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, 2000 was approximately 35% compared to 27% for the year ended March 31, 1999.
The Company owns 18 drilling rigs. At June 13, 2000, 2 rigs were operating on behalf of the Company for its own account, 11 were operating for non-affiliated oil producers, and 5 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.
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 17% of the Company's revenues for the fiscal year ended March 31, 2000. The Company's proved reserves, of which approximately 1,025 MBOE (million barrels of oil equivalent) were proved developed producing and approximately 71 MBOE were proved developed non-producing, had a present value of future net revenues of approximately $10.5 million at March 31, 2000. At that same date, the Company owned interests in approximately 27,459 gross (3,977 net) acres of developed oil and gas properties, and approximately 7,147 gross (1,749 net) acres of undeveloped properties.
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. Industry conditions began to improve during the second quarter of fiscal 2000 and have continued to the present, primarily because of higher oil prices.
The Company's profitability and cash flows are highly dependent on the prices of oil and natural gas. Low oil and natural gas prices have a material adverse effect on the Company's cash flows and profitability. If prices remained depressed for a sustained period of time, a material adverse effect on the Company's future operations and financial condition would be expected.
The Company has no material patents, licenses, franchises, or concessions which it considers significant to its operations.
The nature of the Company's business is such that it does not maintain or require a "backlog" of products, customer orders, or inventory.
The Company's operations are not subject to renegotiation of profits or termination of contracts at the election of the federal government.
The Company has not been a party to any bankruptcy, receivership, reorganization, adjustment, or similar proceeding.
Generally, the Company's business activities are not seasonal in nature. However, weather conditions can hinder drilling activities.
CONTRACT DRILLING OPERATIONS
Drilling Rigs
The following table sets forth the type and depth capabilities of the Company's 18 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 30* 16,000 Gardner Denver 800 55* 30,000 Gardner Denver DW-2100 56* 20,000 National 110-M ---------------- *In active operation at June 13, 2000.
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.
Item 2. PROPERTIES
In addition to its drilling rigs and related equipment and its oil and gas properties, the Company owns a 31 acre tract of land in Midland, Texas on which the Company's executive offices are located and on which the principal support and storage facilities for its contract drilling operations are located. These 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 also 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 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.
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 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.
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, 2000, and no matters were submitted to a vote of security holders during such period.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "TBDI". The following table sets forth, on a per share basis for the periods indicated, the range of high and low last
reported sales prices as reported by NASDAQ. The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Price -------------- High Low ---- --- Fiscal 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
Fiscal 2000 First Quarter 6 1/8 3 9/16 Second Quarter 8 9/16 5 1/8 Third Quarter 7 3/4 5 1/2 Fourth Quarter 12 1/4 5 5/16
On June 13, 2000, the last reported sale price of the Company's Common Stock as reported by NASDAQ was $11 1/16.
The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, New York, New York.
On June 13, 2000, the outstanding shares of the Company's Common Stock were held of record by approximately 2,416 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. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
Item 6.
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, 2000. 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.
____________________
(a) During fiscal years ended March 31, 2000, 1999 and 1998, the Company recognized non-cash charges of approximately $739,000, $1,304,000 and $3,120,000, 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.
Item 7.
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 factors 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.
Although the Company's fiscal year operating results were negatively affected by the disappointing results of the first three months of the fiscal year, during the nine months ended March 31, 2000, the Company experienced an increase in demand and an increase in the prices received for contract drilling services. This increase is attributable to recent increases in oil and gas prices. The Company has been and will continue to be affected by oil and gas industry conditions but cannot predict either the future level of demand for its contract drilling services or future conditions in the contract drilling industry. The contract drilling industry remains highly competitive. 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, -------------------- 2000 1999 1998 ---- ---- ---- (In thousands, except %s)
Contract drilling revenues $15,394 $12,948 $34,891 Contract drilling expenses 12,486 10,027 23,163
Contract drilling expenses as a percent of drilling revenues 81.1% 77.4% 66.4%
Rig utilization 35.0% 26.6% 78.2%
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 $90,000 and $78,000 as of March 31, 2000, and March 31, 1999, respectively.
For properties with proved or proved developed oil and gas reserves, depletion, depreciation and amortization of capitalized costs was calculated for fiscal 2000, 1999 and 1998 by applying the units-of-production method to the estimated amount of such reserves.
In fiscal 2000, 1999 and 1998, the Company recognized non-cash charges of approximately $.7 million, $1.3 million and $3.1 million, respectively, due to writedowns of the carrying value of its oil and gas properties. The writedowns are the result of the adoption in 1996 of Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires the Company to assess the need for an impairment of capitalized costs of oil and gas properties on a property-by-property basis. 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, -------------------- 2000 1999 1998 ---- ---- ---- (In thousands)
Oil and gas revenues $3,169 $1,476 $2,126 Production expenses 926 803 944 Dry holes and abandonments 509 946 476 Depreciation, depletion and amortization 1,552 1,250 1,891 Writedown of properties 739 1,304 3,120
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, 2000 to Year Ended March 31, 1999
Contract drilling revenues for fiscal 2000 increased by 19% from fiscal 1999. Rig utilization rates in fiscal 2000 and 1999 were 35% and 27%, respectively. The increase in contract drilling revenues and utilization rates was due to an increase in oil and gas prices which in turn positively impacted demand for contract drilling. Drilling prices began to increase during the last six months of the year and the Company began to achieve positive 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 81% and 77% of contract drilling revenues in fiscal 2000 and 1999, respectively. The increase is primarily due to the start up costs associated with putting drilling rigs into service after being idle or stacked for a period of time. The Company began the year with two active rigs and ended the fiscal year with eleven active rigs.
Oil and gas revenues increased by 115% in fiscal 2000. This increase can be attributed to the increase in prices received for crude oil and natural gas in addition to an increase in the number of producing properties. Oil and gas production expenses increased by 15% and is a result of major workovers of two wells and an increase in the number of producing properties.
The Company participated as a working-interest owner in the drilling of 16 wells during fiscal 2000, of which four were dry holes. In fiscal 1999, the Company participated as a working-interest owner in the drilling of 12 wells, of which four were dry holes.
Depreciation, depletion and amortization expense increased due to several factors. The increase in rig utilization rates caused an increase in depreciation expense as drilling equipment is depreciated using the units-of- production method based on the monthly utilization of the equipment. During the year ended March 31, 2000, the Company completed the assembly of one additional drilling rig. This rig is capable of drilling to a depth of approximately 16,000 feet. The addition of this Gardner Denver 800 rig brings the Company's available fleet to 18 rigs. In addition, the Company purchased drill pipe and drill collars during the year. The increase in depreciation, depletion and amortization expense for fiscal 2000 reflects the added equipment. Depreciation, depletion and amortization expense on oil and gas properties increased as a result of the number of oil and gas producing properties in which the Company has an ownership interest (a total of 117 wells in fiscal 2000 versus 105 wells in 1999).
The Company recognized a non-cash charge of $.7 million in fiscal 2000 and $1.3 million in fiscal 1999 related to the writedown of the carrying value of its oil and gas properties.
Net working capital was $2.8 million at March 31, 2000, compared to $3.2 million at March 31, 1999. The loss of working capital is attributable to a increase in accounts receivable, accounts payable and other current liabilities, all of which is related to the increase in drilling activity.
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 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.
Income Taxes
At March 31, 2000, the Company had approximately $76.6 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 began to expire in fiscal 2000. 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 2000 and 1999 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 May, 1998, the Company entered into a loan agreement with its bank lender which provides for a $5.0 million revolving line of credit secured by substantially all of the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the line of credit bear interest at the bank's base rate and accrued interest is payable monthly. The loan facility originally matured on May 26, 2000 but has been extended to July 15, 2000.
On June 26, 2000, the Company entered into a commitment agreement with its bank lender. The commitment 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 will bear interest at the Wells Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (9.5% at June 13, 2000) and accrued interest will be payable monthly. The loan facility will mature on August 31, 2002, at which time all outstanding principal and interest will be due in full. Accordingly, the current maturities of debt at March 31, 2000 in effect have been reclassified to long term debt in the accompanying balance sheets based on the commitment agreement. At March 31, 2000 and June 13, 2000, respectively, $2,250,000 and $3,650,000 were outstanding under the loan facility.
The Company anticipates that funds for its capital expenditures in fiscal 2001 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, -------------------- 2000 1999 1998 ---- ---- ---- (In thousands) Oil and gas exploration and development..... $ 2,923 $ 4,242 $ 3,846 Drilling rigs, drill pipe and related equipment......................... 3,149 261 6,086 Other....................................... 199 -- 249 ------ ------ ------ Total.................................. $ 6,271 $ 4,503 $10,181 ====== ====== ======
The Company presently anticipates making capital expenditures of approximately $4.0 million in its 2001 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 $3.5 million for oil and gas exploration and development activities. It is the Company's policy, however, to make capital expenditures based on prevailing economic conditions, the results of its drilling activities, and other factors affecting its business. Accordingly, the amounts actually spent in fiscal 2001 could differ substantially from the amounts estimated.
Trends and Prices
The contract drilling industry is currently experiencing increased demand and increasing prices for contract drilling services due to the rise of oil and gas prices. The Company will be affected by price fluctuations in the industry, 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 created a risk that computer systems, products and equipment utilizing date-sensitive software or computer chips with two- digit date fields would 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 have resulted in interruptions of the Company's business which could have had a material adverse impact on the Company. Significant uncertainty existed concerning the potential effects associated with such compliance as systems that improperly recognized such information would generate erroneous data or cause a system to fail.
The Company is not currently aware of any Year 2000 compliance problems relating to its own operations or that of its significant vendors, customers, purchasers and local, state, federal and other U. S. government entities, but intends to monitor and assess Year 2000 issues.
Item 7A.
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, 2000, 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, 2000, the Company had $2,250,000 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 is subject to interest rate risk.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 29
Balance Sheets, March 31, 2000 and 1999 30
Statements of Operations, Years ended March 31, 2000, 1999 and 1998 32
Statements of Stockholders' Equity, Years ended March 31, 2000, 1999 and 1998 33
Statements of Cash Flows, Years ended March 31, 2000, 1999 and 1998 34
Notes to Financial Statements 35
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, 2000 and 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States.
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 19, 2000
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 2000 and 1999
(In thousands, except share data)
ASSETS 2000 1999 ------ ---- ----
Current assets: Cash and cash equivalents $ 980 $ 1,195 Marketable securities 49 49 Trade receivables, net of allowance for doubtful accounts of $1,486 in 2000 and $1,349 in 1999. 6,398 3,451 Inventories 111 94 Deposits 73 73 Other 796 567 ------ ------ Total current assets 8,407 5,429 ------ ------
Property and equipment, at cost: Drilling equipment 51,858 48,868 Oil and gas properties, based on successful efforts accounting 21,155 18,742 Other property and equipment 3,768 3,569 ------ ------ 76,781 71,179 Less accumulated depreciation, depletion and amortization (61,736) (57,858) ------ ------ Net property and equipment 15,045 13,321 ------ ------
Other assets 173 173 ------ ------
Total assets $ 23,625 $ 18,923 ====== ======
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 2000 and 1999
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999 ------------------------------------ ---- ----
Current liabilities: Trade payables $ 4,240 $ 1,424 Other 1,339 764 ------ ------ Total current liabilities 5,579 2,188
Long Term liabilities: Borrowings from bank 2,250 -- ------ ------ Total liabilities 7,829 2,188 ------ ------ Contingencies
Stockholders' equity: Common stock, $0.10 par value Authorized, 50,000,000 shares; issued, 6,227,125 and 5,979,625 shares at March 31, 2000 and 1999, respectively 623 598 Additional paid-in capital 69,672 69,429 Accumulated deficit (54,311) (53,104)
Accumulated other comprehensive income (loss) (38) (38) Treasury stock-common, 1,268,739 shares at March 31, 2000 and 1999, at cost (150) (150) ------ ------ Total stockholders' equity 15,796 16,735 ------ ------
Total liabilities and stockholders' equity $ 23,625 $ 18,923 ====== ======
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 2000, 1999 and 1998
(In thousands, except share data)
2000 1999 1998 ---- ---- ---- Revenues: Contract drilling $ 15,394 $ 12,948 $ 34,891 Oil and gas 3,169 1,476 2,126 ------ ------ ------ Total revenues 18,563 14,424 37,017 ------ ------ ------ Operating costs and expenses: Contract drilling 12,486 10,027 23,163 Oil and gas production 926 803 944 Dry holes and abandonments 509 946 476 Depreciation, depletion and amortization 3,282 2,699 4,080 Writedown of oil and gas properties 739 1,304 3,120 General and administrative 1,854 1,911 1,863 ------ ------ ------ Total operating costs and expenses 19,796 17,690 33,646 ------ ------ ------ Operating income (loss) (1,233) (3,266) 3,371 ------ ------ ------ Other income (expense): Interest 17 151 133 Gain on sales of assets 137 127 179 Other, net (128) (199) 1,001 ------ ------ ------ Total other income (expense), net 26 79 1,313 ------ ------ ------ Net income (loss) before income tax provision (1,207) (3,187) 4,684 Provision for income taxes -- -- (140) ------ ------ ------ Net income (loss) $ (1,207) $ (3,187) $ 4,544 ====== ====== ====== Net income (loss) per common share: Basic $ (0.25) $ (0.68) $ 0.98 Diluted (0.25) (0.68) 0.91 ========= ========= ========= Weighted average number of common shares outstanding: Basic 4,760,704 4,710,886 4,614,959 Diluted 4,760,704 4,710,886 5,013,981 ========= ========= =========
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity
Years Ended March 31, 2000, 1999 and 1998
(In thousands)
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC. Statements of Cash Flows Years Ended March 31, 2000, 1999 and 1998 (In thousands)
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (1,207) $ (3,187) $ 4,544 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 3,282 2,699 4,080 Dry holes and abandonments 509 946 476 Gain on sales of assets (137) (127) (179) Grant of stock options 97 -- -- Writedown of properties 739 1,304 3,120 Changes in assets and liabilities: Trade receivables (2,947) 4,698 (1,931) Deposits -- -- -- Inventories and other assets (246) 85 (109) Trade payables 2,816 (1,198) (117) Accrued payables and other current liabilities 575 (1,302) (584) -------- -------- -------- Total adjustments 4,688 7,105 4,756 -------- -------- -------- Net cash provided by operating activities 3,481 3,918 9,300 -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (6,271) (4,503) (10,181) Proceeds from sales of property and equipment 154 157 412 -------- -------- -------- Net cash required by investing activities (6,117) (4,346) (9,769) -------- -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options 171 -- 1,044 Proceeds from bank loan 2,250 -- -- -------- -------- -------- Net cash provided by financing activities 2,421 -- 1,044 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (215) (428) 575
Cash and cash equivalents at beginning of year 1,195 1,623 1,048 -------- -------- -------- Cash and cash equivalents at end of year $ 980 $ 1,195 $ 1,623 ======== ======== ========
See accompanying notes to financial statements.
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 $15,000 for 2000 and $0 in 1999 and 1998. Cash payments for taxes due totaled $0, $0, and $29,000 during 2000, 1999 and 1998, 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, 2000 was approximately $49,000. At March 31, 1999, an unrealized loss of approximately $38,000 was deducted from stockholders equity and was included as a component of other comprehensive income.
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 $90,000 and $78,000 as of March 31, 2000 and 1999, 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.
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 $739,000, $1,304,000 and $3,120,000 were recorded in 2000, 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).
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
In May, 1998, the Company entered into a loan agreement with its bank lender which provides for a $5.0 million revolving line of credit secured by substantially all of the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the line of credit bear interest at the bank's base rate and accrued interest is payable monthly. The loan facility originally matured on May 26, 2000 but has been extended to July 15, 2000.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
On June 26, 2000, the Company entered into a commitment agreement with its bank lender. The commitment 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 will bear interest at the Wells Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (9.5% at June 13, 2000) and accrued interest will be payable monthly. The loan facility will mature on August 31, 2002, at which time all outstanding principal and interest will be due in full. Accordingly, the current maturities of debt at March 31, 2000 in effect have been reclassified to long term debt in the accompanying balance sheets based on the commitment agreement. At March 31, 2000 and June 13, 2000, respectively, $2,250,000 and $3,650,000 were outstanding under the loan facility.
(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, 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.
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, 2000, 184,000 shares were earned and exercisable. The remaining 56,000 shares will become earned and exercisable over a two year period. The following sets forth certain information concerning these options.
Number Option Price of ----------------------- Shares Per Share Total ------ ----------------------- Outstanding March 31, 1998 337,500 $ 7.75 $ 2,615,625
Forfeited (5,000) 7.75 (38,750)
Reduction in option price -- (3.625) (1,205,312)
Granted 240,000 4.125-4.5375 1,049,400 ------- ------------ ----------- Outstanding March 31, 1999 572,500 $4.125-4.5375 $ 2,420,963
Forfeited (5,000) 4.125 (20,625)
Exercised (3,000) 4.125 (12,375) ------- ------------ --------- Outstanding March 31, 2000 564,500 $4.125-4.5375 $ 2,387,963 ======= ============ ===========
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 became exercisable on August 31, 1999, the date on which the shareholders of the Company approved and adopted the 1998 Plan. The fair market value of the Company's common stock on August 31, 1999 was $6.063 per share. As a result, the Company recognized approximately $97,000 in compensation expense related to these nonqualified options.
The following sets forth certain information concerning these nonqualified options:
Option Price Number ------------ of Shares Per Share Total --------- --------- ----- Outstanding March 31, 1999 -- $ -- $ --
Granted 50,000 4.125 206,250
Exercised (25,000) 4.125 (103,125) --------- ------- Outstanding March 31, 2000 25,000 $4.125 $ 103,125 ========= =======
All nonqualified options outstanding were earned and exercisable as of March 31, 2000.
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.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In addition to the aforementioned options, during fiscal year 1989, an additional 500,000 shares of nonqualified stock options were granted to another director who is also an officer. These options were granted at an exercise price of $0.25 per share (estimated fair market value at date of grant). On April 4, 1990, the Board of Directors also approved an additional 500,000 shares of nonqualified stock options granted to another director at an exercise price of $0.25 per share (estimated fair market value at date of grant).
The following sets forth certain information concerning these nonqualified options:
Option Price Number ------------ of Shares Per Share Total --------- --------- ----- Outstanding March 31, 1998 219,500 $0.25 54,875 --------- ------- Outstanding March 31, 1999 219,500 0.25 54,875
Exercised (219,500) 0.25 (54,875) --------- ------- Outstanding March 31, 2000 -- $ -- ========= =======
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 2000 and 1999, respectively: dividend yield of 0% and 0%, expected volatility of 62.53% and 54.68%, risk free interest rate of 6.09% and 4.99%, and an expected life of 5.0 and 5.0 years.
Year of Option Exercise Expected Fair Grant Shares Price Life Value ------- ------ -------- -------- ----- 1999 96,000 $4.125 5.0 $2.17 1999 144,000 $4.5375 5.0 $2.07 2000 50,000 $4.125 5.0 $2.15
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:
2000 1999 1998 ---------------- --------------- --------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- (In thousands, except share amounts)
Net income (loss) from continuing operations $(1,207) $(1,309) $(3,187) $(3,719) $4,544 $4,261
Net income (loss) from continuing operations per share (basic) $(0.25) $(0.27) $(0.68) $(0.79) $0.98 $0.92
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, 2000, the Company had approximately $76,616,000 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. These carryforwards began to expire in fiscal 2000. 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, 2000 March 31, 1999 -------------- -------------- Deferred Tax Assets (Liabilities) Federal NOL Carryforwards $ 26,049,454 $ 26,280,337 Allowance for Bad Debts 505,101 458,585 Book over tax depreciation and amortization 567,172 7,150 Accrued Workers Compensation 105,899 (22,044) Other accrued expenses 17,408 20,505 ---------- ---------- Total deferred tax assets 27,245,034 26,744,533 Valuation allowance (27,245,034) (26,744,533) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ==========
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, 2000 and 1999, 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, 2000, 1999 and 1998 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:
2000 1999 1998 ---- ---- ----
Tax provision (benefit) utilizing statutory rates $ (410) $(1,084) $ 1,545
Utilization of NOL 410 1,084 (1,405) ----- ----- ----- Tax provision $ -- $ -- $ 140 ===== ===== =====
(5) Related Parties
During 2000, 1999 and 1998, the Company sold $1,936,000, $1,549,000 and $113,000 and purchased $81,000, $131,000 and $139,000, 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.
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 terminated 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 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.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following tables present information related to the Companies' reportable segments.
Years Ended March 31, ---------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (In thousands) Revenues: Contract drilling $ 15,394 $ 12,948 $ 34,891 Oil and gas 3,169 1,476 2,126 -------- -------- -------- $ 18,563 $ 14,424 $ 37,017 ======== ======== ======== Net income (loss) (a): Contract drilling $ (333) $ (126) $ 8,838 Oil and gas (891) (3,212) (4,427) -------- -------- -------- (1,224) (3,338) 4,411 Corporate income (expenses) (b) 17 151 133 -------- -------- -------- $ (1,207) $ (3,187) $ 4,544 ======== ======== ======== Identifiable assets: Contract drilling $ 16,350 $ 11,877 $ 17,775 Oil and gas 5,277 5,062 4,325 -------- -------- -------- 21,627 16,939 22,100 Corporate assets (c) 1,998 1,984 2,548 -------- -------- -------- $ 23,625 $ 18,923 $ 24,648 ======== ======== ======== Depreciation, depletion and amortization: Contract drilling $ 1,730 $ 1,449 $ 2,188 Oil and gas 1,552 1,250 1,892 -------- -------- -------- $ 3,282 $ 2,699 $ 4,080 ======== ======== ======== Capital expenditures: Contract drilling $ 3,348 $ 261 $ 6,334 Oil and gas 2,923 4,242 3,847 -------- -------- -------- $ 6,271 $ 4,503 $ 10,181 ======== ======== ========
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, 2000, 1999 and 1998, contract drilling revenues earned from individual customers constituting 10% or more of total contract drilling revenues were:
(a) three customers in 2000 individually represented approximately 20%, 15%, and 13% of drilling revenues,
(b) five customers in 1999 individually represented approximately 20%, 15%, 14%, 13% and 11% of drilling revenues.
(C) two customers in 1998 individually represented approximately 14%, and 12% 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
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
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 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.
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, --------- 2000 1999 ---- ---- (In thousands)
Oil and gas properties $21,155 $18,742
Accumulated depreciation, depletion and amortization (15,972) (13,680) ------- ------- $ 5,183 $ 5,062 ======= =======
The Company's costs incurred related to oil and gas property acquisition, exploration and development activities are as follows:
Years Ended March 31, --------------------- 2000 1999 1998 ---- ---- ---- (In thousands)
Property acquisition costs $ 406 $ 422 $ 275
Exploration costs 2,408 2,481 1,430
Development costs 109 1,339 2,141 ------- ------- ------- $ 2,923 $ 4,242 $ 3,846 ======= ======= =======
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, --------------------- 2000 1999 1998 ---- ---- ---- (In thousands) Revenues $ 3,169 $ 1,476 $ 2,126
Production costs 926 803 944
Dry holes and abandonments 509 946 476
Depreciation, depletion and amortization 1,552 1,250 1,892
Writedown of oil and gas properties 739 1,304 3,120
Income tax provision -- -- -- ------- ------- ------- Results of operations from producing activities (excluding corporate overhead and interest costs) $ (557) $(2,827) $(4,306) ======= ======= =======
(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.
In accordance with the Securities and Exchange Commission, the Company's estimates of future net cash flows from the Company's proved properties and the representative value thereof are made using oil and natural gas prices in effect as of the dates of such estimates and are held constant throughout the
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
life of the properties. Average prices used in estimating the future net cash flows at March 31, 2000, 1999 and 1998 were as follows: $27.08, $13.37 and $14.88 per barrel of oil, respectively, and $2.467, $1.683 and $1.656 per Mcf for natural gas, respectively.
The following sets forth proved oil and gas reserves at March 31, 2000, 1999 and 1998:
The reduction in estimate of approximately 1,801 Mmcf of natural gas reserves can be attributed primarily to two natural gas wells. Due to a decline in the initial producing rate used in projections in the prior year reserve report, the State 32 #1 well in Lea County, New Mexico reserves were adjusted by approximately 878 Mmcf. The prior year reserves were projected without benefit of production history as this well was relatively new. The well is currently stable at 2,000 Mcf per day. The Fuller Unit #1 well in Ward County, Texas experienced a mechanical failure and the well bore was lost. The reduction in estimate of approximately 808 Mmcf, was related to this well. In addition, of the total $739,000 impairment of oil and gas properties, approximately $553,000 was related to this well. TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31, ----------------------- 2000 1999 ---- ---- (In thousands)
Standardized Measure
Future cash inflows $21,912 $12,094
Future production and development costs (5,695) (3,211) ------- ------- Future net cash flows 16,217 8,883
10% discount factor (5,731) (2,434) ------- ------- Discounted future net cash flows 10,486 6,449
Discounted income taxes -- -- ------- ------- Standardized Measure $10,486 $ 6,449 ======= =======
2000 1999 1998 ---- ---- ---- (In thousands)
Standardized measure, beginning of year $ 6,449 $ 4,660 $ 5,665
Revisions Prices and costs 1,960 207 (1,889) Accretion of discount 645 466 567 ------- ------- -------- Net revisions 2,605 673 (1,322)
Discoveries and additions 3,676 1,789 1,499 Production (2,244) (673) (1,182) ------- ------- ------- Standardized measure, end of year $10,486 $ 6,449 $ 4,660 ======= ======= =======
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company at June 13, 2000 were as follows:
Director or Officer Name Age Position with Company Since
Thomas C. Brown 73 Chairman of the Board of Directors and Chief Executive Officer 1982
Joe G. Roper 71 Director and President 1982
Donald L. Evans (1) 53 Director 1982
David N. Fitzgerald (1) 77 Director 1984
Don H. Lawson 61 Vice President - Operations 1992
Jeffrey D. Phillips 39 Vice President - Production 1997
Patricia R. Elledge 42 Controller/Treasurer 1994
James M. Alsup 63 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, 2000, 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 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 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.
Mr. Evans has been a Director of the Company since in 1982. Mr. Evans is currently the Chairman of the Board of Directors and Chief Executive Officer of Tom Brown, Inc.
Mr. Fitzgerald has served as a Director of the Company since 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. 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 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.
Item 11. EXECUTIVE COMPENSATION
The discussion under "Executive Compensation" in the Company's definitive proxy statement for the 2000 annual meeting of shareholders is incorporated herein by reference.
Item 12.
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 2000 annual meeting of shareholders is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Executive Compensation - Certain Transactions" in the Company's definitive proxy statement for the 2000 annual meeting of stockholders is incorporated herein by reference.
PART IV
Item 14.
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, 2000, 1999 and 1998
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)
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 - 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 10.11 - Incentive Stock Option Agreement dated September 1, 1998, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.12 - Incentive Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.19 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.13 - Incentive Stock Option Agreement dated September 1, 1998, 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 29, 1999)
Exhibit 10.14 - Incentive Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.15 - Incentive Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.22 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.16 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.23 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.17 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.24 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.18 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.25 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.19 - First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.26 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.20 - 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 10.21 - 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 2000.
Schedule II -----------
TMBR/SHARP DRILLING, INC.
Valuation and Qualifying Accounts
Years ended March 31, 2000, 1999 and 1998
(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:
2000 $ 1,349 $ 137 $ -- $ 1,486
1999 $ 1,135 $ 214 $ -- $ 1,349
1998 $ 1,135 $ -- $ -- $ 1,135
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 28, 2000 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 28, 2000 /s/ Thomas C. Brown -------------------------------- Thomas C. Brown, Chairman of the Board of Directors (Principal Executive Officer)
June 28, 2000 /s/ Joe G. Roper -------------------------------- Joe G. Roper, President and Director
June 28, 2000 /s/ Patricia R. Elledge -------------------------------- Patricia R. Elledge, Controller/ Treasurer (Principal Financial Officer)
June 28, 2000 /s/ David N. Fitzgerald -------------------------------- David N. Fitzgerald, Director
June 28, 2000 /s/ Donald L. Evans -------------------------------- Donald L. Evans, Director
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)
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 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 10.11 Incentive Stock Option Agreement dated September 1, 1998, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.18 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.12 Incentive Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.19 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.13 Incentive Stock Option Agreement dated September 1, 1998, 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 29, 1999)
Exhibit 10.14 Incentive Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.15 Incentive Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.22 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.16 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.23 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.17 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.24 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.18 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.25 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.19 First Amended and Restated Nonstatutory Stock Option Agreement dated September 1, 1998, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.26 in Registrant's Annual Report on Form 10-K dated June 29, 1999)
Exhibit 10.20 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 10.21 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 67
*Exhibit 23.2 Consent of Joe C. Neal & Associates 68
*Exhibit 27 Financial Data Schedule 69
- -------------------- *Filed herewith
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, No. 33-89878 and No. 333-32028) and the Company's previously filed registration statement on Form S-3, No. 333-23391.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas, June 28, 2000
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, No. 33-898878 and No. 333-32028) and the Company's previously filed registration statement on Form S-3, No. 333-23391.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas June 28, 2000