached to this Agreement are incorporated herein and
shall be considered a part of this Agreement for the purposes
stated herein, except that in the event of any conflict between
any of the provisions of such exhibits, annexes and schedules and
the provisions of this Agreement, the provisions of this
Agreement shall prevail.
Section 8.16 Acknowledgment by Borrower. As a material
inducement to the Bank to execute and deliver this Agreement and
to make the Revolving Credit Loans, the Borrower hereby
acknowledges, agrees and represents that (i) the Prior Notes are
renewed, extended and consolidated, but not extinguished, by the
Note; (ii) the Liens, security interests and assignments created
and evidenced by the Prior Security Instruments are,
respectively, valid and subsisting Liens, security interests and
assignments of the respective dignity and priority recited in the
Prior Security Instruments; (iii) there are no claims or offsets
against, or defenses or counterclaims to, the terms or provisions
of the Prior Security Instruments, and the other obligations
created or evidenced by the Prior Security Instruments; (iv)
Borrower has no claims, offsets, defenses or counterclaims
arising from any of the Bank s acts or omissions with respect to
any collateral, the Prior Security Instruments or the Bank s
performance under the Prior Security Instruments; and (v) the
Bank is not in default and no event has occurred which, with the
passage of time, giving of notice, or both, would constitute a
default by the Bank of its obligations under the terms and
provisions of the Prior Security Instruments.
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<PAGE> 35
Section 8.17 Titles of Articles, Sections and Subsections.
All titles or headings to articles, sections, subsections or
other divisions of this Agreement or the exhibits and schedules
hereto are only for the convenience of the parties and shall not
be construed to have any effect or meaning with respect to the
other content of such articles, sections, subsections or other
divisions, such other content being controlling as to the
agreement between the parties hereto.
Section 8.18 Entire Agreement. THIS AGREEMENT, THE NOTE,
THE SECURITY INSTRUMENTS AND THE OTHER LOAN DOCUMENTS CONSTITUTE
A "LOAN AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS
BUSINESS AND COMMERCE CODE AND REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN OR ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be duly executed as of the date first above
written.
TMBR/SHARP DRILLING, INC.
By:__________________________________
Thomas C. Brown, Chairman of the
Board of Directors and Chief
Executive Officer
NORWEST BANK TEXAS, N.A.
By:__________________________________
Mark D. McKinney, Senior Vice
President
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<PAGE> 36
EXHIBIT A
REVOLVING LINE OF CREDIT PROMISSORY NOTE
$5,000,000.00 May 26, 1998
FOR VALUE RECEIVED, in the manner, on the dates and in the
amounts herein stipulated, TMBR/SHARP DRILLING, INC., a Texas
corporation (the "Borrower"), promises and agrees to pay to the
order of Norwest Bank Texas, N.A., a national banking association
(the "Bank"), in Midland, Midland County, Texas, the principal
sum of Five Million and No/100 Dollars ($5,000,000.00) or, if
less, the aggregate unpaid balance of all advances hereunder, in
lawful money of the United States of America, which shall be
legal tender in payment of all debts and dues, public and
private, at the time of payment, and to pay interest thereon from
the date of advance until maturity at a rate per annum which
shall from day to day be equal to the lesser of (a) the Base Rate
in effect from day to day (calculated on the basis of actual days
elapsed, but computed as if each calendar year consisted of 360
days) or (b) the Highest Lawful Rate. Each change in the rate of
interest charged under this Revolving Line of Credit Promissory
Note (this "Note") shall, subject to the terms hereof, become
effective, without notice to the Borrower, upon the effective
date of each change in the Base Rate or the Highest Lawful Rate,
as the case may be. Notwithstanding the foregoing, if at any
time the Base Rate exceeds the Highest Lawful Rate, the rate of
interest on this Note shall be limited to the Highest Lawful
Rate, but any subsequent reductions in the Base Rate shall not
reduce the rate of interest hereon below the Highest Lawful Rate
until the total amount of interest accrued hereon approximately
equals the amount of interest which would have accrued hereon if
the Base Rate had at all times been in effect. In the event that
at maturity (stated or by acceleration), or at final payment of
this Note, the total amount of interest paid or accrued hereon is
less than the amount of interest which would have accrued if the
Base Rate had at all times been in effect, then, at such time and
to the extent permitted by applicable laws, Borrower shall pay to
the Bank an amount equal to the difference between (a) the lesser
of the amount of interest which would have accrued if the Base
Rate had at all times been in effect or the amount of interest
which would have accrued if the Highest Lawful Rate had at all
times been in effect, and (b) the amount of interest actually
paid or accrued on this Note. All of the past due principal and
accrued interest hereunder shall, at the option of the Bank, bear
interest from maturity (stated or by acceleration) until paid at
a rate per annum equal to the Highest Lawful Rate. Interest
calculations may be made ten days prior to any interest
installment due date under this Note, in which event, if there is
an adjustment in the interest rate in accordance with the terms
hereof during such ten-day period, then the Borrower shall
subsequently, on demand, pay to the Bank any underpayment, or the
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<PAGE> 37
Bank shall pay to the Borrower, any overpayment, as the case may
be, as a result of any adjustment during such ten-day period.
This Note (a) is the Revolving Line of Credit Note referred
to in the First Amended and Restated Loan Agreement, dated as of
the date hereof (as the same may be amended, supplemented or
otherwise modified from time to time, the "Loan Agreement"),
between the Borrower and the Bank, (b) is subject to the terms
and conditions thereof, and (c) is subject to optional and
mandatory prepayments in whole or in part as provided in the Loan
Agreement. Reference is made to the Loan Agreement for a further
statement of the rights, remedies, powers, privileges, benefits,
duties and obligations of the Borrower and the Bank under the
Loan Agreement and this Note. Capitalized terms used herein
which are defined in the Loan Agreement shall have such defined
meanings unless otherwise defined herein.
This Note represents the renewal, extension, and
consolidation, but not the extinguishment, of the Prior Notes.
This Note is secured as provided in the Loan Agreement and
in the other Loan Documents, to which reference is hereby made
for a description of the properties and assets in which a Lien
and security interest has been granted, the nature and extent of
the security, the terms and conditions upon which the Liens and
security interests were granted and the rights of the holder of
this Note with respect thereto.
Each borrowing under this Note shall be in the minimum
amount of $50,000.00 (or the unadvanced portion hereof, whichever
is less) and shall be made only in accordance with the provisions
of the Loan Agreement. Subject to the terms hereof and of the
Loan Agreement, Borrower may borrow, repay and reborrow at any
time and from time to time under this Note.
Interest on the outstanding principal balance of this Note
shall be due and payable monthly on the fifteenth day of each
month, commencing June 15, 1998. The then outstanding principal
balance of this Note and all accrued and unpaid interest shall be
due and payable on May 26, 2000.
Time is of the essence of this Note. Upon the occurrence of
any one or more of the Events of Default specified in the Loan
Agreement, all amounts then remaining unpaid on this Note shall
become, or may be declared to be, immediately due and payable,
all as provided therein.
It is the intention of the Borrower and the Bank that the
Bank shall conform strictly to usury laws applicable to it.
Accordingly, if the transactions contemplated by the Loan
Agreement and this Note would be usurious as to the Bank under
laws applicable to it (including the laws of the United States of
America and the State of Texas or any other jurisdiction whose
laws may be mandatorily applicable to the Bank notwithstanding
the other provisions of the Loan Agreement and this Note), then,
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<PAGE> 38
in that event, notwithstanding anything to the contrary in this
Note, the Loan Agreement or any other Loan Document or other
agreement entered into in connection with or as security for this
Note, (i) the aggregate of all consideration which is contracted
for, taken, reserved, charged or received by the Bank under this
Note, the Loan Agreement or any other Loan Document or agreement
entered into in connection with or as security for this Note
shall under no circumstances exceed the maximum amount allowed by
such applicable law, and any excess shall be credited by the Bank
on the principal amount of the Indebtedness to the Bank (or, to
the extent that the principal amount of the Indebtedness shall
have been or would thereby be paid in full, refunded by the Bank
to the Borrower); and (ii) in the event that the maturity of this
Note is accelerated by reason of an Event of Default under the
Loan Agreement or otherwise, or in the event of any prepayment,
then such consideration that constitutes interest under law
applicable to the Bank may never include more than the maximum
amount allowed by such applicable law, and excess interest, if
any, provided for in this Note, the Loan Agreement or otherwise
shall be canceled automatically by the Bank as of the date of
such acceleration of prepayment and, if theretofore paid, shall
be credited by the Bank on the principal amount of the
Indebtedness (or, to the extent that the principal amount of such
Indebtedness shall have been or would thereby be paid in full,
refunded by the Bank to the Borrower).
To the extent that Texas Finance Code Section 303.201, as
supplemented by Article 5069-ID.002 of the Texas Revised Civil
Statutes (Texas Credit Title), is relevant to the Bank for the
purposes of determining the Highest Lawful Rate, the applicable
rate ceiling under such provisions shall be determined by the
indicated (weekly) rate ceiling from time to time in effect,
subject to the Bank's right subsequently to change such method in
accordance with applicable law.
All parties now or hereafter liable with respect to this
Note, whether maker, principal, surety, guarantor, endorser or
otherwise, hereby waive presentment, demand, protest and all
other notices of any kind.
THIS NOTE IS PERFORMABLE AND PAYABLE IN THE COUNTY OF
MIDLAND, STATE OF TEXAS, AND SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF TEXAS; PROVIDED,
HOWEVER, THAT THE LAWS PERTAINING TO ALLOWABLE RATES OF INTEREST
MAY, FROM TIME TO TIME, BE GOVERNED BY THE LAWS OF THE UNITED
STATES OF AMERICA.
TMBR/SHARP DRILLING, INC.
By:__________________________________
Thomas C. Brown, Chairman of the
Board of Directors and Chief
Executive Officer
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