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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(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, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-12757
TMBR/SHARP DRILLING, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1835108
(State of Incorporation) (I.R.S. Employer Identification
No.)
4607 WEST INDUSTRIAL BLVD., MIDLAND, TEXAS 79703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (area code) (915) 699-5050
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ( )
The aggregate market value of voting stock held by nonaffiliates of
the registrant at June 15, 1999 was approximately $20,598,527.
At June 14, 1999, there were 4,710,886 shares of the Registrant's
Common Stock outstanding.
The information required by Items 11, 12 and 13 of Part III of this
Form 10-K 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 in August, 1999.
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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 . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . 20
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . 21
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk . . . . . . . . . . . . . . 28
Item 8. Financial Statements and Supplementary Data . . 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . 53
Part III
Item 10. Directors and Executive Officers
of the Registrant . . . . . . . . . . . . . . 53
Item 11. Executive Compensation . . . . . . . . . . . . . 54
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . 54
Item 13. Certain Relationships and Related Transactions . 54
Part IV and signatures
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . 55
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, 1999 was approximately 27%
compared to 78% for the year ended March 31, 1998.
The Company owns 17 drilling rigs, at June 14, 1999, 2 rigs were
operating on behalf of the Company for its own account, 1 was operating for
non-affiliated oil producers, and 14 were "stacked" (non-operating). 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 of west Texas and
eastern New Mexico. Oil and gas operations comprised approximately 10% of
the Company's revenues for the fiscal year ended March 31, 1999. The
Company's proved reserves, all of which were proved developed producing,
were approximately 1,163 MBOE (million barrels of oil equivalent) and had a
present value of future net revenues of approximately $6.4 million at March
31, 1999. At March 31, 1999, the Company owned interests in approximately
21,018 gross (2,862 net) acres of developed oil and gas properties, and
approximately 6,727 gross (386 net) acres of undeveloped properties.
Industry conditions began to deteriorate during the latter part of
1997 and have continued to the present, primarily because of declining oil
prices. Recently, there has been an excess supply of, and reduced demand
for, crude oil worldwide. This excess supply has placed downward pressures
on oil prices in the United States as well as worldwide. Natural gas
prices also declined during this period because of warm weather conditions,
which reduced demand.
The contract drilling industry is highly sensitive to oil and gas
industry conditions. Many oil and gas exploration companies have
significantly reduced their drilling budgets due to the low oil and gas
prices. As a result, the Company encounters substantial competition from
other drilling contractors. In recent years, competition within the
drilling industry has been intense due to depressed demand for contract
drilling services.
The Company's profitability and cash flows are highly dependent on the
prices of oil and natural gas. Current low oil prices and, to a lesser
degree, natural gas prices, continue to have a material adverse effect on
the Company's cash flows and profitability. If prices remain depressed
for a sustained period of time, this could have a material adverse effect
on the Company's future operations and financial condition.
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.
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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 14, 1999.
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
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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 3 rigs working at
June 14, 1999, 2 were subject to daywork contracts and one was subject to a
footage 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
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
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%
1999 12,948 17 26.6%
____________________
(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, 1999, the Company drilled a
total of 64 wells for approximately 16 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
Penwell Energy, Inc. 14% 2
Marathon Oil Company 13% 10
Tom Brown, Inc. 12% 10
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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 stacked or 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
depressed demand resulting from lower oil and gas prices and excess
deliverability of natural gas.
Employees
At June 4, 1999, the Company had 32 salaried employees and
approximately 68 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.
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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
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.
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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
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
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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.
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
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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.
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, 1999, 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
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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 14, 1999
the Company was operator of 26 wells.
Oil and Gas Reserves
Information concerning the Company's estimated proved oil and gas
reserves is included in Note (10) to the Company's financial statements.
See "Item 8 - Financial Statements and Supplementary Data".
The reserve information is only an estimate. There are numerous
uncertainties inherent in estimating oil and gas reserves and their
estimated values, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers often vary.
In addition, estimates of reserves are subject to revision due to the
results of drilling, testing and production subsequent to the date of such
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, 1999 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.
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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, 1999. 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................................... 74 13 10.976 2.175
New Mexico.............................. 13 5 3.321 .814
--- --- ------ -----
Total......................... 87 18 14.297 2.989
=== === ====== =====
Acreage
Developed Undeveloped
Gross Net Gross Net
Texas............................ 17,687 2,245 6,727 386
New Mexico....................... 3,331 617 -- --
------ ----- ----- -----
Total.................. 21,018 2,862 6,727 386
====== ===== ===== =====
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. Pursuant to the license agreement, the Company is
required to drill two wells by March, 2000. The Company is currently in
pursuit of a partner or buyer for its interest. 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,
---------------------
1999 1998 1997
-------------- -------------- --------------
Type of Well Gross Net Gross Net Gross Net
Exploratory (1)
Oil 3 1.714 3 .913 3 .700
Gas 3 .781 -- -- 2 .433
Dry 3 1.108 6 .956 5 1.077
Development (2)
Oil -- -- 9 1.592 7 1.835
Gas 2 .266 -- -- -- --
Dry 1 .150 3 .355 2 .625
--------------------------
(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 14, 1999, the Company was participating in the drilling of 1
gross (.25 net) exploratory well in Gaines County, Texas and 1 gross
(.20 net) exploratory well in 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 because 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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<PAGE> 15
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,
----------------------------------
1999 1998 1997
---- ---- ----
Net Production
Oil (Bbls) 68,135 72,880 76,266
Gas (Mcf) 568,627 439,711 361,745
EBO (1) 162,906 146,165 136,557
Sales Prices
Oil ($/Bbl) $10.84 $18.24 $23.93
Gas ($/Mcf) 1.29 1.80 1.81
EBO 9.06 14.55 18.24
Production (Lifting) Costs
per EBO 4.93 6.46 6.77
--------------------
(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
materially interferes with the use of its properties in the operation of
its 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, 1999, Titan Resources I, Inc. and Navajo Refining and
Crude Marketing accounted for approximately 32% and 12%, 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
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<PAGE> 17
on which the Company's executive offices are located and on which the
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.
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 eliminated the accrual of $854,153 and the
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<PAGE> 18
difference between the accrued amount and the settlement amount ($479,153)
was recognized as miscellaneous income in the Company's financial
statements for 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 Company's
financial statements for the year ended March 31, 1998.
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, 1999, and no matters were
submitted to a vote of security holders during such period.
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-
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<PAGE> 19
dealer prices without retail mark-ups, mark-downs or commissions and may
not represent actual transactions.
Price
--------------
High Low
---- ---
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
Fiscal 1999
First Quarter 13 3/4 8 1/2
Second Quarter 10 1/8 3 3/4
Third Quarter 6 5/8 2 3/4
Fourth Quarter 4 7/16 3
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 14, 1999, the outstanding shares of the Company's Common Stock
were held of record by approximately 2,494 stockholders.
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> 20
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, 1999.
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,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenues:
Contract drilling $ 12,948 $ 34,891 $ 18,483 $ 21,298 $ 18,357
Oil and gas 1,476 2,126 2,491 1,683 1,042
------ ------ ------ ------ ------
Total operating revenues 14,424 37,017 20,974 22,981 19,399
Operating costs and expenses:
Contract drilling 10,027 23,163 14,190 17,252 14,630
Oil and gas production 803 944 924 554 350
Dry holes and abandonments 946 476 558 945 629
Depreciation, depletion
and amortization 2,699 4,080 1,784 907 876
General and administrative 1,911 1,863 1,560 1,599 1,553
Writedown of oil and
gas properties (a) 1,304 3,120 171 2,624 --
------ ------ ------ ------ ------
Total operating costs
and expenses 17,690 33,646 19,187 23,881 18,038
------ ------ ------ ------ ------
Operating income (loss) (3,266) 3,371 1,787 (900) 1,361
Other income (expenses):
Interest 151 133 (278) (139) (154)
Other (72) 1,180 52 117 359
------ ------ ------ ------ ------
Total other income (expense) 79 1,313 (226) (22) 205
------ ------ ------ ------ ------
Net income(loss) before income
tax provision (3,187) 4,684 1,561 (922) 1,566
Provision for income taxes -- (140) (16) (30) (30)
------ ------ ------ ------ ------
Net income (loss) before
extraordinary items $ (3,187) $ 4,544 $ 1,545 $ (952) $ 1,536
====== ====== ====== ====== ======
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<PAGE> 21
Net income (loss)
before extraordinary
items per share:
Basic ($0.68) $0.98 $0.43 ($0.29) $0.49
Diluted ($0.68) $0.91 $0.38 -- $0.38
====== ====== ====== ====== ======
Weighted average number of
common shares outstanding:
Basic 4,711 4,615 3,608 3,254 3,109
Diluted 4,711 5,014 4,106 4,075 4,032
===== ===== ===== ===== =====
BALANCE SHEET DATA
Cash and cash equivalents $ 1,195 $ 1,623 $ 1,048 $ 339 $ 1,590
Total assets 18,923 24,648 19,761 11,660 10,040
Total debt -- -- -- 1,300 --
Stockholders' equity 16,735 19,960 14,372 4,959 5,775
</TABLE>
____________________
(a) During fiscal years ended March 31, 1999, 1998 and 1997, the
Company recognized non-cash charges of approximately
$1,304,000, $3,120,000 and $171,000, 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> 22
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> 23
The contract drilling industry remains highly competitive. Throughout
the fiscal year ended March 31, 1999, the demand for drilling rigs has
significantly dropped 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,
1999 1998 1997
(In thousands, except %s)
Contract drilling revenues $12,948 $34,891 $18,483
Contract drilling expenses 10,027 23,163 14,190
Contract drilling expenses as
a percent of drilling revenues 77.4% 66.4% 76.8%
Rig utilization 26.6% 78.2% 51.6%
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 $78,000 and $111,000 as of March
31, 1999, and March 31, 1998, respectively.
For properties with proved or proved developed oil and gas reserves,
depletion, depreciation and amortization of capitalized costs was
calculated for fiscal 1999, 1998 and 1997 by applying the units-of-
production method to the estimated amount of such reserves.
In fiscal 1999, 1998 and 1997, the Company recognized non-cash charges
of approximately $1.3 million, $3.1 million and $171,000, 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
-23-
<PAGE> 24
requires the Company to assess the need for an impairment of capitalized
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,
1999 1998 1997
(In thousands)
Oil and gas revenues $1,476 $2,126 $2,491
Production expenses 803 944 924
Dry holes and abandonments 946 476 558
Depreciation, depletion and
amortization 1,250 1,891 802
Writedown of properties 1,304 3,120 171
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, 1999 to Year Ended March 31, 1998
Contract drilling revenues for fiscal 1999 decreased by 63% from fiscal
1998. Rig utilization rates in fiscal 1999 and 1998 were 27% and 78%,
respectively. The decrease in contract drilling revenues and utilization
rates was due to a significant downturn in oil and gas prices which in turn
negatively impacted demand for contract drilling. Drilling prices were
depressed throughout the year and the Company chose to underutilize its
drilling equipment rather than subject it to additional wear and tear at
unacceptable operating margins. 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 industry wide that are actually
available for work cannot be accurately determined.
Contract drilling expenses were 77% and 66% of contract drilling
revenues in fiscal 1999 and 1998, respectively. The increase is due to the
significant reduction in contract drilling revenues.
Oil and gas revenues decreased by 31% in fiscal 1999. This decrease
can be attributed to the decline in oil and gas prices during the year. In
fiscal 1998, the Company sold a group of fourteen wells in Ector County,
Texas. These wells had high lifting costs on an equivalent barrel of oil
("EBO") basis. As a result of this sale, oil and gas production expenses
for the year ended March 31, 1999 decreased by 15%.
The Company participated as a working-interest owner in the drilling of
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<PAGE> 25
12 wells during fiscal 1999, of which four were dry holes. In fiscal 1998,
the Company participated as a working-interest owner in the drilling of 21
wells, of which nine were dry holes.
Depreciation, depletion and amortization expense decreased due to
several factors. The decline in the rig utilization rates caused a decline
in depreciation expense as drilling equipment is depreciated using the
units-of-production method based on the monthly utilization of the
equipment. Depreciation, depletion and amortization expense on oil and gas
properties decreased as a result of the reduced carrying values of the
properties from impairments in prior years.
The Company recognized a non-cash charge of $1.3 million in fiscal 1999
and $3.1 million in fiscal 1998 related to the writedown of the carrying
value of its oil and gas properties.
Net working capital was 3.2 million at March 31, 1999, compared to $6.0
million at March 31, 1998. The loss of working capital is attributable to
a decrease in accounts receivable.
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.
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.
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<PAGE> 26
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.
Income Taxes
At March 31, 1999, the Company had approximately $77.3 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 1999 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 1999 and 1998 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.
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
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<PAGE> 27
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.
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.
On May 26, 1998, the Company renewed, extended and consolidated the
prior loan facilities with 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 2000 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.
The following table sets forth information regarding the capital
expenditures made by the Company during the last three fiscal years.
Year Ended March 31,
1999 1998 1997
(In thousands)
Oil and gas exploration and development..... $ 4,242 $ 3,846 $3,424
Drilling rigs, drill pipe and
related equipment......................... 261 6,086 2,940
Other....................................... -- 249 390
------ ------ -----
Total.................................. $ 4,503 $10,181 $6,754
====== ====== =====
The Company presently anticipates making capital expenditures of
approximately $4.5 million in its 2000 fiscal year. Of this amount, the
Company expects that approximately $.5 million will be spent for the
acquisition of drill pipe, drill collars and related equipment, and
approximately $4.0 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
-27-
<PAGE> 28
drilling activities, and other factors affecting its business.
Accordingly, the amounts actually spent in fiscal 2000 could differ
substantially from the amounts estimated.
Trends and Prices
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 Year 2000 (Y2K) issue is the risk that systems, products and
equipment utilizing data-sensitive software or computer chips with two-
digit date fields will fail to properly recognize the Year 2000. Such
failures by the Company's software and hardware or that of government
entities, service providers, suppliers and customers could result in
interruptions of the Company's business which could have a material adverse
impact on the Company. Significant uncertainty exists concerning the
potential effects associated with such compliance as systems that do not
properly recognize such information could generate erroneous data or cause
a system to fail.
In order to address the Year 2000 issue, the Board of Directors
appointed a committee consisting of the President, Chief Financial Officer
and Legal Counsel to assist the Company in its Year 2000 efforts.
At March 31, 1999, the Company had completed updating and testing its
information systems for Year 2000 compliance and has determined that the
Year 2000 issues directly related to its information systems will not have
a material impact on its business, operations nor its financial position.
The cost of planning, implementing and testing the Company's information
systems was minimal and immaterial to its operations as a whole.
The Company believes that its greatest risk for Year 2000 issues that
may adversely effect the Company's operations is in the area of third party
computer systems that are not Year 2000 compliant and which, as a result,
may cause interruptions in the Company's normal business operations. The
Year 2000 committee prepared a formal questionnaire which was sent to all
significant customers, suppliers, purchasers and vendors, to determine the
extent to which the Company was vulnerable to those third parties' failure
to remediate the Year 2000 problem. The Company has received written
assurances from approximately 50% of its purchasers, suppliers and
customers who responded as being Year 2000 compliant. The third party
confirmation process is still ongoing.
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<PAGE> 29
Currently, the Company does not have a remediation or contingency plan
in effect but will continue to monitor and assess Year 2000 issues and a
contingency plan will be developed before December 31, 1999.
In the event that any of the Company's significant vendors, customers,
purchasers and local, state, federal and other U. S. government entities do
not successfully and timely achieve Year 2000 compliance, the Company's
business, operations or financial position could be adversely affected. In
addition, there can be no assurance that unexpected Year 2000 compliance
problems of either the Company or its vendors, customers, purchasers and
local, state, federal and other U. S. government entities would not
materially and adversely affect the Company's business, financial condition
or operating results.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary sources of market risk for the Company include fluctuations
in commodity prices and interest rate fluctuations. At March 31, 1999, the
Company had not entered into any hedge arrangements, commodity swap
agreements, commodity futures, options or other similar agreements relating
to crude oil and natural gas.
At March 31, 1999, the Company did not have any amounts outstanding
under its $5.0 million revolving line of credit which bears interest at the
lender's base rate in effect from time to time. As borrowings under this
line of credit bear interest at a variable rate, the Company would be
subject to interest rate risk if the line of credit was utilized.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 29
Balance Sheets, March 31, 1999 and 1998 30
Statements of Operations, Years ended
March 31, 1999, 1998 and 1997 32
Statements of Stockholders' Equity,
Years ended March 31, 1999, 1998 and 1997 33
Statements of Cash Flows,
Years ended March 31, 1999, 1998 and 1997 34
Notes to Financial Statements 35
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<PAGE> 30
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, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended March 31, 1999. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
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 21, 1999
-30-
<PAGE> 31
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,195 $ 1,623
Marketable securities 49 87
Trade receivables,
net of allowance for doubtful
accounts of $1,349 in 1999
and $1,135 in 1998. 3,451 8,149
Inventories 94 82
Deposits 73 73
Other 567 664
------ ------
Total current assets 5,429 10,678
------ ------
Property and equipment, at cost:
Drilling equipment 48,868 48,691
Oil and gas properties, based on
successful efforts accounting 18,742 15,452
Other property and equipment 3,569 3,786
------ ------
71,179 67,929
Less accumulated depreciation,
depletion and amortization (57,858) (54,132)
------ ------
Net property and equipment 13,321 13,797
------ ------
Other assets 173 173
------ ------
Total assets $ 18,923 $ 24,648
====== ======
</TABLE>
See accompanying notes to financial statements.
-31-
<PAGE> 32
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ ---- ----
<S> <C> <C>
Current liabilities:
Trade payables $ 1,424 $ 2,622
Other 764 2,066
------ ------
Total current liabilities 2,188 4,688
------ ------
Total liabilities 2,188 4,688
------ ------
Contingencies
Stockholders' equity:
Common stock, $0.10 par value
Authorized, 50,000,000 shares;
issued, 5,979,625 shares at
March 31, 1999 and 1998 598 598
Additional paid-in capital 69,429 69,429
Accumulated deficit (53,104) (49,917)
Accumulated other comprehensive
income (loss) (38) --
Treasury stock-common, 1,268,739 shares
at March 31, 1999 and 1998, at cost (150) (150)
------ ------
Total stockholders' equity 16,735 19,960
------ ------
Total liabilities and
stockholders' equity $ 18,923 $ 24,648
====== ======
</TABLE>
See accompanying notes to financial statements.
-32-
<PAGE> 33
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 1999, 1998 and 1997
(In thousands, except share data)
1999 1998 1997
---- ---- ----
Revenues:
Contract drilling $ 12,948 $ 34,891 $ 18,483
Oil and gas 1,476 2,126 2,491
------ ------ ------
Total revenues 14,424 37,017 20,974
------ ------ ------
Operating costs and expenses:
Contract drilling 10,027 23,163 14,190
Oil and gas production 803 944 924
Dry holes and abandonments 946 476 558
Depreciation, depletion and
amortization 2,699 4,080 1,784
Writedown of oil and gas
properties 1,304 3,120 171
General and administrative 1,911 1,863 1,560
------ ------ ------
Total operating costs
and expenses 17,690 33,646 19,187
------ ------ ------
Operating income (loss) (3,266) 3,371 1,787
------ ------ ------
Other income (expense):
Interest 151 133 (278)
Gain on sales of assets 127 179 65
Other, net (199) 1,001 (13)
------ ------ ------
Total other income
(expense), net 79 1,313 (226)
------ ------ ------
Net income (loss) before
income tax provision (3,187) 4,684 1,561
Provision for income taxes -- (140) (16)
------ ------ ------
Net income (loss) $ (3,187) $ 4,544 $ 1,545
====== ====== ======
Net income (loss) per common share:
Basic $ (0.68) $ 0.98 $ 0.43
Diluted (0.68) 0.91 0.38
========= ========= =========
Weighted average number of
common shares outstanding:
Basic 4,710,886 4,614,959 3,607,925
Diluted 4,710,886 5,013,981 4,105,882
========= ========= =========
See accompanying notes to financial statements.
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<PAGE> 34
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity
Years Ended March 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Treasury Stock Total
------------ Paid-In Accumulated Comprehensive --------------- Stockholders'
Shares Amount Capital Deficit Income (Loss) Shares Amount Equity
------ ------ ---------- ----------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net Loss -- -- -- (3,187) -- -- -- (3,187)
Other comprehensive
income, net of tax
Unrealized loss
on marketable
equity securities -- -- -- -- (38) -- -- (38)
--------
Comprehensive Loss $ (3,225)
----- ----- -------- -------- ---- ----- ----- --------
Balance, March 31,
1999 5,980 $ 598 $ 69,429 $ (53,104) $(38) 1,270 $(150) $ 16,735
===== ===== ======== ======== ==== ===== ===== =======
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 35
TMBR/SHARP DRILLING, INC.
Statements of Cash Flows
Years Ended March 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (3,187) $ 4,544 $ 1,545
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation, depletion and amortization 2,699 4,080 1,784
Dry holes and abandonments 946 476 558
Gain on sales of assets (127) (179) (65)
Writedown of properties 1,304 3,120 171
Changes in assets and liabilities:
Trade receivables 4,698 (1,931) (3,276)
Deposits -- -- 350
Inventories and other assets 85 (109) (262)
Trade payables (1,198) (117) (597)
Accrued payables and other
current liabilities (1,302) (584) 585
-------- -------- --------
Total adjustments 7,105 4,756 (752)
-------- -------- --------
Net cash provided
by operating activities 3,918 9,300 793
-------- -------- --------
Cash flows from investing activities:
Additions to property and equipment (4,503) (10,181) (6,754)
Proceeds from sales of property
and equipment 157 412 102
-------- -------- --------
Net cash required
by investing activities (4,346) (9,769) (6,652)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- -- 7,780
Proceeds from exercise of stock options -- 1,044 88
Proceeds from bank loan -- -- 3,200
Repayments of bank loan -- -- (4,500)
-------- -------- --------
Net cash provided by
financing activities -- 1,044 6,568
-------- -------- --------
Net increase (decrease) in
cash and cash equivalents (428) 575 709
Cash and cash equivalents at beginning
of year 1,623 1,048 339
-------- -------- --------
Cash and cash equivalents at end of year $ 1,195 $ 1,623 $ 1,048
======== ======== ========
See accompanying notes to financial statements.
-35-
<PAGE> 36
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 1999 and 1998, and $278,000 in 1997. Cash
payments for taxes due totaled $0, $29,000, and $0 during 1999, 1998 and
1997, 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,
1999 was approximately $49,000. An unrealized loss of approximately
$38,000 was deducted from stockholders equity and was included as a
component of other comprehensive income.
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<PAGE> 37
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 $78,000 and $111,000 as of March 31, 1999 and 1998,
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.
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<PAGE> 38
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 $171,000 in 1997. Additional impairments
of $1,304,000 and $3,120,000 were recorded in 1999 and 1998, 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 9), and
the valuation allowance for deferred taxes (see Note 4).
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<PAGE> 39
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.
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<PAGE> 40
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. No
amounts were outstanding under the line of credit on March 31, 1999.
(3) Stockholders' Equity
(a) Common Stock
On February 13, 1997, the Company closed a private placement of
725,000 shares of common stock at a price of $11.00 per share. The net
proceeds from the placement were approximately $7.4 million.
(b) Stock Option Plans
1984 Stock Option Plan
In August of 1984, the Company adopted the 1984 Stock Option Plan (the
"Plan") which initially authorized 375,000 shares of the Company's common
stock to be issued as either incentive stock options or nonqualified stock
options. This Plan was amended in August 1986 to increase the authorized
shares to 475,000 shares of the Company's common stock. In January 1988,
the Plan was amended to reduce the option price on certain options issued
prior to March 31, 1986, to reflect the then current fair market value of
the Company's common stock. The Plan provides that options may be granted
to key employees or directors for various terms at a price not less than
the fair market value of the shares on the date of the grant. Options to
purchase 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.
-40-
<PAGE> 41
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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. In
September 1998, options outstanding under the plan were amended to reduce
the option price to $4.125 per share.
On September 3, 1996, the Company granted 465,000 shares of
nonqualified stock options to key employees under the 1994 Plan. All of
the nonqualified stock options granted on September 3, 1996 are earned and
exercisable as of May 1, 1997. On September 1, 1998, the Company granted
240,000 shares of incentive stock options at a price of $4.125 to key
employees under the 1994 Plan. On March 9, 1999, 140,000 shares became
earned and exercisable. The remaining 100,000 shares will become earned
and exercisable over a three year period. The following sets forth certain
information concerning these options.
Number Option Price
of ---------------------
Shares Per Share Total
------ ---------------------
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
Forfeited (5,000) 7.75 (38,750)
Reduction in option
price -- (3.625) (1,205,312)
Granted 240,000 4.125-4.5375 1,049,400
------- ------------ -----------
Outstanding March 31, 1999 572,500 $4.125-4.5375 $ 2,420,963
======= ============ ===========
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<PAGE> 42
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
1998 Stock Option Plan
In September 1998, the Company adopted, subject to shareholder
approval, its 1998 Stock Option Plan (the "1998 Plan") which authorizes the
grant of options to purchase up to 750,000 shares of the Company's common
stock. These options may be issued as either incentive or nonqualified
stock options. The 1998 Plan provides that options may be granted to key
employees or directors from various terms at a price not less than the fair
market value of the shares on the date of grant. The Company granted
options to purchase 50,000 shares of common stock to two outside directors
under the 1998 Plan, subject to shareholder approval. These nonqualified
options were granted at $4.125 per share and are exercisable on the date on
which the shareholders of the Company approve and adopt the 1998 Plan.
In connection with a private placement completed in February 1997, the
Company issued and currently has outstanding a warrant to purchase 36,250
common shares with an exercise price of $13.20 per share. This warrant
became exercisable on February 17, 1998 and expires on February 17, 2002.
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, 1997 368,800 $0.25 $ 92,200
Exercised (149,300) 0.25 (37,325)
--------- -------
Outstanding March 31, 1998 219,500 0.25 54,875
--------- -------
Outstanding March 31, 1999 219,500 $0.25 $ 54,875
========= =======
All nonqualified options outstanding were earned and exercisable as of
March 31, 1999.
-42-
<PAGE> 43
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Pursuant to SFAS 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plans under Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly no
compensation expense has been recognized for these stock option plans. 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 1999 and 1997, respectively:
dividend yield of 0% and 0%, expected volatility of 54.68% and 68.32%, risk
free interest rate of 4.99% and 6.7%, and an expected life of 5.0 and 5.0
years.
Year of Option Exercise Expected Fair
Grant Shares Price Life Value
------- ------ -------- -------- -----
1997 465,000 $7.75 5.0 $4.87
1999 96,000 $4.125 5.0 $2.17
1999 144,000 $4.5375 5.0 $2.07
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:
1999 1998 1997
---------------- --------------- ---------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
(In thousands, except share amounts)
Net income (loss)
from continuing
operations $(3,187) $(3,719) $4,544 $4,261 $1,545 $(436)
Net income (loss)
from continuing
operations per
share (basic) $(0.68) $(0.79) $0.98 $0.92 $0.43 $(0.10)
-43-
<PAGE> 44
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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, 1999, the Company had approximately $77,295,000 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 1999. 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.
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, 1999 March 31, 1998
-------------- --------------
Deferred Tax Assets (Liabilities)
Federal NOL Carryforwards $ 26,280,337 $ 23,220,964
Allowance for Bad Debts 458,585 385,803
Book over tax depreciation
and amortization 7,150 739,967
Accrued Workers Compensation (22,044) 139,574
Other accrued expenses 20,505 27,353
---------- ----------
Total deferred tax assets 26,744,533 24,513,661
Valuation allowance (26,744,533) (24,513,661)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
-44-
<PAGE> 45
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company has provided a valuation allowance for the entire balance
of deferred tax assets at March 31, 1999 and March 31, 1998, 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, 1999, 1998 and
1997 differ from the statutory tax rate of 34% primarily due to utilization
of net operating loss carryforwards. Tax expense is generally limited to
alternative minimum tax.
The following table sets forth a reconciliation of the tax provision
using statutory rates to the actual tax provision provided in the
statements of operations:
1999 1998 1997
---- ---- ----
Tax provision (benefit)
utilizing statutory rates $(1,084) $ 1,545 $ 525
Utilization of NOL 1,084 (1,405) (509)
----- ----- ---
Tax provision $ -- $ 140 $ 16
===== ===== ===
(5) Related Parties
During 1999, 1998 and 1997, the Company sold $1,549,000, $113,000 and
$190,000 and purchased $131,000, $139,000 and $119,000, 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.
-45-
<PAGE> 46
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(6) Employee Benefits
Effective May 1, 1995, the Company established the TMBR/Sharp
Drilling, Inc. Employee Retirement Plan which is a 401(K) profit sharing
plan. Company contributions are discretionary and have been currently set
at 25% for each dollar contributed by each eligible employee, limited,
however, to a maximum of 5% of the employee's compensation. The Company
has decided to terminate the 401(K) plan effective March 31, 1999.
(7) Business Segments and Significant Customers
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1999 which changes the way the
Company reports information about its operating segments. The information
for 1998 and 1997 has been restated from the prior year's presentation in
order to conform with 1999 presentation.
The Company operates in two reportable segments: (i) drilling and (ii)
oil and gas exploration and development. The long-term financial
performance of each of the reportable segments is affected by similar
economic conditions. Both reportable segments operate in the Permian Basin
of West Texas and Eastern New Mexico.
The accounting policies of the segments are the same as those
described in Note 1 of Notes to Financial Statements. The Company
evaluates performance based on profit or loss from operations before income
taxes, accounting changes, nonrecurring items and interest income and
expense.
The Company accounts for intersegment sales transfers as if the sales
or transfers were to third parties, that is, at current prices.
-46-
<PAGE> 47
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following tables present information related to the Companies'
reportable segments.
Years Ended March 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Revenues:
Contract drilling $ 12,948 $ 34,891 $ 18,483
Oil and gas 1,476 2,126 2,491
-------- -------- --------
$ 14,424 $ 37,017 $ 20,974
======== ======== ========
Net income (loss) (a):
Contract drilling $ (126) $ 8,838 $ 1,937
Oil and gas (3,212) (4,427) (114)
-------- -------- --------
(3,338) 4,411 1,823
Corporate income
(expenses) (b) 151 133 (278)
-------- -------- --------
$ (3,187) $ 4,544 $ 1,545
======== ======== ========
Identifiable assets:
Contract drilling $ 11,877 $ 17,775 $ 11,711
Oil and gas 5,062 4,325 6,179
-------- -------- --------
16,939 22,100 17,890
Corporate assets (c) 1,984 2,548 1,871
-------- -------- --------
$ 18,923 $ 24,648 $ 19,761
======== ======== ========
Depreciation, depletion and
amortization:
Contract drilling $ 1,449 $ 2,188 $ 982
Oil and gas 1,250 1,892 802
-------- -------- --------
$ 2,699 $ 4,080 $ 1,784
======== ======== ========
Capital expenditures:
Contract drilling $ 261 $ 6,334 $ 3,330
Oil and gas 4,242 3,847 3,424
-------- -------- --------
$ 4,503 $ 10,181 $ 6,754
======== ======== ========
-47-
<PAGE> 48
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, 1999, 1998 and 1997, contract drilling
revenues earned from individual customers constituting 10% or more of total
contract drilling revenues were:
(a) five customers in 1999 individually represented approximately
20%, 15%, 14%, 13% and 11% of drilling revenues.
(b) two customers in 1998 individually represented approximately
14%, and 12% of drilling revenues,
(c) four customers in 1997 individually represented approximately
21%, 18%, 12% and 10% of drilling revenues,
The loss of one or more of the above customers could have a material
adverse effect on the Company, depending upon the demand for drilling rigs
at the time of such loss and the Company's ability to find new customers.
(8) Contingencies
In March, 1992, the Company was notified by the Texas Department of
Insurance that the Company's former workers' compensation insurance
carriers, Sir Lloyd's Insurance Company and its affiliate, Standard
Financial Indemnity Corporation ("SFIC"), had been placed 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
-48-
<PAGE> 49
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.
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 eliminated the accrual of $854,153 and the
difference between the accrued amount and the settlement amount of $479,153
was recognized as miscellaneous income in the Company's financial
statements for 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 Company's
financial statements for the year ended March 31, 1998.
The Company provided 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.
-49-
<PAGE> 50
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(9) Supplemental Information Related to Oil and Gas Activities
The Company's capitalized cost of oil and gas properties is as
follows:
March 31,
---------
1999 1998
---- ----
(In thousands)
Oil and gas properties $18,742 $15,452
Accumulated depreciation,
depletion and amortization (13,680) (11,127)
------- -------
$ 5,062 $ 4,325
======= =======
The Company's costs incurred related to oil and gas property
acquisition, exploration and development activities are as follows:
Years Ended March 31,
---------------------
1999 1998 1997
---- ---- ----
(In thousands)
Property acquisition costs $ 422 $ 275 $ 194
Exploration costs 2,481 1,430 920
Development costs 1,339 2,141 2,310
------- ------- -------
$ 4,242 $ 3,846 $ 3,424
======= ======= =======
-50-
<PAGE> 51
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,
---------------------
1999 1998 1997
---- ---- ----
(In thousands)
Revenues $ 1,476 $ 2,126 $ 2,491
Production costs 803 944 924
Dry holes and abandonments 946 476 558
Depreciation, depletion and
amortization 1,250 1,892 802
Writedown of oil and gas
properties 1,304 3,120 171
Income tax provision -- -- --
------- ------- -------
Results of operations from
producing activities
(excluding corporate
overhead and interest costs) $(2,827) $(4,306) $ 36
======= ======= =======
(10) Unaudited supplemental oil and gas reserve information
The reserve information presented below are only estimates. There are
numerous uncertainties inherent in estimating quantities of proved reserves
and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company.
Reserve engineering is a subjective process of estimating underground
accumulations of crude oil and natural gas that cannot be measured in an
exact manner, and the accuracy of any reserve estimate is a function of the
quality of available data and of engineering and geological interpretation
and judgment. The quantities of oil and gas that are ultimately recovered,
production and operating costs, the amount and timing of future development
expenditures and future oil and gas prices may all differ from those
assumed in such estimates.
-51-
<PAGE> 52
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following sets forth proved oil and gas reserves at March 31,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
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 370.4 3,288.9 484.6 2,413.7 368.6 2,815.6
Revisions of previous
estimates (30.7) (326.7) (159.3) 1,069.2 103.5 (120.3)
Improved recovery -- -- -- -- 3.7 (5.6)
Purchases of minerals in
place and extensions 143.8 2,092.3 131.9 247.5 85.0 85.7
Sales of minerals in place -- -- (13.9) (1.9) -- --
Production (68.1) (568.4) (72.9) (439.7) (76.2) (361.7)
----- ------- ----- ------- ----- -------
End of year 415.4 4,486.1 370.4 3,288.9 484.6 2,413.7
===== ======= ===== ======= ===== =======
Proved Developed Reserves:
Beginning of year 370.4 3,288.9 484.6 2,413.7 368.6 2,815.6
----- ------- ----- ------- ----- -------
End of year 415.4 4,486.1 370.4 3,288.9 484.6 2,413.7
===== ======= ===== ======= ===== =======
</TABLE>
-52-
<PAGE> 53
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31,
-----------------------
1999 1998
---- ----
(In thousands)
Standardized Measure
Future cash inflows $12,094 $10,065
Future production and
development costs (3,211) (3,205)
------- -------
Future net cash flows 8,883 6,860
10% discount factor (2,434) (2,200)
------- -------
Discounted future net cash flows 6,449 4,660
Discounted income taxes -- --
------- -------
Standardized Measure $ 6,449 $ 4,660
======= =======
1999 1998 1997
---- ---- ----
(In thousands)
Standardized measure,
beginning of year $ 4,660 $ 5,665 $ 4,954
Revisions
Prices and costs 207 (1,889) 813
Accretion of discount 466 567 495
------- ------- --------
Net revisions 673 (1,322) 1,308
Discoveries and additions 1,789 1,499 970
Production (673) (1,182) (1,567)
------- ------- -------
Standardized measure,
end of year $ 6,449 $ 4,660 $ 5,665
======= ======= =======
-53-
<PAGE> 54
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 14, 1999 were as
follows:
Director
or Officer
Name Age Position with Company Since
---- --- --------------------- ----------
Thomas C. Brown 72 Chairman of the Board of Directors
and Chief Executive Officer 1982
Joe G. Roper 70 Director and President 1982
Donald L. Evans (1) 52 Director 1982
David N. Fitzgerald (1) 76 Director 1984
Don H. Lawson 60 Vice President - Operations 1992
Jeffrey D. Phillips 38 Vice President - Production 1997
Patricia R. Elledge 41 Controller/Treasurer 1994
James M. Alsup 62 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.
-54-
<PAGE> 55
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
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 1999 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 1999 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 1999 annual meeting of
stockholders is incorporated herein by reference.
-55-
<PAGE> 56
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 28
(a)2. Financial Statement Schedules
Years ended March 31, 1999, 1998 and 1997
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 10.26 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)
-56-
<PAGE> 57
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 - 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 10.11 - 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 10.12 - 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 10.13 - 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)
-57-
<PAGE> 58
Exhibit 10.14 - 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 10.15 - 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 10.16 - 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 10.17 - 1998 Stock Option Plan (Incorporated by reference
to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q
dated November 12, 1998)
*Exhibit 10.18 - Incentive Stock Option Agreement dated September 1,
1998, between Don H. Lawson and the Registrant.
*Exhibit 10.19 - Incentive Stock Option Agreement dated September 1,
1998, between Jeffrey D. Phillips and the Registrant.
*Exhibit 10.20 - Incentive Stock Option Agreement dated September 1,
1998, between Patricia R. Elledge and the Registrant.
*Exhibit 10.21 - Incentive Stock Option Agreement dated September 1,
1998, between Joe G. Roper and the Registrant.
*Exhibit 10.22 - Incentive Stock Option Agreement dated September 1,
1998, between Thomas C. Brown and the Registrant.
*Exhibit 10.23 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Patricia R. Elledge and
the Registrant.
*Exhibit 10.24 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Jeffrey D. Phillips and
the Registrant.
*Exhibit 10.25 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Joe G. Roper and the
Registrant.
*Exhibit 10.26 - First Amended and Restated Nonstatutory Stock Option
Agreement dated September 1, 1998, between Thomas C. Brown and the
Registrant.
-58-
<PAGE> 59
Exhibit 10.27 - 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 10.28 - Loan Agreement dated May 26, 1998 between Norwest
Bank, Texas N. A. and the Registrant. (Incorporated by reference
to Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated
June 26, 1998)
*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
1999.
-59-
<PAGE> 60
Schedule II
-----------
TMBR/SHARP DRILLING, INC.
Valuation and Qualifying Accounts
Years ended March 31, 1999, 1998 and 1997
(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:
1999 $ 1,135 $ 214 $ -- $ 1,349
1998 $ 1,135 $ -- $ -- $ 1,135
1997 $ 1,225 $ -- $ 90 $ 1,135
-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 29, 1999 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 29, 1999 /s/ Thomas C. Brown
-------------------------------
Thomas C. Brown, Chairman
of the Board of Directors
(Principal Executive Officer)
June 29, 1999 /s/ Joe G. Roper
-------------------------------
Joe G. Roper, President and
Director
June 29, 1999 /s/ Patricia R. Elledge
--------------------------------
Patricia R. Elledge, Controller/
Treasurer (Principal Financial
Officer)
June 29, 1999 /s/ David N. Fitzgerald
--------------------------------
David N. Fitzgerald, Director
June 29, 1999 /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 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 10.11 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 10.12 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 10.13 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)
Exhibit 10.14 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)
-63-
<PAGE> 64
Exhibit 10.15 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 10.16 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 10.17 1998 Stock Option Plan (Incorporated by reference
to Exhibit 10.1 in Registrant's Quarterly
Report on Form 10-Q dated November 12, 1998)
*Exhibit 10.18 Incentive Stock Option Agreement dated September 1, 65
1998, between Don H. Lawson and the
Registrant.
*Exhibit 10.19 Incentive Stock Option Agreement dated September 1, 69
1998, between Jeffrey D. Phillips and the
Registrant.
*Exhibit 10.20 Incentive Stock Option Agreement dated September 1, 73
1998, between Patricia R. Elledge and the
Registrant.
*Exhibit 10.21 Incentive Stock Option Agreement dated September 1, 77
1998, between Joe G. Roper and the
Registrant.
*Exhibit 10.22 Incentive Stock Option Agreement dated September 1, 81
1998, between Thomas C. Brown and the
Registrant.
*Exhibit 10.23 First Amended and Restated Nonstatutory Stock Option 85
Agreement dated September 1, 1998, between
Patricia R. Elledge and the Registrant.
*Exhibit 10.24 First Amended and Restated Nonstatutory Stock Option 90
Agreement dated September 1, 1998, between
Jeffrey D. Phillips and the Registrant.
*Exhibit 10.25 First Amended and Restated Nonstatutory Stock Option 95
Agreement dated September 1, 1998, between
Joe G. Roper and the Registrant.
*Exhibit 10.26 First Amended and Restated Nonstatutory Stock Option 100
Agreement dated September 1, 1998, between
Thomas C. Brown and the Registrant.
-64-
<PAGE> 65
Exhibit 10.27 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 10.28 Loan Agreement dated May 26, 1998 between Norwest
Bank, Texas N. A. and the Registrant.
(Incorporated by reference to Exhibit 10.18
in Registrant's Annual Report on Form 10-K
dated June 26, 1998)
*Exhibit 23.1 Consent of Arthur Andersen LLP 105
*Exhibit 23.2 Consent of Joe C. Neal & Associates 106
*Exhibit 27 Financial Data Schedule 107
--------------------
*Filed herewith
-65-
<PAGE> 66
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement"),
dated and effective as of the 1st day of September, 1998, is
between TMBR/SHARP DRILLING, INC., a Texas corporation (the
"Company"), and Don H. Lawson ("Employee").
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock, $.10 par value,
of the Company (the "Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan,
the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option (the "Option") to purchase all
or any part of any aggregate of 17,000 shares of Stock, on the
terms and conditions set forth herein and in the Plan, which Plan
is incorporated herein by reference as a part of this Agreement.
This Option is intended to constitute an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Stock
purchased pursuant to the exercise of this Option shall be $4.125
per share, which has been determined to be the fair market value
of the Stock at the date of grant of this Option. For all
purposes of this Agreement, the fair market value of the Stock
shall be determined in accordance with the provisions of the
Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
in whole or in part, by written notice to the Company at its
principal executive office addressed to the attention of its
President or Chief Executive Officer, at any time and from time
to time after March 9, 1999.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company
terminates by reason of disability (within the
meaning of Section 22(e)(3) of the Code), this
Option may be exercised in full by Employee (or
Employee's estate or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) at any time during the period of one
year following such termination.
-66-
<PAGE> 67
(b) If Employee dies while in the employ of the
Company, Employee's estate, or the person who
acquires this Option by will or the laws of
descent and distribution or otherwise by reason of
the death of Employee, may exercise this Option in
full at any time during the period of one year
following the date of Employee's death.
(c) If Employee's employment with the Company
terminates for any reason other than as described
in (a) or (b) above, unless Employee is terminated
for cause, this Option may be exercised by
Employee at any time during the period of three
months following such termination, or by
Employee's estate (or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) during a period of one year following
Employee's death if Employee dies during such
three-month period, but in each case only as to
the number of shares Employee was entitled to
purchase hereunder upon exercise of this Option as
of the date Employee's employment so terminates.
For purposes of this Agreement, "cause" shall mean
Employee's gross negligence or willful misconduct
in the performance of the duties of Employee's
employment, or Employee's final conviction of a
felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) and (b). No fraction of a share of Stock
shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results In compensation income to
Employee for federal or state income tax purposes, Employee
shall deliver to the Company at the time of such exercise or
-67-
<PAGE> 68
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations, and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee agrees that the shares of
Stock which Employee may acquire by exercising this Option shall
not be sold, transferred, assigned, pledged or hypothecated in
the absence of an effective registration statement for the shares
under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws or an applicable exemption from
the registration requirements of the Act and any applicable state
securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would
constitute a violation of any applicable securities laws, whether
federal or state. In addition, Employee agrees (i) that the
certificates representing the shares of Stock purchased under
this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company
may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the
Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give
related instructions to its transfer agent, if any, to stop
registration of the transfer of shares of Stock purchased under
this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
persons lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
-68-
<PAGE> 69
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
----------------------------
Joe G. Roper, President
---------------------------
Don H. Lawson
-69-
<PAGE> 70
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement"),
dated and effective as of the 1st day of September, 1998, is
between TMBR/SHARP DRILLING, INC., a Texas corporation (the
"Company"), and Jeffrey D. Phillips ("Employee").
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock, $.10 par value,
of the Company (the "Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan,
the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option (the "Option") to purchase all
or any part of any aggregate of 22,000 shares of Stock, on the
terms and conditions set forth herein and in the Plan, which Plan
is incorporated herein by reference as a part of this Agreement.
This Option is intended to constitute an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Stock
purchased pursuant to the exercise of this Option shall be $4.125
per share, which has been determined to be the fair market value
of the Stock at the date of grant of this Option. For all
purposes of this Agreement, the fair market value of the Stock
shall be determined in accordance with the provisions of the
Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
in whole or in part, by written notice to the Company at its
principal executive office addressed to the attention of its
President or Chief Executive Officer, at any time and from time
to time after March 9, 1999.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company
terminates by reason of disability (within the
meaning of Section 22(e)(3) of the Code), this
Option may be exercised in full by Employee (or
Employee's estate or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) at any time during the period of one
year following such termination.
-70-
<PAGE> 71
(b) If Employee dies while in the employ of the
Company, Employee's estate, or the person who
acquires this Option by will or the laws of
descent and distribution or otherwise by reason of
the death of Employee, may exercise this Option in
full at any time during the period of one year
following the date of Employee's death.
(c) If Employee's employment with the Company
terminates for any reason other than as described
in (a) or (b) above, unless Employee is terminated
for cause, this Option may be exercised by
Employee at any time during the period of three
months following such termination, or by
Employee's estate (or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) during a period of one year following
Employee's death if Employee dies during such
three-month period, but in each case only as to
the number of shares Employee was entitled to
purchase hereunder upon exercise of this Option as
of the date Employee's employment so terminates.
For purposes of this Agreement, "cause" shall mean
Employee's gross negligence or willful misconduct
in the performance of the duties of Employee's
employment, or Employee's final conviction of a
felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) and (b). No fraction of a share of Stock
shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results In compensation income to
Employee for federal or state income tax purposes, Employee
shall deliver to the Company at the time of such exercise or
-71-
<PAGE> 72
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations, and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee agrees that the shares of
Stock which Employee may acquire by exercising this Option shall
not be sold, transferred, assigned, pledged or hypothecated in
the absence of an effective registration statement for the shares
under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws or an applicable exemption from
the registration requirements of the Act and any applicable state
securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would
constitute a violation of any applicable securities laws, whether
federal or state. In addition, Employee agrees (i) that the
certificates representing the shares of Stock purchased under
this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company
may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the
Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give
related instructions to its transfer agent, if any, to stop
registration of the transfer of shares of Stock purchased under
this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
persons lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
-72-
<PAGE> 73
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By: --------------------------
Joe G. Roper, President
--------------------------
Jeffrey D. Phillips
-73-
<PAGE> 74
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement"),
dated and effective as of the 1st day of September, 1998, is
between TMBR/SHARP DRILLING, INC., a Texas corporation (the
"Company"), and Patricia R. Elledge ("Employee").
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock, $.10 par value,
of the Company (the "Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan,
the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option (the "Option") to purchase all
or any part of any aggregate of 22,000 shares of Stock, on the
terms and conditions set forth herein and in the Plan, which Plan
is incorporated herein by reference as a part of this Agreement.
This Option is intended to constitute an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Stock
purchased pursuant to the exercise of this Option shall be $4.125
per share, which has been determined to be the fair market value
of the Stock at the date of grant of this Option. For all
purposes of this Agreement, the fair market value of the Stock
shall be determined in accordance with the provisions of the
Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
in whole or in part, by written notice to the Company at its
principal executive office addressed to the attention of its
President or Chief Executive Officer, at any time and from time
to time after March 9, 1999.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company
terminates by reason of disability (within the
meaning of Section 22(e)(3) of the Code), this
Option may be exercised in full by Employee (or
Employee's estate or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) at any time during the period of one
year following such termination.
-74-
<PAGE> 75
(b) If Employee dies while in the employ of the
Company, Employee's estate, or the person who
acquires this Option by will or the laws of
descent and distribution or otherwise by reason of
the death of Employee, may exercise this Option in
full at any time during the period of one year
following the date of Employee's death.
(c) If Employee's employment with the Company
terminates for any reason other than as described
in (a) or (b) above, unless Employee is terminated
for cause, this Option may be exercised by
Employee at any time during the period of three
months following such termination, or by
Employee's estate (or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) during a period of one year following
Employee's death if Employee dies during such
three-month period, but in each case only as to
the number of shares Employee was entitled to
purchase hereunder upon exercise of this Option as
of the date Employee's employment so terminates.
For purposes of this Agreement, "cause" shall mean
Employee's gross negligence or willful misconduct
in the performance of the duties of Employee's
employment, or Employee's final conviction of a
felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) and (b). No fraction of a share of Stock
shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results In compensation income to
Employee for federal or state income tax purposes, Employee
shall deliver to the Company at the time of such exercise or
-75-
<PAGE> 76
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations, and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee agrees that the shares of
Stock which Employee may acquire by exercising this Option shall
not be sold, transferred, assigned, pledged or hypothecated in
the absence of an effective registration statement for the shares
under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws or an applicable exemption from
the registration requirements of the Act and any applicable state
securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would
constitute a violation of any applicable securities laws, whether
federal or state. In addition, Employee agrees (i) that the
certificates representing the shares of Stock purchased under
this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company
may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the
Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give
related instructions to its transfer agent, if any, to stop
registration of the transfer of shares of Stock purchased under
this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
persons lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
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<PAGE> 77
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
--------------------------
Joe G. Roper, President
--------------------------
Patricia R. Elledge
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<PAGE> 78
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement"),
dated and effective as of the 1st day of September, 1998, is
between TMBR/SHARP DRILLING, INC., a Texas corporation (the
"Company"), and Joe G. Roper ("Employee").
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock, $.10 par value,
of the Company (the "Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan,
the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option (the "Option") to purchase all
or any part of any aggregate of 72,000 shares of Stock, on the
terms and conditions set forth herein and in the Plan, which Plan
is incorporated herein by reference as a part of this Agreement.
This Option is intended to constitute an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Stock
purchased pursuant to the exercise of this Option shall be
$4.5375 per share, which has been determined to be the fair
market value of the Stock at the date of grant of this Option.
For all purposes of this Agreement, fair market value of the
Stock shall be determined in accordance with the provisions of
the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, and subject further to the
right of accumulation, this Option may be exercised as to 22,000
shares on March 9, 1999; as much as 44,000 shares on March 9,
2000; as much as 66,000 shares on March 9, 2001; and as to the
remaining 6,000 shares, on March 9, 2002. To the extent Employee
does not in any period purchase all or any part of the shares to
which Employee is entitled, Employee has the right cumulatively
thereafter to purchase any shares not so purchased and such right
shall continue until this Option terminates or expires, but in no
event may the aggregate fair market value (determined as of the
time this Option is granted) of the Stock with respect to which
this Option is exercisable for the first time under the terms of
the Plan exceed $100,000 during any calendar year.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
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<PAGE> 79
(a) If Employee's employment with the Company
terminates by reason of disability (within the
meaning of Section 22(e)(3) of the Code), this
Option may be exercised in full by Employee (or
Employee's estate or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) at any time during the period of one
year following such termination.
(b) If Employee dies while in the employ of the
Company, Employee's estate, or the person who
acquires this Option by will or the laws of
descent and distribution or otherwise by reason of
the death of Employee, may exercise this Option in
full at any time during the period of one year
following the date of Employee's death.
(c) If Employee's employment with the Company
terminates for any reason other than as described
in (a) or (b) above, unless Employee is terminated
for cause, this Option may be exercised by
Employee at any time during the period of three
months following such termination, or by
Employee's estate (or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) during a period of one year following
Employee's death if Employee dies during such
three-month period, but in each case only as to
the number of shares Employee was entitled to
purchase hereunder upon exercise of this Option as
of the date Employee's employment so terminates.
For purposes of this Agreement, "cause" shall mean
Employee's gross negligence or willful misconduct
in the performance of the duties of Employee's
employment, or Employee's final conviction of a
felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the
expiration of five years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) and (b). No fraction of a share of Stock
shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
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<PAGE> 80
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results In compensation income to
Employee for federal or state income tax purposes, Employee
shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations, and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee agrees that the shares of
Stock which Employee may acquire by exercising this Option shall
not be sold, transferred, assigned, pledged or hypothecated in
the absence of an effective registration statement for the shares
under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws or an applicable exemption from
the registration requirements of the Act and any applicable state
securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would
constitute a violation of any applicable securities laws, whether
federal or state. In addition, Employee agrees (i) that the
certificates representing the shares of Stock purchased under
this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company
may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the
Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give
related instructions to its transfer agent, if any, to stop
registration of the transfer of shares of Stock purchased under
this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
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<PAGE> 81
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
persons lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
----------------------------
Thomas C. Brown, Chairman of
the Board of Directors
----------------------------
Joe G. Roper
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<PAGE> 82
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement"),
dated and effective as of the 1st day of September, 1998, is
between TMBR/SHARP DRILLING, INC., a Texas corporation (the
"Company"), and Thomas C. Brown ("Employee").
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock, $.10 par value,
of the Company (the "Stock"), and in consideration of the mutual
agreements and other matters set forth herein and in the Plan,
the Company and Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option (the "Option") to purchase all
or any part of any aggregate of 72,000 shares of Stock, on the
terms and conditions set forth herein and in the Plan, which Plan
is incorporated herein by reference as a part of this Agreement.
This Option is intended to constitute an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of the Stock
purchased pursuant to the exercise of this Option shall be
$4.5375 per share, which has been determined to be the fair
market value of the Stock at the date of grant of this Option.
For all purposes of this Agreement, fair market value of the
Stock shall be determined in accordance with the provisions of
the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, and subject further to the
right of accumulation, this Option may be exercised as to 22,000
shares on March 9, 1999; as much as 44,000 shares on March 9,
2000; as much as 66,000 shares on March 9, 2001; and as to the
remaining 6,000 shares, on March 9, 2002. To the extent Employee
does not in any period purchase all or any part of the shares to
which Employee is entitled, Employee has the right cumulatively
thereafter to purchase any shares not so purchased and such right
shall continue until this Option terminates or expires, but in no
event may the aggregate fair market value (determined as of the
time this Option is granted) of the Stock with respect to which
this Option is exercisable for the first time under the terms of
the Plan exceed $100,000 during any calendar year.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
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<PAGE> 83
(a) If Employee's employment with the Company
terminates by reason of disability (within the
meaning of Section 22(e)(3) of the Code), this
Option may be exercised in full by Employee (or
Employee's estate or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) at any time during the period of one
year following such termination.
(b) If Employee dies while in the employ of the
Company, Employee's estate, or the person who
acquires this Option by will or the laws of
descent and distribution or otherwise by reason of
the death of Employee, may exercise this Option in
full at any time during the period of one year
following the date of Employee's death.
(c) If Employee's employment with the Company
terminates for any reason other than as described
in (a) or (b) above, unless Employee is terminated
for cause, this Option may be exercised by
Employee at any time during the period of three
months following such termination, or by
Employee's estate (or the person who acquires this
Option by will or the laws of descent and
distribution or otherwise by reason of the death
of Employee) during a period of one year following
Employee's death if Employee dies during such
three-month period, but in each case only as to
the number of shares Employee was entitled to
purchase hereunder upon exercise of this Option as
of the date Employee's employment so terminates.
For purposes of this Agreement, "cause" shall mean
Employee's gross negligence or willful misconduct
in the performance of the duties of Employee's
employment, or Employee's final conviction of a
felony or of a misdemeanor involving moral
turpitude.
This Option shall not be exercisable in any event after the
expiration of five years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in cash
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) and (b). No fraction of a share of Stock
shall be issued by the Company upon exercise of an Option or
accepted by the Company in payment of the exercise price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
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<PAGE> 84
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results In compensation income to
Employee for federal or state income tax purposes, Employee
shall deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations, and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee agrees that the shares of
Stock which Employee may acquire by exercising this Option shall
not be sold, transferred, assigned, pledged or hypothecated in
the absence of an effective registration statement for the shares
under the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws or an applicable exemption from
the registration requirements of the Act and any applicable state
securities laws. Employee also agrees that the shares of Stock
which Employee may acquire by exercising this Option will not be
sold or otherwise disposed of in any manner which would
constitute a violation of any applicable securities laws, whether
federal or state. In addition, Employee agrees (i) that the
certificates representing the shares of Stock purchased under
this Option may bear such legend or legends as the Board of
Directors of the Company deems appropriate in order to assure
compliance with applicable securities laws, (ii) that the Company
may refuse to register the transfer of the shares of Stock
purchased under this Option on the stock transfer records of the
Company if such proposed transfer would in the opinion of counsel
satisfactory to the Company constitute a violation of any
applicable securities law and (iii) that the Company may give
related instructions to its transfer agent, if any, to stop
registration of the transfer of shares of Stock purchased under
this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
-84-
<PAGE> 85
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
persons lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
--------------------------
Joe G. Roper, President
--------------------------
Thomas C. Brown
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<PAGE> 86
FIRST AMENDED AND RESTATED
NONSTATUTORY STOCK OPTION AGREEMENT
THIS FIRST AMENDED AND RESTATED NONSTATUTORY STOCK OPTION
AGREEMENT (this "Agreement"), dated and effective as of the 1st
day of September, 1998, is between TMBR/SHARP DRILLING, INC., a
Texas corporation (the "Company"), and Patricia R. Elledge
("Employee").
WHEREAS, on the 3rd day of September, 1996, Employee was
granted a nonstatutory stock option to purchase 20,000 shares of
the Company's common stock, $.10 par value per share, at an
exercise price of $7.75 per share;
WHEREAS, Employee has exercised the above-described stock
option to the extent of 10,000 shares of common stock, and 10,000
shares remain available to be purchased under such option;
WHEREAS, the Board of Directors of the Company has reduced
the exercise price of the Employee's option from $7.75 per share
to $4.125 per share, subject to Employee's approval;
WHEREAS, the Company and the Employee desire to enter into
this First Amended and Restated Nonstatutory Stock Option
Agreement for the purpose of amending the exercise price of the
nonstatutory stock option granted to Employee on September 3,
1996;
NOW, THEREFORE, the Company and the Employee hereby amend
and restate the Nonstatutory Stock Option Agreement to read in
its entirety as follows:
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock of the Company
("Stock"), and in consideration of the mutual agreements and
other matters set forth herein and in the Plan, the Company and
Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option ("Option") to purchase all or
any part of an aggregate of 10,000 shares of Stock, on the terms
and conditions set forth herein and in the Plan, which Plan is
incorporated herein by reference as a part of this Agreement.
This Option shall not be treated as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
-86-
<PAGE> 87
2. Purchase Price. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $4.125 per
share, which has been determined to be the fair market value of
the Stock at the date of gant of this Option. For all purposes
of this Agreement, fair market value of Stock shall be determined
in accordance with the provisions of the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
by written notice to the Company at its principal executive
office addressed to the attention of its President or Chief
Executive Officer, at any time and from time to time after May 1,
1997.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company terminates by
reason of disability (within the meaning of Section
22(e)(3) of the Code), this Option may be exercised in
full by Employee (or Employee's estate or the person
who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of
Employee) at any time during the period of one year
following such termination.
(b) If Employee dies while in the employ of the company,
Employee's estate, or the person who acquires this
Option by will or the laws of descent and distribution
or otherwise by reason of the death of Employee, may
exercise this Option in full at any time during the
period of one year following the date of Employee's
death.
(c) If Employee's employment with the Company terminates
for any reason other than as described in (a) or (b)
above, unless Employee is terminated for cause, this
Option may be exercised by Employee at any time during
the period of three months following such termination,
or by Employee's estate (or the person who acquires
this Option by will or the laws of descent and
distribution or otherwise by reason of the death of
Employee) during a period of one year following
Employee's death if Employee dies during such three-
month period, but in each case only as to the number of
shares Employee was entitled to purchase hereunder upon
exercise of this Option as of the date Employee's
employment so terminates. For purposes of this
Agreement, "cause" shall mean Employee's gross
negligence or willful misconduct in performance of the
duties of Employee's employment, or Employee's final
conviction of a felony or of a misdemeanor involving
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<PAGE> 88
moral turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in case
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) or (b). No fraction of a share of Stock
shall by issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results in compensation income to
Employee for federal or state income tax purposes, Employee shall
deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee understands that at the time
of the execution of this Agreement the shares of Stock to be
issued upon exercise of this Option have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any
state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon
the exercise of the Option have been registered for issue under
the Act, the Company will not issue such shares unless the holder
of the Option provides the Company with a written opinion of
legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed
issuance of such shares to such Option holder may be made without
registration under the Act. In the event exemption from
registration under the Act is available upon an exercise of this
Option, Employee (or the person permitted to exercise this Option
in the event of Employee's death), if requested by the Company to
-88-
<PAGE> 89
do so, will execute and deliver to the Company in writing an
agreement containing such provisions as the Company may require
to assure compliance with applicable securities laws.
Employee agrees that the shares of Stock which Employee may
acquire by exercising this Option shall be acquired for
investment without a view to distribution, within the meaning of
the Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state
securities laws or an applicable exemption from the registration
requirements of the Act and any applicable state securities laws.
Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of
any applicable securities laws, whether federal or state.
In addition, Employee agrees (i) that the certificates
representing the shares of Stock purchased under this Option may
bear such legend or legends as the Board of Directors of the
Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to
register the transfer of the shares of Stock purchased under this
Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to
the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to
its transfer agent, if any, to stop registration of the transfer
of the shares of Stock purchased under this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
person s lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
9. Amendment and Restatement. This Agreement amends and
restates in its entirety that certain Nonstatutory Stock Option
Agreement, dated as of September 3, 1996 (the "Prior Agreement"),
between the Company and Employee. By Employee's execution
hereof, Employee acknowledges and agrees that the Prior Agreement
is cancelled and is of no further force and effect and that this
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<PAGE> 90
Agreement supersedes in all respects the Prior Agreement.
Employee further agrees to deliver and return the original Prior
Agreement to the Company promptly after Employee's execution of
this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
--------------------------
Joe G. Roper, President
--------------------------
Patricia R. Elledge
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<PAGE> 91
FIRST AMENDED AND RESTATED
NONSTATUTORY STOCK OPTION AGREEMENT
THIS FIRST AMENDED AND RESTATED NONSTATUTORY STOCK OPTION
AGREEMENT (this "Agreement"), dated and effective as of the 1st
day of September, 1998, is between TMBR/SHARP DRILLING, INC., a
Texas corporation (the "Company"), and Jeffrey D. Phillips
("Employee").
WHEREAS, on the 3rd day of September, 1996, Employee was
granted a nonstatutory stock option to purchase 20,000 shares of
the Company's common stock, $.10 par value per share, at an
exercise price of $7.75 per share;
WHEREAS, Employee has exercised the above-described stock
option to the extent of 10,000 shares of common stock, and 10,000
shares remain available to be purchased under such option;
WHEREAS, the Board of Directors of the Company has reduced
the exercise price of the Employee's option from $7.75 per share
to $4.125 per share, subject to Employee's approval;
WHEREAS, the Company and the Employee desire to enter into
this First Amended and Restated Nonstatutory Stock Option
Agreement for the purpose of amending the exercise price of the
nonstatutory stock option granted to Employee on September 3,
1996;
NOW, THEREFORE, the Company and the Employee hereby amend
and restate the Nonstatutory Stock Option Agreement to read in
its entirety as follows:
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock of the Company
("Stock"), and in consideration of the mutual agreements and
other matters set forth herein and in the Plan, the Company and
Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option ("Option") to purchase all or
any part of an aggregate of 10,000 shares of Stock, on the terms
and conditions set forth herein and in the Plan, which Plan is
incorporated herein by reference as a part of this Agreement.
This Option shall not be treated as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
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<PAGE> 92
2. Purchase Price. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $4.125 per
share, which has been determined to be the fair market value of
the Stock at the date of gant of this Option. For all purposes
of this Agreement, fair market value of Stock shall be determined
in accordance with the provisions of the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
by written notice to the Company at its principal executive
office addressed to the attention of its President or Chief
Executive Officer, at any time and from time to time after May 1,
1997.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company terminates by
reason of disability (within the meaning of Section
22(e)(3) of the Code), this Option may be exercised in
full by Employee (or Employee's estate or the person
who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of
Employee) at any time during the period of one year
following such termination.
(b) If Employee dies while in the employ of the company,
Employee's estate, or the person who acquires this
Option by will or the laws of descent and distribution
or otherwise by reason of the death of Employee, may
exercise this Option in full at any time during the
period of one year following the date of Employee's
death.
(c) If Employee's employment with the Company terminates
for any reason other than as described in (a) or (b)
above, unless Employee is terminated for cause, this
Option may be exercised by Employee at any time during
the period of three months following such termination,
or by Employee's estate (or the person who acquires
this Option by will or the laws of descent and
distribution or otherwise by reason of the death of
Employee) during a period of one year following
Employee's death if Employee dies during such three-
month period, but in each case only as to the number of
shares Employee was entitled to purchase hereunder upon
exercise of this Option as of the date Employee's
employment so terminates. For purposes of this
Agreement, "cause" shall mean Employee's gross
negligence or willful misconduct in performance of the
duties of Employee's employment, or Employee's final
conviction of a felony or of a misdemeanor involving
-92-
<PAGE> 93
moral turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in case
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) or (b). No fraction of a share of Stock
shall by issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results in compensation income to
Employee for federal or state income tax purposes, Employee shall
deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee understands that at the time
of the execution of this Agreement the shares of Stock to be
issued upon exercise of this Option have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any
state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon
the exercise of the Option have been registered for issue under
the Act, the Company will not issue such shares unless the holder
of the Option provides the Company with a written opinion of
legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed
issuance of such shares to such Option holder may be made without
registration under the Act. In the event exemption from
registration under the Act is available upon an exercise of this
Option, Employee (or the person permitted to exercise this Option
in the event of Employee's death), if requested by the Company to
-93-
<PAGE> 94
do so, will execute and deliver to the Company in writing an
agreement containing such provisions as the Company may require
to assure compliance with applicable securities laws.
Employee agrees that the shares of Stock which Employee may
acquire by exercising this Option shall be acquired for
investment without a view to distribution, within the meaning of
the Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state
securities laws or an applicable exemption from the registration
requirements of the Act and any applicable state securities laws.
Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of
any applicable securities laws, whether federal or state.
In addition, Employee agrees (i) that the certificates
representing the shares of Stock purchased under this Option may
bear such legend or legends as the Board of Directors of the
Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to
register the transfer of the shares of Stock purchased under this
Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to
the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to
its transfer agent, if any, to stop registration of the transfer
of the shares of Stock purchased under this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
person s lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
9. Amendment and Restatement. This Agreement amends and
restates in its entirety that certain Nonstatutory Stock Option
Agreement, dated as of September 3, 1996 (the "Prior Agreement"),
between the Company and Employee. By Employee's execution
hereof, Employee acknowledges and agrees that the Prior Agreement
is cancelled and is of no further force and effect and that this
-94-
<PAGE> 95
Agreement supersedes in all respects the Prior Agreement.
Employee further agrees to deliver and return the original Prior
Agreement to the Company promptly after Employee's execution of
this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
--------------------------
Joe G. Roper, President
--------------------------
Jeffrey D. Phillips
-95-
<PAGE> 96
FIRST AMENDED AND RESTATED
NONSTATUTORY STOCK OPTION AGREEMENT
THIS FIRST AMENDED AND RESTATED NONSTATUTORY STOCK OPTION
AGREEMENT (this "Agreement"), dated and effective as of the 1st
day of September, 1998, is between TMBR/SHARP DRILLING, INC., a
Texas corporation (the "Company"), and Joe G. Roper ("Employee").
WHEREAS, on the 3rd day of September, 1996, Employee was
granted a nonstatutory stock option to purchase 100,000 shares of
the Company's common stock, $.10 par value per share, at an
exercise price of $7.75 per share;
WHEREAS, the Board of Directors of the Company has reduced
the exercise price of the Employee's option from $7.75 per share
to $4.125 per share, subject to Employee's approval;
WHEREAS, the Company and the Employee desire to enter into
this First Amended and Restated Nonstatutory Stock Option
Agreement for the purpose of amending the exercise price of the
nonstatutory stock option granted to Employee on September 3,
1996;
NOW, THEREFORE, the Company and the Employee hereby amend
and restate the Nonstatutory Stock Option Agreement to read in
its entirety as follows:
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock of the Company
("Stock"), and in consideration of the mutual agreements and
other matters set forth herein and in the Plan, the Company and
Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option ("Option") to purchase all or
any part of an aggregate of 100,000 shares of Stock, on the terms
and conditions set forth herein and in the Plan, which Plan is
incorporated herein by reference as a part of this Agreement.
This Option shall not be treated as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $4.125 per
share, which has been determined to be the fair market value of
the Stock at the date of gant of this Option. For all purposes
of this Agreement, fair market value of Stock shall be determined
in accordance with the provisions of the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
by written notice to the Company at its principal executive
-96-
<PAGE> 97
office addressed to the attention of its President or Chief
Executive Officer, at any time and from time to time after May 1,
1997.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company terminates by
reason of disability (within the meaning of Section
22(e)(3) of the Code), this Option may be exercised in
full by Employee (or Employee's estate or the person
who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of
Employee) at any time during the period of one year
following such termination.
(b) If Employee dies while in the employ of the company,
Employee's estate, or the person who acquires this
Option by will or the laws of descent and distribution
or otherwise by reason of the death of Employee, may
exercise this Option in full at any time during the
period of one year following the date of Employee's
death.
(c) If Employee's employment with the Company terminates
for any reason other than as described in (a) or (b)
above, unless Employee is terminated for cause, this
Option may be exercised by Employee at any time during
the period of three months following such termination,
or by Employee's estate (or the person who acquires
this Option by will or the laws of descent and
distribution or otherwise by reason of the death of
Employee) during a period of one year following
Employee's death if Employee dies during such three-
month period, but in each case only as to the number of
shares Employee was entitled to purchase hereunder upon
exercise of this Option as of the date Employee's
employment so terminates. For purposes of this
Agreement, "cause" shall mean Employee's gross
negligence or willful misconduct in performance of the
duties of Employee's employment, or Employee's final
conviction of a felony or of a misdemeanor involving
moral turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in case
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
any combination of (a) or (b). No fraction of a share of Stock
-97-
<PAGE> 98
shall by issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results in compensation income to
Employee for federal or state income tax purposes, Employee shall
deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee understands that at the time
of the execution of this Agreement the shares of Stock to be
issued upon exercise of this Option have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any
state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon
the exercise of the Option have been registered for issue under
the Act, the Company will not issue such shares unless the holder
of the Option provides the Company with a written opinion of
legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed
issuance of such shares to such Option holder may be made without
registration under the Act. In the event exemption from
registration under the Act is available upon an exercise of this
Option, Employee (or the person permitted to exercise this Option
in the event of Employee's death), if requested by the Company to
do so, will execute and deliver to the Company in writing an
agreement containing such provisions as the Company may require
to assure compliance with applicable securities laws.
Employee agrees that the shares of Stock which Employee may
acquire by exercising this Option shall be acquired for
investment without a view to distribution, within the meaning of
the Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration
statement for the shares under the Act and applicable state
-98-
<PAGE> 99
securities laws or an applicable exemption from the registration
requirements of the Act and any applicable state securities laws.
Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of
any applicable securities laws, whether federal or state.
In addition, Employee agrees (i) that the certificates
representing the shares of Stock purchased under this Option may
bear such legend or legends as the Board of Directors of the
Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to
register the transfer of the shares of Stock purchased under this
Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to
the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to
its transfer agent, if any, to stop registration of the transfer
of the shares of Stock purchased under this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
person s lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
9. Amendment and Restatement. This Agreement amends and
restates in its entirety that certain Nonstatutory Stock Option
Agreement, dated as of September 3, 1996 (the "Prior Agreement"),
between the Company and Employee. By Employee's execution
hereof, Employee acknowledges and agrees that the Prior Agreement
is cancelled and is of no further force and effect and that this
Agreement supersedes in all respects the Prior Agreement.
Employee further agrees to deliver and return the original Prior
Agreement to the Company promptly after Employee's execution of
this Agreement.
-99-
<PAGE> 100
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
------------------------------
Thomas C. Brown, Chairman of
the Board of Directors
------------------------------
Joe G. Roper
-100-
<PAGE> 101
FIRST AMENDED AND RESTATED
NONSTATUTORY STOCK OPTION AGREEMENT
THIS FIRST AMENDED AND RESTATED NONSTATUTORY STOCK OPTION
AGREEMENT (this "Agreement"), dated and effective as of the 1st
day of September, 1998, is between TMBR/SHARP DRILLING, INC., a
Texas corporation (the "Company"), and Thomas C. Brown
("Employee").
WHEREAS, on the 3rd day of September, 1996, Employee was
granted a nonstatutory stock option to purchase 195,000 shares of
the Company's common stock, $.10 par value per share, at an
exercise price of $7.75 per share;
WHEREAS, the Board of Directors of the Company has reduced
the exercise price of the Employee's option from $7.75 per share
to $4.125 per share, subject to Employee's approval;
WHEREAS, the Company and the Employee desire to enter into
this First Amended and Restated Nonstatutory Stock Option
Agreement for the purpose of amending the exercise price of the
nonstatutory stock option granted to Employee on September 3,
1996;
NOW, THEREFORE, the Company and the Employee hereby amend
and restate the Nonstatutory Stock Option Agreement to read in
its entirety as follows:
To carry out the purposes of the TMBR/SHARP DRILLING, INC.
1994 STOCK OPTION PLAN (the "Plan"), by affording Employee the
opportunity to purchase shares of common stock of the Company
("Stock"), and in consideration of the mutual agreements and
other matters set forth herein and in the Plan, the Company and
Employee hereby agree as follows:
1. Grant of Option. The Company hereby irrevocably grants
to Employee the right and option ("Option") to purchase all or
any part of an aggregate of 195,000 shares of Stock, on the terms
and conditions set forth herein and in the Plan, which Plan is
incorporated herein by reference as a part of this Agreement.
This Option shall not be treated as an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
2. Purchase Price. The purchase price of Stock purchased
pursuant to the exercise of this Option shall be $4.125 per
share, which has been determined to be the fair market value of
the Stock at the date of gant of this Option. For all purposes
of this Agreement, fair market value of Stock shall be determined
in accordance with the provisions of the Plan.
3. Exercise of Option. Subject to the earlier expiration
of this Option as herein provided, this Option may be exercised,
-101-
<PAGE> 102
by written notice to the Company at its principal executive
office addressed to the attention of its President or Chief
Executive Officer, at any time and from time to time after May 1,
1997.
This Option is not transferable by Employee otherwise than
by will or the laws of descent and distribution, and may be
exercised only by Employee during Employee's lifetime and while
Employee remains an employee of the Company, except that:
(a) If Employee's employment with the Company terminates by
reason of disability (within the meaning of Section
22(e)(3) of the Code), this Option may be exercised in
full by Employee (or Employee's estate or the person
who acquires this Option by will or the laws of descent
and distribution or otherwise by reason of the death of
Employee) at any time during the period of one year
following such termination.
(b) If Employee dies while in the employ of the company,
Employee's estate, or the person who acquires this
Option by will or the laws of descent and distribution
or otherwise by reason of the death of Employee, may
exercise this Option in full at any time during the
period of one year following the date of Employee's
death.
(c) If Employee's employment with the Company terminates
for any reason other than as described in (a) or (b)
above, unless Employee is terminated for cause, this
Option may be exercised by Employee at any time during
the period of three months following such termination,
or by Employee's estate (or the person who acquires
this Option by will or the laws of descent and
distribution or otherwise by reason of the death of
Employee) during a period of one year following
Employee's death if Employee dies during such three-
month period, but in each case only as to the number of
shares Employee was entitled to purchase hereunder upon
exercise of this Option as of the date Employee's
employment so terminates. For purposes of this
Agreement, "cause" shall mean Employee's gross
negligence or willful misconduct in performance of the
duties of Employee's employment, or Employee's final
conviction of a felony or of a misdemeanor involving
moral turpitude.
This Option shall not be exercisable in any event after the
expiration of ten years from the date of grant hereof. The
purchase price of shares as to which this Option is exercised
shall be paid in full at the time of exercise (a) in case
(including check, bank draft or money order payable to the order
of the Company), (b) by delivering to the Company shares of Stock
having a fair market value equal to the purchase price, or (c)
-102-
<PAGE> 103
any combination of (a) or (b). No fraction of a share of Stock
shall by issued by the Company upon exercise of an Option or
accepted by the Company in payment of the purchase price thereof;
rather, Employee shall provide a cash payment for such amount as
is necessary to effect the issuance and acceptance of only whole
shares of Stock. Unless and until a certificate or certificates
representing such shares shall have been issued by the Company to
Employee, Employee (or the person permitted to exercise this
Option in the event of Employee's death) shall not be or have any
of the rights or privileges of a shareholder of the Company with
respect to shares acquirable upon an exercise of this Option.
4. Withholding of Tax. To the extent that the exercise of
this Option or the disposition of shares of Stock acquired by
exercise of this Option results in compensation income to
Employee for federal or state income tax purposes, Employee shall
deliver to the Company at the time of such exercise or
disposition such amount of money or shares of Stock as the
Company may require to meet its obligation under applicable tax
laws or regulations and, if Employee fails to do so, the Company
is authorized to withhold from any cash or Stock remuneration
then or thereafter payable to Employee any tax required to be
withheld by reason of such resulting compensation income. Upon
an exercise of this Option, the Company is further authorized in
its discretion to satisfy any such withholding requirement out of
any cash or shares of Stock distributable to Employee upon such
exercise.
5. Status of Stock. Employee understands that at the time
of the execution of this Agreement the shares of Stock to be
issued upon exercise of this Option have not been registered
under the Securities Act of 1933, as amended (the "Act"), or any
state securities law. The Company may effect such a registration
in the future; however, until the shares of Stock acquirable upon
the exercise of the Option have been registered for issue under
the Act, the Company will not issue such shares unless the holder
of the Option provides the Company with a written opinion of
legal counsel, who shall be satisfactory to the Company,
addressed to the Company and satisfactory in form and substance
to the Company's counsel, to the effect that the proposed
issuance of such shares to such Option holder may be made without
registration under the Act. In the event exemption from
registration under the Act is available upon an exercise of this
Option, Employee (or the person permitted to exercise this Option
in the event of Employee's death), if requested by the Company to
do so, will execute and deliver to the Company in writing an
agreement containing such provisions as the Company may require
to assure compliance with applicable securities laws.
Employee agrees that the shares of Stock which Employee may
acquire by exercising this Option shall be acquired for
investment without a view to distribution, within the meaning of
the Act, and shall not be sold, transferred, assigned, pledged or
hypothecated in the absence of an effective registration
-103-
<PAGE> 104
statement for the shares under the Act and applicable state
securities laws or an applicable exemption from the registration
requirements of the Act and any applicable state securities laws.
Employee also agrees that the shares of Stock which Employee may
acquire by exercising this Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of
any applicable securities laws, whether federal or state.
In addition, Employee agrees (i) that the certificates
representing the shares of Stock purchased under this Option may
bear such legend or legends as the Board of Directors of the
Company deems appropriate in order to assure compliance with
applicable securities laws, (ii) that the Company may refuse to
register the transfer of the shares of Stock purchased under this
Option on the stock transfer records of the Company if such
proposed transfer would in the opinion of counsel satisfactory to
the Company constitute a violation of any applicable securities
law and (iii) that the Company may give related instructions to
its transfer agent, if any, to stop registration of the transfer
of the shares of Stock purchased under this Option.
6. Employment Relationship. For purposes of this
Agreement, Employee shall be considered to be in the employment
of the Company as long as Employee remains an employee of either
the Company, a parent or subsidiary corporation (as defined in
Section 424 of the Code) of the Company, or a corporation or a
parent or subsidiary of such corporation assuming or substituting
a new option for this Option. Any question as to whether and
when there has been a termination of such employment, and the
cause of such termination, shall be determined by the Board of
Directors of the Company, and its determination shall be final.
7. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of any successors to the Company and all
person s lawfully claiming under Employee.
8. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas.
9. Amendment and Restatement. This Agreement amends and
restates in its entirety that certain Nonstatutory Stock Option
Agreement, dated as of September 3, 1996 (the "Prior Agreement"),
between the Company and Employee. By Employee's execution
hereof, Employee acknowledges and agrees that the Prior Agreement
is cancelled and is of no further force and effect and that this
Agreement supersedes in all respects the Prior Agreement.
Employee further agrees to deliver and return the original Prior
Agreement to the Company promptly after Employee's execution of
this Agreement.
-104-
<PAGE> 105
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its officer thereunto duly authorized, and
Employee has executed this Agreement, all as of the day and year
first above written.
TMBR/SHARP DRILLING, INC.
By:
--------------------------
Joe G. Roper, President
--------------------------
Thomas C. Brown
-105-
<PAGE> 106
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,
June 29, 1999
-106-
<PAGE> 107
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 29, 1999
-107-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1195
<SECURITIES> 49
<RECEIVABLES> 3451
<ALLOWANCES> 1349
<INVENTORY> 94
<CURRENT-ASSETS> 5429
<PP&E> 71179
<DEPRECIATION> 57858
<TOTAL-ASSETS> 18923
<CURRENT-LIABILITIES> 2188
<BONDS> 0
0
0
<COMMON> 598
<OTHER-SE> 16137
<TOTAL-LIABILITY-AND-EQUITY> 18923
<SALES> 0
<TOTAL-REVENUES> 14424
<CGS> 0
<TOTAL-COSTS> 17690
<OTHER-EXPENSES> 199
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3187)
<INCOME-TAX> (3187)
<INCOME-CONTINUING> (3187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3187)
<EPS-BASIC> (.68)
<EPS-DILUTED> (.68)
</TABLE>
