10-K405 1 formkedg.txt 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended March 31, 2001 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-12757 TMBR/SHARP DRILLING, INC. (Exact name of registrant as specified in its charter) TEXAS 75-1835108 (State of Incorporation) (I.R.S. Employer Identification No.) 4607 WEST INDUSTRIAL BLVD., MIDLAND, TEXAS 79703 (Address of principal executive offices) (Zip Code) Registrant's telephone number (area code) (915) 699-5050 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. (X) The aggregate market value of voting stock held by nonaffiliates of the registrant at May 31, 2001 was approximately $69,191,598. At May 31, 2001, there were 5,100,986 shares of the Registrant's Common Stock outstanding. The information required by Items 11, 12 and 13 of Part III of this Form 10-K are incorporated by reference from the registrant's Proxy Statement to be filed pursuant to Regulation 14A with respect to the registrant's Annual Meeting to be held in August, 2001. 2 TMBR/SHARP DRILLING, INC. FORM 10-K TABLE OF CONTENTS Part I Page Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . 16 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 17 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 17 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 17 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 20 Item 7A. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . 27 Item 8. Financial Statements and Supplementary Data . . . . . . 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . 53 Part III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 53 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . 54 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 54 Item 13. Certain Relationships and Related Transactions. . . . . 55 Part IV and signatures Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . 55 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 -2- 3 PART I Item 1. BUSINESS General TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc. The principal executive offices of the Company are located at 4607 West Industrial Blvd., Midland, Texas, 79703 and its telephone number is (915) 699-5050. The Company is engaged in two lines of business, which include the domestic onshore contract drilling of oil and gas wells, and the acquisition, exploration for, development, production and sale of oil and natural gas. The Company provides domestic onshore contract drilling services to major and independent oil and gas companies. The Company focuses its operations in the Permian Basin of west Texas and eastern New Mexico. In addition to its drilling rigs, the Company provides the crews and most of the ancillary equipment used in the operation of its drilling rigs. Rig utilization for the fiscal year ended March 31, 2001 was approximately 68% compared to 35% for the year ended March 31, 2000. The Company owns 18 drilling rigs. At May 31, 2001, 3 rigs were operating on behalf of the Company for its own account, 11 were operating for non-affiliated oil producers, and 4 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. -3- 4 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 13% of the Company's revenues for the fiscal year ended March 31, 2001. The Company's proved reserves, of which approximately 1,999 MBOE (million barrels of oil equivalent) were proved developed producing and approximately 131 MBOE were proved developed non-producing, had a present value of future net revenues of approximately $29.3 million at March 31, 2001. At that same date, the Company owned interests in approximately 23,171 gross (4,015 net) acres of developed oil and gas properties, and approximately 1,006,295 gross (40,221 net) acres of undeveloped properties. The contract drilling industry is highly sensitive to oil and gas industry conditions. Since the early 1980's, many oil and gas exploration companies significantly reduced their drilling budgets due to the low oil and gas prices. As a result, the Company encountered 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 crude oil and natural gas 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 historically had a material adverse effect on the Company's cash flows and profitability. If prices become 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. -4- 5 CONTRACT DRILLING OPERATIONS Drilling Rigs The following table sets forth the type and depth capabilities of the Company's 19 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(a) 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 31* 16,000 BDW 800 55* 30,000 Gardner Denver DW-2100 56* 20,000 National 110-M ---------------- *In active operation at May 31, 2001. (a) On April 12, 2001, this rig was destroyed as a result of an explosion, fire and subsequent blow out. This rig was insured in the amount of $750,000. Major overhauls, repairs and general maintenance for the drilling rigs are primarily conducted at the Company's principal support and storage facilities in Midland, Texas. The Company emphasizes the maintenance and periodic improvement of its drilling equipment and believes that its rigs are generally in good condition. See "Item 2. Properties". Drilling Contracts The Company's drilling contracts are usually obtained through competitive bidding or as a result of direct negotiations with customers. Drilling contracts typically obligate the Company to pay all expenses associated with drilling an oil or gas well, including wages of drilling personnel, maintenance expenses and incidental purchases of rig supplies and equipment. The majority of the Company's contracts are "daywork" contracts with the remainder being "footage" or "turnkey" contracts. Under a footage contract, the Company charges an agreed price per foot of hole drilled, whereas a day-work contract permits the Company to charge a per diem fixed rate for each day the rig is in operation. A turnkey contract specifies a total price for drilling a well plus providing other services, materials or equipment which are typically the responsibility of the operator under footage or daywork contracts. Prices for all contracts vary depending on the -5- 6 location, depth, duration, complexity of the well to be drilled, operating conditions and other factors peculiar to each proposed well. Under footage and turnkey contracts, the Company manages the drilling operation and the type of equipment to be used, subject to certain customer specifications. The Company also bears the risk and expense of mechanical malfunctions, equipment shortages, and other delays arising from problems caused in drilling a well. Daywork contracts permit the operator of the well to manage drilling operations and to specify the type of equipment to be used. Under daywork contracts, the Company generally bears none of the risk due to time delays caused by unforeseeable circumstances such as stuck or broken drill pipe or blowouts. Of the 14 rigs working at May 31, 2001, all were subject to daywork contracts. The Company's operations are subject to many hazards, including well blowouts and fires that could cause personal injury, suspension of drilling operations, damage to or destruction of equipment and damage to producing formations and surrounding areas. The Company believes it is adequately insured for public liability and damage to the property of others resulting from its operations. Rig Utilization The Company's contract drilling revenues depend upon the utilization of its drilling rigs and the contract rates received for its drilling operations. These two factors are affected by a number of variables, including competitive conditions in the drilling industry and the level of exploration and development activity conducted by oil and gas producers at any given time. The level of domestic drilling activity has historically fluctuated and cannot be accurately predicted because of numerous factors affecting the petroleum industry, including oil and gas prices and the degree of government regulation of the industry. Contract drilling revenues and rig utilization rates for the past five years are set forth below. Contract Drilling Year Ended Revenues Number of Percent of March 31, (in thousands) Rigs Owned Utilization ---------- ----------------- ---------- ----------- 1997 $ 18,483 15 51.6% 1998 34,891 17(a) 78.2% 1999 12,948 17 26.6% 2000 15,394 18(b) 35.0% 2001 36,023 19(c) 68.2% ____________________ (a) Of the total number of rigs owned, one was owned only for a portion of the fiscal year ended March 31, 1998. (b) Of the total number of rigs owned, one was owned only for a portion of the fiscal year ended March 31, 2000. (c) Of the total number of rigs owned, one was owned only for a portion of the fiscal year ended March 31, 2001. On April 12, 2001, this rig was destroyed as a result of an explosion, fire and subsequent blow out. -6- 7 Customers During the fiscal year ended March 31, 2001, the Company drilled a total of 160 wells for approximately 19 customers. The following table sets forth certain information with respect to customers for the Company's contract drilling services that accounted for more than 10% of the Company's total revenues during the last fiscal year. Percent of Number of Wells Name of Customer Total Revenues Drilled ---------------- -------------- --------------- Pure Resources, Inc. 35% 49 Pogo Producing Company 13% 33 The loss of any one or more of the above customers could have a material adverse effect on the Company, depending upon the demand for the Company's drilling rigs at the time of such loss and the Company's ability to attract new customers. Competition The Company encounters substantial competition from other drilling contractors in its contract drilling operations. The Company's principal market areas of west Texas and eastern New Mexico are highly fragmented and competitive. Companies compete primarily on the basis of contract rates, suitability and availability of equipment and crews, experience of drilling in certain areas, and reputation. The Company believes it competes favorably with respect to all of these factors. Competition is primarily on a well-by- well basis and may vary significantly at any particular time. Drilling rigs can be stacked or moved from one region to another in response to perceived long-term changes in levels of activity. In recent years, competition within the industry has been intense due to the depressed demand resulting from lower oil and gas prices and excess deliverability of natural gas. Employees At May 31, 2001, the Company had 52 salaried employees and approximately 332 hourly paid employees. Employees of the Company are not covered by any collective bargaining agreements and the Company has never experienced a strike or work stoppage. The Company considers its employee relations to be satisfactory. REGULATION Oil and Gas The Company's operations are regulated by certain federal and state agencies. In particular, oil and gas production and related operations are or have been subject to price controls, taxes and other laws relating to the oil and gas industry. The Company cannot predict how existing laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on its business, financial condition or results of operations. -7- 8 The Company's oil and gas exploration, production and related operations are subject to extensive rules and regulations promulgated by federal, state and local agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden on the oil and gas industry increases the Company's cost of doing business and affects its profitability. Because such rules and regulations are frequently amended or reinterpreted, the Company is unable to predict the future cost or impact of complying with such laws. The State of Texas and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration and production of oil and gas. Such states also have statutes or regulations addressing conservation matters, including provisions for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from oil and gas wells and the regulation of spacing, plugging and abandonment of such wells. Sales of gas by the Company are not regulated and are made at market prices. However, the Federal Energy Regulatory Commission ("FERC") regulates interstate and certain intrastate gas transportation rates and service conditions, which affect the marketing of gas produced by the Company, as well as the revenues received by the Company for sales of such production. Since the mid-1980s, FERC has issued a series of orders, culminating in Order Nos. 636,636-A and 636-B ("Order 636"), that have significantly altered the marketing and transportation of gas. Order 636 mandates a fundamental restructuring of interstate pipeline sales and transportation service, including the unbundling by interstate pipelines of the sales, transportation, storage and other components of the city-gate sales services such pipelines previously performed. One of FERC's purposes in issuing the orders was to increase competition within all phases of the gas industry. Order 636 and subsequent FERC orders issued in individual pipeline restructuring proceedings have been the subject of appeals, the results of which have generally been supportive of the FERC's open-access policy. In 1996, the United States Court of Appeals for the District of Columbia Circuit largely upheld Order No. 636, et seq. Because further review of certain of these orders is still possible, and other appeals remain pending, it is difficult to predict the ultimate impact of the orders on the Company and its gas marketing efforts. Generally, Order 636 has eliminated or substantially reduced the interstate pipelines' traditional role as wholesalers of gas, and has substantially increased competition and volatility in gas markets. While significant regulatory uncertainty remains, Order 636 may ultimately enhance the Company's ability to market and transport its gas, although it may also subject the Company to greater competition. The sale of oil by the Company is not regulated and is made at market prices. The price the Company receives from the sale of oil is affected by the cost of transporting the product to market. Effective as of January 1, 1995, FERC implemented regulations establishing an indexing system for transportation rates for interstate common carrier oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions and limitations. These regulations could increase the cost of transporting -8- 9 oil by interstate pipelines, although the most recent adjustment generally decreased rates. These regulations have generally been approved on judicial review. The Company is not able to predict with certainty what effect, if any, these regulations will have on it, but, other factors being equal, the regulations may, over time, tend to increase transportation costs or reduce wellhead prices for oil. The Company is required to comply with various federal and state regulations regarding plugging and abandonment of oil and gas wells. Environmental Various federal, state and local laws and regulations governing the discharge of materials into the environment, or otherwise relating to the protection of the environment, health and safety, affect the Company's operations and costs. These laws and regulations sometimes require governmental authorization before certain activities, limit or prohibit other activities because of protected areas or species, impose substantial liabilities for pollution related to Company operations or properties, and provide penalties for noncompliance. In particular, the Company's exploration and production operations, its activities in connection with storage and transportation of oil and other liquid hydrocarbons, and its use of facilities for treating, processing or otherwise handling hydrocarbons and related exploration and production wastes are subject to stringent environmental regulation. As with the industry generally, compliance with existing and anticipated regulations increases the Company's overall cost of business. While these regulations affect the Company's capital expenditures and earnings, the Company believes that such regulations do not affect its competitive position in the industry because its competitors are similarly affected by environmental regulatory programs. Environmental regulations have historically been subject to frequent change and, therefore, the Company is unable to predict the future costs or other future impacts of environmental regulations on its future operations. A discharge of hydrocarbons or hazardous substances into the environment could subject the Company to substantial expense, including the cost to comply with applicable regulations that require a response to the discharge, such as containment or cleanup, claims by neighboring landowners or other third parties for personal injury, property damage or their response costs and penalties assessed, or other claims sought by regulatory agencies for response cost or for natural resource damages. The following are examples of some environmental laws that potentially impact the Company and its operations. Water. The Oil Pollution Act ("OPA") was enacted in 1990 and amends provisions of the Federal Water Pollution Control Act of 1972 ("FWPCA") and other statutes as they pertain to prevention of and response to major oil spills. The OPA subjects owners of facilities to strict, joint and potentially unlimited liability for removal costs and certain other consequences of an oil spill, where such spill is into navigable waters, or along shorelines. In the event of an oil spill into such waters, substantial -9- 10 liabilities could be imposed upon the Company. States in which the Company operates have also enacted similar laws. Regulations are currently being developed under the OPA and similar state laws that may also impose additional regulatory burdens on the Company. The FWPCA imposes restrictions and strict controls regarding the discharge of produced waters, other oil and gas wastes, any form of pollutant, and, in some instances, storm water runoff, into waters of the United States. The FWPCA provides for civil, criminal and administrative penalties for any unauthorized discharges and, along with the OPA, imposes substantial potential liability for the costs of the removal, remediation or damages resulting from an unauthorized discharge. State laws for the control of water pollution also provide for civil, criminal and administrative penalties and liabilities in the case of an unauthorized discharge into state waters. The cost of compliance with the OPA and the FWPCA have not historically been material to the Company's operations, but there can be no assurance that changes in federal, state or local water pollution control programs will not materially adversely effect the Company in the future. Although no assurances can be given, the Company believes that compliance with existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on the Company's financial condition or results of operations. Air Emissions. Amendments to the Federal Clean Air Act enacted in late 1990 (the "1990 CAA Amendments") require or will require most industrial operations in the United States to incur capital expenditures in order to meet air emissions control standards developed by the Environmental Protection Agency ("EPA") and state environmental agencies. Although no assurances can be given, the Company believes implementation of the 1990 CAA Amendments will not have a material adverse effect on the Company's financial condition or results of operations. Solid Waste. The Company generates non-hazardous solid wastes that are subject to the requirements of the Federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes. The EPA and the states in which the Company operates are considering the adoption of stricter disposal standards for the type of non-hazardous wastes generated by the Company. RCRA also governs the generation, management, and disposal of hazardous wastes. At present, the Company is not required to comply with a substantial portion of the RCRA requirements because the Company's operations generate minimal quantities of hazardous wastes. However, it is anticipated that additional wastes, which could include wastes currently generated during operations, could in the future be designated as "hazardous wastes". Hazardous wastes are subject to more rigorous and costly disposal and management requirements than are non-hazardous wastes. Such changes in the regulations may result in additional capital expenditures or operating expenses by the Company. Superfund. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as "Superfund", imposes liability, without regard to fault or the legality of the original act, on certain -10- 11 classes of persons in connection with the release of a "hazardous substance" into the environment. These persons include the current owner or operator of any site where a release historically occurred and companies that disposed or arranged for the disposal of the hazardous substances at the site. CERCLA also authorizes the EPA and, in some instances, third parties to act in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its ordinary operations, the Company may have managed substances that may fall within CERCLA's definition of a "hazardous substance". The Company may be jointly and severally liable under CERCLA for all or part of the costs required to clean up sites where the Company disposed of or arranged for the disposal of these substances. This potential liability extends to properties that the Company owned or operated, as well as to properties owned and operated by others at which disposal of the Company's hazardous substances occurred. The Company may also fall into the category of a "current owner or operator". The Company currently owns or leases numerous properties that for many years have been used for the exploration and production of oil and gas. Although the Company believes it has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other wastes may have been disposed of or released by the Company on or under the properties owned or leased by the Company. In addition, many of these properties have been previously owned or operated by third parties who may have disposed of or released hydrocarbons or other wastes at these properties. Under CERCLA, and analogous state laws, the Company could be subject to certain liabilities and obligations, such as being required to remove or remediate previously disposed wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including contaminated groundwater) or to perform remedial plugging operations to prevent future contamination. OIL AND GAS OPERATIONS The Company's oil and gas operations involve the acquisition, exploration for, development and production of oil and natural gas. During the fiscal year ended March 31, 2001, the Company's exploration efforts were conducted in west Texas and eastern New Mexico. The Company is actively investing in oil and gas properties for the purpose of exploration, development and production of oil and gas. The Company acquires or participates in these arrangements as a working interest owner and usually provides the contract drilling services for such ventures. Exploration for oil and natural gas requires substantial expenditures, especially for exploration in more remote areas. As is customary in the oil and gas industry, the drilling of oil and gas wells is usually accomplished through participation with other third parties. One of the parties experienced with operations in the area is usually designated as the operator of the property and is responsible for the direct supervision, administration -11- 12 and accounting for wells drilled and completed pursuant to an operating agreement between the parties. The Company typically serves as operator of oil and gas prospects assembled by the Company and participates as a non- operating working interest owner in prospects assembled and generated by third parties. As operator, the Company supervises the drilling and completion of wells and production therefrom and the further development of surrounding properties. The operator of a well has significant control over its location and the timing of its drilling. In addition, the operator of a well receives fees from other working interest owners as reimbursement for the general and administrative expenses attendant to the operation of the wells. The operator will normally receive revenues and pay expenses equal to more than its ownership interest in the wells, and then must remit or collect all but its share to or from the other respective participants in the well. At May 31, 2001 the Company was operator of 35 wells. Oil and Gas Reserves Information concerning the Company's estimated proved oil and gas reserves is included in Note (10) to the Company's financial statements. See "Item 8 - Financial Statements and Supplementary Data". The reserve information included in this report is only an estimate. There are numerous uncertainties inherent in estimating oil and gas reserves and their estimated values, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, estimates of reserves are subject to revision due to the results of drilling, testing and production subsequent to the date of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. The accuracy of such estimates is highly dependent upon the accuracy of the underlying assumptions upon which they are based. In general, the volume of production from oil and gas properties declines as reserves are depleted. Except to the extent the Company acquires properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of, and volumes of production by, the Company will decline as reserves are produced. The Company's future oil and gas production is therefore highly dependent upon its level of success in acquiring or finding additional reserves. The Company has no reserves outside the United States. No major discovery or other favorable or adverse event has occurred since March 31, 2001 which is believed to have caused a significant change in the estimated proved oil and gas reserves of the Company. -12- 13 The Company's oil and gas reserves and production are not subject to any long-term supply or similar agreements with foreign governments or authorities. The Company's estimate of reserves has not been filed with or included in reports to any federal agency other than the Securities and Exchange Commission. Productive Wells and Acreage The following tables set forth the gross and net productive oil and gas wells and developed and undeveloped acreage in which the Company owned a working interest as of March 31, 2001. Excluded from the table is acreage in which the Company's interest is limited to royalty or similar interests. Productive Wells ----------------------------------- Gross Net ----------- ---------------- Oil Gas Oil Gas --- --- ------- ----- Texas................................... 64 13 9.962 2.235 New Mexico.............................. 21 9 7.312 2.716 Oklahoma............................... 1 3 .029 .090 --- --- ------ ----- Total......................... 86 25 17.303 5.041 === === ====== ===== Acreage ----------------------------------------- Developed Undeveloped ----------------- ------------------- Gross Net Gross Net ------ ----- --------- ------ Texas............................ 14,880 2,510 4,535 2,273 New Mexico....................... 5,731 1,429 1,760 448 Oklahoma......................... 2,560 76 -- -- Palau............................ -- -- 1,000,000 37,500 ------ ----- --------- ------ Total.................. 23,171 4,015 1,006,295 40,221 ====== ===== ========= ====== Generally, the terms of developed oil and gas leaseholds are continuing and such leases remain in force by virtue of, and so long as, production from lands under lease is maintained. Undeveloped oil and gas leaseholds are generally for a primary term, such as five or ten years, subject to maintenance with the payment of specified minimum delay rentals or extension by production. On September 5, 1995, the Company entered into a 10 year License Agreement with the Government of the Republic of Palau and the State of Kayangel which will allow the Company to explore for oil and natural gas -13- 14 offshore. The license covers approximately 1.1 million acres within the waters of Palau. Pursuant to the amended license agreement, the Company is required to drill two wells by March, 2002. Any exploration activities in the license area will be conducted jointly with other third parties under a carried interest, farmout or other similar arrangements which would allow the Company to retain an ownership interest without incurring the initial costs of exploration. Drilling Activity The following table sets forth certain information concerning the number of gross and net exploratory and development wells drilled for the Company's account during the periods indicated. Year Ended March 31, ------------------------------------------------------- 2001 2000 1999 --------------- --------------- --------------- Type of Well Gross Net Gross Net Gross Net ------------ ----- ----- ----- ----- ----- ----- Exploratory (1) Oil 3 1.162 6 1.680 3 1.714 Gas 4 1.262 4 .590 3 .781 Dry 7 1.937 3 .500 3 1.108 Development (2) Oil 4 2.40 2 .160 -- -- Gas 1 .05 -- -- 2 .266 Dry 2 .10 1 .10 1 .150 -------------------------- (1) An exploratory well is a well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir. (2) A development well is a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive. At May 31, 2001, the Company was participating in the drilling of 2 gross (.766 net) exploratory wells in Reeves County, Texas and 1 gross (.30 net) exploratory well in Lea County, New Mexico. Substantially all of the equipment used in the Company's drilling operations is owned by the Company; however, certain insignificant items of drilling equipment are leased or rented as needed because such equipment either cannot be purchased or is only necessary for the drilling of certain types of wells located in certain areas. -14- 15 Production, Prices and Costs. The following table sets forth certain information regarding the volumes of the Company's net production of oil and gas, the average sales prices received associated with its sales of oil and gas, and the average production (lifting) cost per equivalent barrel of oil ("EBO"). Year Ended March 31, ------------------------------------ 2001 2000 1999 ------- ------- ------- Net Production Oil (Bbls) 108,886 78,217 68,135 Gas (Mcf) 428,355 611,901 568,627 EBO (1) 180,279 180,201 162,906 Sales Prices Oil ($/Bbl) $31.14 $21.12 $10.84 Gas ($/Mcf) 4.82 2.48 1.29 EBO 30.25 17.58 9.06 Production (Lifting) Costs per EBO 7.77 5.13 4.93 -------------------- (1) An EBO is one equivalent barrel of oil using the ratio of six Mcf of gas to one barrel of oil. Title to Properties As is customary in the oil and gas industry, a preliminary title examination is conducted at the time oil or gas properties believed to be suitable for drilling are acquired by the operator. Prior to the commencement of operations, curative work determined to be appropriate as a result of a title search is performed with respect to significant defects before the operator commences development. Title examinations have been performed with respect to substantially all of the Company's interests in its producing properties. The Company believes that title to its properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry, subject to such exceptions which, in the Company's opinion, are not so material as to detract substantially from the value of such properties. The Company's properties are subject to royalty, overriding royalty, and other outstanding interests customary in the industry, and are also subject to burdens such as liens incident to operating agreements, current taxes not yet due, development obligations under oil and gas leases, and other encumbrances, easements and restrictions. The Company does not believe that any of these burdens materially interferes with the use of its properties in the operation of its business. Markets and Customers The Company sells its oil and gas at the wellhead on an "as-produced" basis and does not refine petroleum products. Other than normal production -15- 16 facilities, the Company does not own an interest in any bulk storage facilities or pipelines. As is customary in the industry, the Company sells its production in any one area to relatively few purchasers, including transmission companies that have pipelines near the Company's producing wells. Gas purchase contracts are generally on a short-term "spot market" basis and usually contain provisions by which the prices and delivery quantities for future deliveries will be determined. During the year ended March 31, 2001, Navajo Refining and Crude Marketing and Lantern Petroleum Corporation accounted for approximately 30% and 17%, respectively, of the Company's oil and gas revenues for such period. The loss of either one of these purchasers could cease or delay the Company's production and sale of its oil and gas reserves to the extent that alternative purchasers having adequate gathering facilities are not found to replace such purchaser's volume of oil or gas purchased. However, in the event of a loss of any purchaser, the Company believes that, under present circumstances, it would be able to find other purchasers for its oil and gas production. Competition The Company encounters strong competition from major oil companies and independent producers and operators in acquiring properties and leases for exploration for oil and gas. Competition is particularly intense with respect to the acquisition of desirable undeveloped oil and gas leases. The principal competitive factors in the acquisition of undeveloped oil and gas leases include qualified personnel and having access to the data necessary to acquire and develop such leases, as well as the amount of consideration and terms offered. Many of the Company's competitors have financial resources, staffs and facilities substantially greater than those of the Company. In addition, the producing and marketing of natural gas and oil is affected by a number of factors which are beyond the control of the Company, the effect of which cannot be accurately predicted. Of significant importance recently has been the domination and control of oil markets and prices by foreign producers. The principal raw materials and resources necessary for the exploration and development of oil and gas are leasehold prospects under which oil and gas reserves may be discovered, drilling rigs and related equipment to explore for such reserves and knowledgeable personnel to conduct all phases of oil and gas operations. The Company must compete for such raw materials and resources with both major oil companies and independent operators, and the continued availability, without periodic interruption, of such materials and resources to the Company cannot be assured. Item 2. PROPERTIES In addition to its drilling rigs and related equipment and its oil and gas properties, the Company owns a 31 acre tract of land in Midland, Texas on which the Company's executive offices are located and on which the 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. -16- 17 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. LEGAL PROCEEDINGS The Company is a defendant in various lawsuits generally incidental to its business. The Company does not believe that the ultimate resolution of such litigation will have a significant effect on the Company's financial position or results of operations. 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, 2001, and no matters were submitted to a vote of security holders during such period. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "TBDI". The following table sets forth, on a per share basis for the periods indicated, the range of high and low last reported sales prices as reported by NASDAQ. The quotations are inter-dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions. -17- 18 Price ------------------- High Low ------- -------- 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 Fiscal 2001 First Quarter 12 1/2 8 3/4 Second Quarter 15 3/4 10 1/2 Third Quarter 14 11/16 10 Fourth Quarter 18 3/8 13 On May 31, 2001, the last reported sale price of the Company's Common Stock as reported by NASDAQ was $17. The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, New York, New York. On May 31, 2001, the outstanding shares of the Company's Common Stock were held of record by approximately 2,240 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". -18- 19 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, 2001. 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.
Years ended March 31, ------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In thousands, except per share amounts) INCOME STATEMENT DATA Operating revenues: Contract drilling $ 36,023 $ 15,394 $ 12,948 $ 34,891 $ 18,483 Oil and gas 5,454 3,169 1,476 2,126 2,491 ------ ------ ------ ------ ------ Total operating revenues 41,477 18,563 14,424 37,017 20,974 Operating costs and expenses: Contract drilling 22,767 12,486 10,027 23,163 14,190 Oil and gas production 1,363 926 803 944 924 Dry holes and abandonments 811 490 840 440 391 Exploration 174 19 106 36 167 Depreciation, depletion and amortization 5,137 3,282 2,699 4,080 1,784 General and administrative 1,918 1,854 1,911 1,863 1,560 Writedown of oil and gas properties (a) 1,171 739 1,304 3,120 171 ------ ------ ------ ------ ------ Total operating costs and expenses 33,341 19,796 17,690 33,646 19,187 ------ ------ ------ ------ ------ Operating income (loss) 8,136 (1,233) (3,266) 3,371 1,787 Other income (expenses): Interest (216) 17 151 133 (278) Other 558 9 (72) 1,180 52 ------ ------ ------ ------ ------ Total other income (expense) 342 26 79 1,313 (226) ------ ------ ------ ------ ------ Net income(loss) before income tax provision 8,478 (1,207) (3,187) 4,684 1,561 Provision for income taxes (170) -- -- (140) (16) ------ ------ ------ ------ ------ Net income (loss) before extraordinary items $ 8,308 $(1,207) $ (3,187) $ 4,544 $ 1,545 ====== ====== ====== ====== ====== 20 Net income (loss) before extraordinary items per share: Basic $ 1.67 $(0.25) $(0.68) $ 0.98 $ 0.43 Diluted $ 1.54 $(0.25) $(0.68) $ 0.91 $ 0.38 ====== ====== ====== ====== ====== Weighted average number of common shares outstanding: Basic 4,979 4,761 4,711 4,615 3,608 Diluted 5,392 4,761 4,711 5,014 4,106 ===== ===== ===== ===== ===== BALANCE SHEET DATA Cash and cash equivalents $ 301 $ 980 $ 1,195 $ 1,623 $ 1,048 Total assets 35,401 23,625 18,923 24,648 19,761 Total debt 1,080 2,250 -- -- -- Stockholders' equity 24,606 15,796 16,735 19,960 14,372
____________________ (a) During fiscal years ended March 31, 2001, 2000 and 1999, the Company recognized non-cash charges of approximately $1,171,000, $739,000 and $1,304,000, 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. -19- 21 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. -20- 22 Although the Company's fiscal year 2000 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 continues to experience increases in demand for its contract drilling services. 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, ------------------------- 2001 2000 1999 ---- ---- ---- (In thousands, except %s) Contract drilling revenues $36,023 $15,394 $12,948 Contract drilling expenses 22,767 12,486 10,027 Contract drilling expenses as a percent of drilling revenues 63.2% 81.1% 77.4% Rig utilization 68.2% 35.0% 26.6% Oil and Gas Operations The Company's oil and gas producing activities are accounted for using the successful efforts method of accounting. Accordingly, the Company capitalizes all costs incurred to acquire oil and gas properties (proved and unproved), all development costs, and the costs of successful exploratory wells. The costs of unsuccessful exploratory wells are expensed. Geological and geophysical costs, including seismic costs, are charged to expense when incurred. In cases where the Company provides contract drilling for oil and gas properties in which it has an ownership interest, the Company's proportionate share of costs is capitalized as stated above, net of its working-interest share of profits from the related drilling contracts. Capitalized costs of undeveloped properties, which are not depleted until proved reserves can be associated with the properties, are periodically reviewed for possible impairment. Such unevaluated costs totaled approximately $845,000 and $90,000 as of March 31, 2001, and March 31, 2000, respectively. -21- 23 For properties with proved or proved developed oil and gas reserves, depletion, depreciation and amortization of capitalized costs was calculated for fiscal 2001, 2000 and 1999 by applying the units-of-production method to the estimated amount of such reserves. In fiscal 2001, 2000 and 1999, the Company recognized non-cash charges of approximately $1.2 million, $.7 million and $1.3 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, -------------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Oil and gas revenues $5,454 $3,169 $1,476 Production expenses 1,363 926 803 Dry holes and abandonments 811 490 840 Exploration expenses 174 19 106 Depreciation, depletion and amortization 1,739 1,552 1,250 Writedown of properties 1,171 739 1,304 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, 2001 to Year Ended March 31, 2000 Contract drilling revenues for fiscal 2001 increased by 134% from fiscal 2000. Rig utilization rates in fiscal 2001 and 2000 were 68% and 35%, 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 have steadily increased during the year ended March 31, 2001. Availability of experienced personnel has become a problem industry wide and certainly affects rig utilization. Historically, rig utilization in the Company's operating market is difficult to project because of wide fluctuations in drilling activity. -22- 24 In addition, the number of rigs industry wide that are actually available for work cannot be accurately determined. Contract drilling expenses were 63% and 81% of contract drilling revenues in fiscal 2001 and 2000, respectively. The decrease can be attributable to high start up costs that occurred in 2000. High start up costs are associated with putting rigs into service afer being idle or stacked for a period of time. Additionally, the decrease is a result of higher revenues due to increasing drilling prices. Oil and gas revenues increased by 72% in fiscal 2001. This increase is a result of an increase in prices received for crude oil and natural gas. The following table sets forth certain information relating to oil and gas revenues: Fiscal year ended March 31, ----------------- 2001 2000 ---- ---- Quantities ---------- Oil (bbls) 108,886 78,217 Gas (mcf) 428,355 611,901 Average Price ------------- Oil (bbls) $ 31.14 $ 21.12 Gas (mcf) $ 4.82 $ 2.48 The decline in natural gas production from the prior year is due to the plugging and abandonment of two non-operated natural gas wells in Ward County, Texas. Also, a recompletion of one well in Pecos County, Texas has negatively affected the current year's natural gas production. In addition, the Company's interest in a natural gas well in Lea County, New Mexico was reduced by 25% because the well reached "pay-out" status. Oil and gas production expenses increased by approximately 47%. This increase in production expenses can be attributed to the increased water production and workover on one well in Gaines County, Texas. In addition, the Company has experienced a general rise in the cost of services and supplies which are included in production expenses. Severance taxes increased along with the increase in oil and gas revenue. Also, the prior years results are affected by a recovery of an insurance claim concerning the loss of a well bore in Lea County, New Mexico. The production expenses in the prior year reflect this recovery. The Company participated as a working-interest owner in the drilling of 21 wells during fiscal 2001, of which nine were dry holes. In fiscal 2000, the Company participated as a working-interest owner in the drilling of 16 wells, of which 4 were dry holes. -23- 25 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, 2001, the Company purchased a BDW-800 rig with a depth capacity of approximately 16,000 feet. This rig was put in service on February 6, 2001. The addition of the rig brought the Company's available fleet to 19 rigs. Unfortunately, on April 12, 2001, an explosion, fire and subsequent blow-out destroyed one of our National 75A rigs that had a depth capacity of 12,500 feet. Three Company employees were injured as a result of the fire. Their injuries are covered under the Company's workers' compensation policy. The rig was insured in the amount of $750,000. As a result of the explosion, fire and subsequent blow-out, the Company has an available fleet of 18 drilling rigs. Also, during the year the Company purchased drill collars and drill pipe. During the year ended March 31, 2001, the Company recovered approximately $384,000 in bad debts that had been reserved in prior years. This amount is included in miscellaneous income. The Company recognized a non-cash charge of approximately $1.2 million in fiscal 2001 and $.7 million in fiscal 2000 related to the writedown of the carrying value of its oil and gas properties. Net working capital was $5.4 million at March 31, 2001, compared to $2.8 million at March 31, 2000. The increase in working capital is attributable to an increase in accounts receivable which relates to the increase in drilling activity. 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. -24- 26 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 an increase in accounts receivable, accounts payable and other current liabilities, all of which is related to the increase in drilling activity. Income Taxes At March 31, 2001, the Company had approximately $73.0 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 2001 and 2000 differ from the statutory tax rate of 34% primarily due to the utilization of NOLs. Tax expense is generally limited to alternative minimum tax. -25- 27 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 bore interest at the bank's base rate and accrued interest was payable monthly. The loan facility originally matured on May 26, 2000 but was extended to July 15, 2000. On June 26, 2000, the Company renewed and extended the prior loan agreements with its bank lender. The second and restated agreement provides for a $5.0 million revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under this line of credit bear interest at the Wells Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (7.0% at May 31, 2001) and accrued interest is payable monthly. The loan facility will mature on August 31, 2002, at which time all outstanding principal and interest will be due in full. At March 31, 2001 and May 31, 2001, respectively, $1,080,000 and $747,000 were outstanding under the loan facility. The Company anticipates that funds for its capital expenditures in fiscal 2002 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, ------------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Oil and gas exploration and development..... $ 7,596 $ 2,904 $ 4,136 Drilling rigs, drill pipe and related equipment......................... 4,139 3,149 261 Other....................................... 586 199 -- ------ ------ ------ Total.................................. $12,321 $ 6,252 $ 4,397 ====== ====== ====== -26- 28 The Company presently anticipates making capital expenditures of approximately $13.0 million in its 2002 fiscal year. Of this amount, the Company expects that approximately $5.0 million will be spent for the acquisition of drill pipe, drill collars and related equipment, and approximately $8.0 million for oil and gas exploration and development activities. It is the Company's policy, however, to make capital expenditures based on prevailing economic conditions, the results of its drilling activities, and other factors affecting its business. Accordingly, the amounts actually spent in fiscal 2002 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. 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, 2001, 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, 2001, the Company had $1,080,000 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. -27- 29 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Public Accountants 29 Balance Sheets, March 31, 2001 and 2000 30 Statements of Operations, Years ended March 31, 2001, 2000 and 1999 32 Statements of Stockholders' Equity, Years ended March 31, 2001, 2000 and 1999 33 Statements of Cash Flows, Years ended March 31, 2001, 2000 and 1999 34 Notes to Financial Statements 35 -28- 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of TMBR/Sharp Drilling, Inc.: We have audited the accompanying balance sheets of TMBR/Sharp Drilling, Inc. (a Texas corporation) as of March 31, 2001 and 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2001, 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 18, 2001 -29- 31 TMBR/SHARP DRILLING, INC. Balance Sheets March 31, 2001 and 2000 (In thousands, except share data) ASSETS 2001 2000 ------ ---- ---- Current assets: Cash and cash equivalents $ 301 $ 980 Marketable securities 91 49 Trade receivables, net of allowance for doubtful accounts of $1,227 in 2001 and $1,486 in 2000. 13,625 6,398 Inventories 148 111 Deposits 73 73 Other 871 796 ------ ------ Total current assets 15,109 8,407 ------ ------ Property and equipment, at cost: Drilling equipment 55,599 51,858 Oil and gas properties, based on successful efforts accounting 26,372 21,155 Other property and equipment 2,844 3,768 ------ ------ 84,815 76,781 Less accumulated depreciation, depletion and amortization (64,696) (61,736) ------ ------ Net property and equipment 20,119 15,045 ------ ------ Other assets 173 173 ------ ------ Total assets $ 35,401 $ 23,625 ====== ====== See accompanying notes to financial statements. -30- 32 TMBR/SHARP DRILLING, INC. Balance Sheets March 31, 2001 and 2000 (In thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ------------------------------------ ---- ---- Current liabilities: Trade payables $ 7,414 $ 4,240 Other 2,301 1,339 ------ ------ Total current liabilities 9,715 5,579 Long Term liabilities: Borrowings from bank 1,080 2,250 ------ ------ Total liabilities 10,795 7,829 ------ ------ Contingencies Stockholders' equity: Common stock, $0.10 par value Authorized, 50,000,000 shares; issued, 6,332,225 and 6,227,125 shares at March 31, 2001 and 2000, respectively 633 623 Additional paid-in capital 70,122 69,672 Accumulated deficit (46,003) (54,311) Accumulated other comprehensive income (loss) 4 (38) Treasury stock-common, 1,268,739 shares at March 31, 2001 and 2000, at cost (150) (150) ------ ------ Total stockholders' equity 24,606 15,796 ------ ------ Total liabilities and stockholders' equity $ 35,401 $ 23,625 ====== ====== See accompanying notes to financial statements. -31- 33 TMBR/SHARP DRILLING, INC. Statements of Operations Years Ended March 31, 2001, 2000 and 1999 (In thousands, except share data) 2001 2000 1999 ---- ---- ---- Revenues: Contract drilling $ 36,023 $ 15,394 $ 12,948 Oil and gas 5,454 3,169 1,476 ------ ------ ------ Total revenues 41,477 18,563 14,424 ------ ------ ------ Operating costs and expenses: Contract drilling 22,767 12,486 10,027 Oil and gas production 1,363 926 803 Dry holes and abandonments 811 490 840 Exploration 174 19 106 Depreciation, depletion and amortization 5,137 3,282 2,699 Writedown of oil and gas properties 1,171 739 1,304 General and administrative 1,918 1,854 1,911 ------ ------ ------ Total operating costs and expenses 33,341 19,796 17,690 ------ ------ ------ Operating income (loss) 8,136 (1,233) (3,266) ------ ------ ------ Other income (expense): Interest (216) 17 151 Gain on sales of assets 256 137 127 Other, net 302 (128) (199) ------ ------ ------ Total other income (expense), net 342 26 79 ------ ------ ------ Net income (loss) before income tax provision 8,478 (1,207) (3,187) Provision for income taxes (170) -- -- ------ ------ ------ Net income (loss) $ 8,308 $ (1,207) $ (3,187) ====== ====== ====== Net income (loss) per common share: Basic $ 1.67 $ (0.25) $ (0.68) Diluted 1.54 (0.25) (0.68) ========= ========= ========= Weighted average number of common shares outstanding: Basic 4,979,082 4,760,704 4,710,886 Diluted 5,391,934 4,760,704 4,710,886 ========= ========= ========= See accompanying notes to financial statements. -32- 34 TMBR/SHARP DRILLING, INC. Statements of Stockholders' Equity Years Ended March 31, 2001, 2000 and 1999 (In thousands)
Accumulated Common Stock Additional Other Treasury Stock Total ------------ Paid-In Accumulated Comprehensive --------------- Stockholders' Shares Amount Capital Deficit (Loss) Income Shares Amount Equity ------ ------ ---------- ----------- ------------- ------ ------ ------------- Balance, March 31, 1998 5,980 $ 598 $ 69,429 $(49,917) $ -- 1,270 $(150) $ 19,960 Net Loss -- -- -- (3,187) -- -- -- (3,187) Other comprehensive income, net of tax Unrealized loss on marketable equity securities -- -- -- -- (38) -- -- (38) -------- Comprehensive Loss (3,225) ----- ----- -------- -------- ----- ----- ----- -------- Balance, March 31, 1999 5,980 598 69,429 (53,104) (38) 1,270 (150) 16,735 Exercise of Stock Options 247 25 146 -- -- -- -- 171 Grant of Stock Options -- -- 97 -- -- -- -- 97 Net Loss -- -- -- (1,207) -- -- -- (1,207) ----- ----- -------- -------- ----- ----- ----- -------- Balance, March 31, 2000 6,227 $ 623 $ 69,672 $ (54,311) $(38) 1,270 $(150) $ 15,796 Exercise of Stock Options 105 10 450 -- -- -- -- 460 Net Income -- -- -- 8,308 -- -- -- 8,308 35 Other comprehensive income, net of tax Unrealized gain on marketable equity securities -- -- -- -- 42 -- -- 42 -------- Comprehensive Income 8,350 ----- ----- -------- -------- ----- ----- ----- -------- Balance, March 31, 2001 6,332 $ 633 $ 70,122 $ (46,003) $ 4 1,270 $(150) $ 24,606 ===== ===== ======== ======== ===== ===== ===== ========
See accompanying notes to financial statements. -33- 36 TMBR/SHARP DRILLING, INC. Statements of Cash Flows Years Ended March 31, 2001, 2000 and 1999 (In thousands)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 8,308 $ (1,207) $ (3,187) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 5,137 3,282 2,699 Dry holes and abandonments 811 490 840 Gain on sales of assets (256) (137) (127) Grant of stock options -- 97 -- Writedown of properties 1,171 739 1,304 Changes in assets and liabilities: Trade receivables (7,227) (2,947) 4,698 Inventories and other assets (212) (246) 85 Trade payables 3,174 2,816 (1,198) Accrued payables and other current liabilities 962 575 (1,302) -------- -------- -------- Total adjustments 3,560 4,669 6,999 -------- -------- -------- Net cash provided by operating activities 11,868 3,462 3,812 -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (12,321) (6,252) (4,397) Proceeds from sales of property and equipment 484 154 157 -------- -------- -------- Net cash required by investing activities (11,837) (6,098) (4,240) -------- -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options 460 171 -- Proceeds (repayments) from bank loan, net (1,170) 2,250 -- -------- -------- -------- Net cash provided (required) by financing activities (710) 2,421 -- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (679) (215) (428) Cash and cash equivalents at beginning of year 980 1,195 1,623 -------- -------- -------- Cash and cash equivalents at end of year $ 301 $ 980 $ 1,195 ======== ======== ========
See accompanying notes to financial statements. -34- 37 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 $270,000 for 2001 and $15,000 in 2000 and $0 in 1999. Cash payments for taxes due totaled $0 , $0, and $0 during 2001, 2000 and 1999, 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, 2001 was approximately $91,000. An unrealized gain of approximately $42,000 was added to stockholders equity and was included as a component of other comprehensive income. -35- 38 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 $845,000 and $90,000 as of March 31, 2001 and 2000, 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. -36- 39 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. Impairments of $1,171,000, $739,000 and $1,304,000 were recorded in 2001, 2000 and 1999, 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), the valuation allowance for deferred taxes (see Note 4), the provision for doubtful accounts, and the reserve for the Company's portion of workers compensation claims. -37- 40 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. The following table sets forth certain information concerning EPS. For the Year Ended 2001 --------------------------------- Per Share Income Shares Amount ------ ------ --------- Income before extraordinary item and accounting change $8,308 Basic EPS Income available to common stockholders 8,308 4,979,082 $1.67 ==== Effect of Dilutive Securities Stock Options 412,852 ----- --------- Diluted EPS Income available to common stockholders + assumed conversions $8,308 5,391,934 $1.54 ===== ========= ==== Common stock equivalents for 1999 and 2000 were anti-dilutive. -38- 41 TMBR/SHARP DRILLING, INC. Notes to Financial Statements 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 bore interest at the bank's base rate and accrued interest was payable monthly. The loan facility originally matured on May 26, 2000 but was extended to July 15, 2000. -39- 42 TMBR/SHARP DRILLING, INC. Notes to Financial Statements On June 26, 2000, the Company renewed and extended the prior loan agreements with its bank lender. The second and restated agreement provides for a $5.0 million revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under this line of credit bear interest at the Wells Fargo Bank Texas, N. A. (formerly Norwest Bank, Texas N.A.) base rate (8.0% at March 31, 2001) and accrued interest is payable monthly. The loan facility will mature on August 31, 2002, at which time all outstanding principal and interest will be due in full. At March 31, 2001, $1,080,000 was 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. -40- 43 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, 2001, 157,000 shares were earned and exercisable. The remaining 12,000 shares will become earned and exercisable over a one year period. The following sets forth certain information concerning these options. Number Option Price of ----------------------- Shares Per Share Total ------ ----------------------- 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 Exercised (80,100) 4.125-4.5375 (357,638) ------- ------------ --------- Outstanding March 31, 2001 484,400 $4.125-4.5375 $ 2,030,325 ======= ============ ========== -41- 44 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 during the year ended March 31, 2000. At March 31, 2001, no options were outstanding under the 1998 Plan. In connection with a private placement completed in February 1997, the Company issued and currently has outstanding a warrant to purchase 36,250 common shares with an exercise price of $13.20 per share. This warrant became exercisable on February 17, 1998, and expires on February 17, 2002. -42- 45 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: 2001 2000 1999 ---------------- --------------- --------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- ----- -------- ----- -------- ----- (In thousands, except share amounts) Net income (loss) from continuing operations $ 8,308 $ 8,217 $(1,207) $(1,309) $(3,187) $(3,719) Net income (loss) from continuing operations per share (basic) $ 1.67 $ 1.65 $(0.25) $(0.27) $(0.68) $(0.79) -43- 46 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, 2001, the Company had approximately $73,057,003 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, 2001 March 31, 2000 -------------- -------------- Deferred Tax Assets (Liabilities) Federal NOL Carryforwards $ 24,839,381 $ 26,049,454 Allowance for Bad Debts 417,313 505,101 Book over tax depreciation and amortization 961,341 567,172 Accrued Workers Compensation 320,782 105,899 Other accrued expenses 7,695 17,408 ---------- ---------- Total deferred tax assets 26,546,512 27,245,034 Valuation allowance (26,546,512) (27,245,034) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ========== -44- 47 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, 2001 and 2000, 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, 2001, 2000 and 1999 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: 2001 2000 1999 ---- ---- ---- Tax provision (benefit) utilizing statutory rates $ 2,882 $ (410) $(1,084) Utilization of NOL (2,712) 410 1,084 ----- ----- ----- Tax provision $ 170 $ -- $ -- ===== ===== ===== (5) Related Parties During 2001, 2000 and 1999, the Company sold $701,000, $1,936,000 and $1,549,000 and purchased $154,000, $81,000 and $131,000, respectively, of goods and services from entities affiliated with individuals serving as officers and/or directors of the Company. These purchases and sales are transacted using market rates. These transactions are included in "contract drilling revenue" and "contract drilling expense" or "other income or expense" in the accompanying statements of operations. The related party transactions discussed in the preceding paragraph are noninterest-bearing and are settled in the normal course of business. -45- 48 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. -46- 49 TMBR/SHARP DRILLING, INC. Notes to Financial Statements The following tables present information related to the Companies' reportable segments. Years Ended March 31, ---------------------------------------- 2001 2000 1999 ---------- ---------- ---------- (In thousands) Revenues: Contract drilling $ 36,023 $ 15,394 $ 12,948 Oil and gas 5,454 3,169 1,476 -------- -------- -------- $ 41,477 $ 18,563 $ 14,424 ======== ======== ======== Net income (loss) (a): Contract drilling $ 8,660 $ (333) $ (126) Oil and gas 34 (891) (3,212) -------- -------- -------- 8,694 (1,224) (3,338) Corporate income (expenses) (b) (216) 17 151 -------- -------- -------- $ 8,478 $ (1,207) $ (3,187) ======== ======== ======== Identifiable assets: Contract drilling $ 23,414 $ 16,350 $ 11,877 Oil and gas 10,551 5,277 5,062 -------- -------- -------- 33,965 21,627 16,939 Corporate assets (c) 1,436 1,998 1,984 -------- -------- -------- $ 35,401 $ 23,625 $ 18,923 ======== ======== ======== Depreciation, depletion and amortization: Contract drilling $ 3,398 $ 1,730 $ 1,449 Oil and gas 1,739 1,552 1,250 -------- -------- -------- $ 5,137 $ 3,282 $ 2,699 ======== ======== ======== Capital expenditures: Contract drilling $ 4,725 $ 3,348 $ 261 Oil and gas 7,596 2,904 4,136 -------- -------- -------- $ 12,321 $ 6,252 $ 4,397 ======== ======== ======== -47- 50 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, 2001, 2000 and 1999, contract drilling revenues earned from individual customers constituting 10% or more of total contract drilling revenues were: (a) two drilling customers in 2001 individually represented approximately 35%, and 13% of total revenues, (b) two drilling customers in 2000 individually represented approximately 17%, and 13% of total revenues, (c) three drilling customers in 1999 individually represented approximately 14%, 13% and 12% of total 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 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. The Company was covered by a fully insured workers' compensation policy from September 1997 to September 2000. Currently the Company is covered under a $100,000 deductible plan and is generally responsible for the first $100,000 in claim costs for each workers' compensation injury. -48- 51 TMBR/SHARP DRILLING, INC. Notes to Financial Statements 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. (9) Supplemental Information Related to Oil and Gas Activities The Company's capitalized cost of oil and gas properties is as follows: March 31, --------- 2001 2000 ---- ---- (In thousands) Oil and gas properties $26,372 $21,155 Accumulated depreciation, depletion and amortization (17,283) (15,972) ------- ------- $ 9,089 $ 5,183 ======= ======= The Company's costs incurred related to oil and gas property acquisition, exploration and development activities are as follows: Years Ended March 31, --------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Property acquisition costs $ 717 $ 406 $ 422 Exploration costs 5,300 2,389 2,375 Development costs 1,579 109 1,339 ------- ------- ------- $ 7,596 $ 2,904 $ 4,136 ======= ======= ======= -49- 52 TMBR/SHARP DRILLING, INC. Notes to Financial Statements The Company's results of operations from oil and gas producing activities are as follows: Years Ended March 31, --------------------- 2001 2000 1999 ---- ---- ---- (In thousands) Revenues $ 5,454 $ 3,169 $ 1,476 Production costs 1,363 926 803 Dry holes and abandonments 811 490 840 Exploration costs 174 19 106 Depreciation, depletion and amortization 1,739 1,552 1,250 Writedown of oil and gas properties 1,171 739 1,304 Income tax provision -- -- -- ------- ------- ------- Results of operations from producing activities (excluding corporate overhead and interest costs) $ 196 $ (557) $ (2,827) ======= ======= ======= (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 -50- 53 TMBR/SHARP DRILLING, INC. Notes to Financial Statements 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 life of the properties. Average prices used in estimating the future net cash flows at March 31, 2001, 2000 and 1999 were as follows: $28.16, $27.08 and $13.37 per barrel of oil, respectively, and $5.861, $2.467 and $1.683 per Mcf for natural gas, respectively. The following sets forth proved oil and gas reserves at March 31, 2001, 2000 and 1999:
2001 2000 1999 --------------------- --------------------- --------------------- Oil Gas Oil Gas Oil Gas MBbls MMcf MBbls MMcf MBbls MMcf ------- --------- ------- --------- ------- --------- (In thousands) Proved Reserves: Beginning of Year 605.0 2,948.1 415.4 4,486.1 370.4 3,288.9 Revisions of previous estimates 372.2 1,472.4 93.6 (1,801.5) (30.7) (326.7) Improved recovery -- -- -- -- - -- Purchases of minerals in place and extensions 213.2 2,303.3 174.2 875.4 143.8 2,092.3 Sales of minerals in place -- -- -- -- -- -- Production (108.9) (428.7) (78.2) (611.9) (68.1) (568.4) ------- ------- ----- ------- ----- ------- End of year 1,081.5 6,295.1 605.0 2,948.1 415.4 4,486.1 ======= ======= ===== ======= ===== ======= Proved Developed Reserves: Beginning of year 605.0 2,948.1 415.4 4,486.1 370.4 3,288.9 ------- ------- ----- ------- ----- ------- End of year 1,081.5 6,295.1 605.0 2,948.1 415.4 4,486.1 ======= ======= ===== ======= ===== =======
The upward revisions of previous estimates for the year ended March 31, 2001 is primarily due to the increase in crude oil and natural gas prices. -51- 54 TMBR/SHARP DRILLING, INC. Notes to Financial Statements March 31, ----------------------- 2001 2000 ---- ---- (In thousands) Standardized Measure Future cash inflows $61,866 $21,912 Future production and development costs (11,808) (5,695) ------- ------- Future net cash flows 50,058 16,217 10% discount factor (20,739) (5,731) ------- ------- Discounted future net cash flows 29,319 10,486 Discounted income taxes -- -- ------- ------- Standardized Measure $29,319 $10,486 ======= ======= 2001 2000 1999 ---- ---- ---- (In thousands) Standardized measure, beginning of year $10,486 $ 6,449 $ 4,660 Revisions Prices and costs 12,646 1,960 207 Accretion of discount 1,049 645 466 ------- ------- -------- Net revisions 13,695 2,605 673 Discoveries and additions 9,229 3,676 1,789 Production (4,091) (2,244) (673) ------- ------- ------- Standardized measure, end of year $29,319 $10,486 $ 6,449 ======= ======= ======= -52- 55 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and officers of the Company at May 31, 2001 were as follows: Director or Officer Name Age Position with Company Since ---- --- --------------------- ---------- Thomas C. Brown 74 Chairman of the Board of Directors and Chief Executive Officer 1982 David N. Fitzgerald (1)(2) 78 Director 1984 Michael M. Cone (2) 63 Director 2001 Raymond E. Batchelor (1) 67 Director 2001 James B. Taylor (2) 63 Director 2001 Jeffrey D. Phillips 40 President 1997 Don H. Lawson 62 Vice President - Operations 1992 Patricia R. Elledge 43 Controller/Treasurer 1994 James M. Alsup 64 Secretary 1982 -------------------------- (1) Member of Compensation Committee (2) Member of Audit Committee Directors of the Company serve until the annual meeting of stockholders to be held in August, 2001, 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. -53- 56 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. Cone has served as a Director of the Company since April, 2001. Since 1985, he has been the majority owner and Chairman of Tri-C Resources, Inc. an independent oil and gas exploration company. Mr. Batchelor has served as a Director of the Company since April, 2001. He has been President of BHC Pipe & Equipment Company since 1987. Mr. Taylor has served as a Director of the Company since April, 2001. He is currently a Director of Willbros Group, Inc. From 1997 to 2000 he was Chairman of Solana Petroleum Corporation. From 1996 to 1998 he was a Director of Arakis Energy Corporation. From 1993 to 1996 he was Executive Vice President of Occidental Oil and Gas Corporation. Mr. Phillips has been employed by the Company since 1995. He has been President since April 1, 2001. He was Vice President - Production from 1997 to 2001. From 1993 to 1995 he was Operations Manager for Staley Operating Co., a privately held exploration and production company. Mr. Lawson has been employed by the Company since 1967. He has been the Vice President - Operations of the Company since 1992. 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. Item 11. EXECUTIVE COMPENSATION The discussion under "Executive Compensation" in the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The discussion under "Principal Shareholders" and the information appearing under "Election of Directors" in the Company's definitive proxy statement for the 2001 annual meeting of shareholders is incorporated herein by reference. -54- 57 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The discussion under "Executive Compensation - Certain Transactions" in the Company's definitive proxy statement for the 2001 annual meeting of stockholders is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Page (a)1. See Index to Financial Statements at Item 8 28 (a)2. Financial Statement Schedules Years ended March 31, 2001, 2000 and 1999 Schedule II - Valuation and Qualifying Accounts . . . . 58 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 10.20 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) -55- 58 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) -56- 59 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 - Directors' Fee Stock Plan* Exhibit 10.21 - 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 10.22 - Second Amended and Restated Loan Agreement dated June 26, 2000 between Wells Fargo Bank, Texas N. A. and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated August 9, 2000) *Exhibit 23.1 - Consent of Arthur Andersen LLP *Exhibit 23.2 - Consent of Joe C. Neal & Associates ---------------------------------- *Filed herewith (b) No reports on Form 8-K were filed during the last quarter of fiscal 2001. -57- 60 Schedule II ----------- TMBR/SHARP DRILLING, INC. Valuation and Qualifying Accounts Years ended March 31, 2001, 2000 and 1999 (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: 2001 $ 1,486 $ 125 $ 384 $ 1,227 2000 $ 1,349 $ 137 $ -- $ 1,486 1999 $ 1,135 $ 214 $ -- $ 1,349 -58- 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TMBR/SHARP DRILLING, INC. June 15, 2001 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 15, 2001 /s/ Thomas C. Brown Thomas C. Brown, Chairman of the Board of Directors (Principal Executive Officer) June 15, 2001 /s/ Jeffrey D. Phillips Jeffrey D. Phillips, President June 15, 2001 /s/ Patricia R. Elledge Patricia R. Elledge, Controller/ Treasurer (Principal Financial Officer) June 15, 2001 /s/ David N. Fitzgerald David N. Fitzgerald, Director June 15, 2001 /s/ Michael M. Cone Michael M. Cone, Director June 15, 2001 /s/ Raymond E. Batchelor Raymond E. Batchelor, Director June 15, 2001 /s/ James B. Taylor James B. Taylor, Director -59- 62 INDEX TO EXHIBITS Description Page No. ----------- -------- Exhibit 3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 in Registrant's Annual Report on Form 10-K dated June 28, 1991) Exhibit 3.2 Bylaws of the Company, as amended. (Incor- porated by reference to Exhibit 3.2 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Executive Compensation Plans and Arrangements --------------------------------------------- (Exhibits 10.1 through and including Exhibit 10.20 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) -60- 63 Exhibit 10.6 Incentive Stock Option Agreement dated December 4, 1992 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 25, 1993) Exhibit 10.7 Incentive Stock Option Agreement dated November 16, 1993 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 27, 1994) Exhibit 10.8 1994 Stock Option Plan. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.9 TMBR/Sharp Drilling, Inc. Employee Retirement Plan. (Incorporated by reference to Exhibit 10.11 in Registrant's Annual Report on Form 10-K dated June 28, 1995) Exhibit 10.10 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) -61- 64 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 Directors' Fee Stock Plan* Exhibit 10.21 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 10.22 Second Amended and Restated Loan Agreement dated June 26, 2000 between Wells Fargo Bank, Texas N. A. and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated August 9,2000) *Exhibit 23.1 Consent of Arthur Andersen LLP 63 *Exhibit 23.2 Consent of Joe C. Neal & Associates 64 -------------------- *Filed herewith -62- 65 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (registration No. 33-46699, 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 15, 2001 -63- 66 Exhibit 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS As independent petroleum engineers, we hereby consent to the incorporation by reference of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (registration No. 33-46699, 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 15, 2001 -64-