Item 1. BUSINESS
General
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The principal executive offices of the Company are located at 4607 West Industrial Blvd., Midland, Texas, 79703 and its telephone number is (915) 699-5050.
The Company is engaged in two lines of business, which include the domestic onshore contract drilling of oil and gas wells, and the acquisition, exploration for, development, production and sale of oil and natural gas.
The Company provides domestic onshore contract drilling services to major and independent oil and gas companies. The Company focuses its operations in the Permian Basin of west Texas and eastern New Mexico. In addition to its drilling rigs, the Company provides the crews and most of the ancillary equipment used in the operation of its drilling rigs. Rig utilization for the fiscal year ended March 31, 1998 was approximately 78% compared to 52% for the year ended March 31, 1997.
The Company owns 17 drilling rigs, of which 2 were operating on behalf of the Company for its own account, 6 of which were operating for non- affiliated oil producers, and 9 were "stacked" (non-operating) at June 22, 1998. All of the Company's rigs are operational and actively marketed in the Permian Basin of west Texas and eastern New Mexico. The Company markets its contract drilling services to both major oil companies and independent oil producers. The depth capabilities of the Company's rigs range from 8,500 feet to 30,000 feet.
An onshore drilling rig consists of engines, drawworks, mast, pumps to circulate drilling fluids, blowout preventers, the drillstring and related equipment. The size and type of rig utilized for each drilling project depends upon the location of the well, the well depth and equipment requirements specified in the drilling contract, among other factors.
The Company believes it has established a reputation for reliability, high quality equipment and well-trained crews. The Company continually seeks to modify and upgrade its equipment to maximize the performance and capabilities of its drilling rig fleet, which the Company believes provides it with a competitive advantage. The Company has the capability to design, repair and modify its drilling rig fleet from its principal support and storage facilities in Midland, Texas, and an additional storage yard in Odessa, Texas.
The Company's oil and gas exploration and production operations complement its onshore drilling operations. These activities are focused in the mature producing regions in the Permian Basin. Oil and gas operations comprised approximately 6% of the Company's revenues for the fiscal year ended March 31, 1998. The Company's proved reserves, all of which were proved developed producing, were approximately 919 MBOE (million barrels of oil equivalent) and had a present value of future net revenues of approximately $4.7 million at March 31, 1998. At March 31, 1998, the Company owned interests in approximately 18,818 gross (2,464 net) acres of developed oil and gas properties, and approximately 7,207 gross (454 net) acres of undeveloped properties.
The Company has no material patents, licenses, franchises, or concessions which it considers significant to its operations.
The nature of the Company's business is such that it does not maintain or require a "backlog" of products, customer orders, or inventory.
The Company's operations are not subject to renegotiation of profits or termination of contracts at the election of the federal government.
The Company has not been a party to any bankruptcy, receivership, reorganization, adjustment, or similar proceeding.
Generally, the Company's business activities are not seasonal in nature. However, weather conditions can hinder drilling activities.
CONTRACT DRILLING OPERATIONS
Drilling Rigs
The following table sets forth the type and depth capabilities of the Company's 17 onshore drilling rigs.
Rig No. Depth Capacity Type 2 8,500 Weiss W-45 3* 8,500 Weiss W-45 4 8,500 Unit 15 6 12,500 National 75A 7 10,000 Unit 15 10 12,500 National 75A 12 11,500 National 50A 14 12,500 BDW 650 17* 9,500 Unit 15 22* 13,500 Brewster N-75 23* 13,500 National 75A 24* 13,500 Gardner Denver 700 27* 13,500 Gardner Denver 700 28* 16,000 Gardner Denver 800 29 16,000 Gardner Denver 800 55* 30,000 Gardner Denver DW-2100 56 20,000 National 110-M ---------------- *In active operation at June 22, 1998.
Major overhauls, repairs and general maintenance for the drilling rigs are primarily conducted at the Company's principal support and storage facilities in Midland, Texas. The Company emphasizes the maintenance and periodic improvement of its drilling equipment and believes that its rigs are generally in good condition. See "Item 2.
Item 2. PROPERTIES
In addition to its drilling rigs and related equipment and its oil and gas properties, the Company owns a 31 acre tract of land in Midland, Texas on which the Company's executive offices are located and on which the
principal support and storage facilities for its contract drilling operations are located. Such facilities include an office building and fabrication and maintenance shop. The facility allows for open storage of drilling equipment and drill pipe.
The Company also owns a 78 acre tract of land in Odessa, Texas, which is presently being utilized as a secondary storage location. From time to time, the Company's rigs are stored and stacked in the field at the rig's last location site.
The Company owns a warehouse and yard facility situated on approximately 4 acres in Midland, Texas. This additional storage is being used to complement the existing Midland yard facility. The Company believes that the support and storage facilities for its drilling rigs and related equipment are more than adequate.
Item 3.
Item 3. LEGAL PROCEEDINGS
In March, 1992, the Company was notified by the Texas Department of Insurance that the Company's former workers' compensation insurance carriers, Sir Lloyd's Insurance Company and its affiliate, Standard Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by order of the 201st District Court of Travis County, Texas, on March 12, 1992 in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of Texas vs. Standard Financial Indemnity Corporation. Approximately two months before being ordered into liquidation, SFIC requested that the Company pay policy premiums in the approximate amount of $646,476. On July 22, 1993 the special deputy receiver of SFIC billed the Company approximately $1,061,000 for retrospective premiums, but adjusted the amount to $854,153 on January 12, 1994.
In November, 1995, the Company was notified that a lawsuit had been filed in Travis County, Texas styled Texas property and Casualty Insurance Guaranty Association vs. TMBR/Sharp Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty Insurance Guaranty Association ("Guaranty Association") was seeking a recovery of past workers' compensation claims advanced by the Guaranty Association related to the Company's workers compensation insurance program with SFIC. The Guaranty Association was seeking to recover a total of $803,057.11.
On September 9, 1997, the Company entered into a settlement agreement with the Guaranty Association. The Company agreed to pay to the Guaranty Association the sum of $375,000 in full satisfaction of any liability relating the Company's workers compensation insurance program with SFIC and Sir Lloyd's Insurance Company and the lawsuit brought by the Guaranty Association. The Company originally accrued $854,153 relating to the Guaranty Association's claim for reimbursement. As a result of the settlement, the Company has eliminated the accrual of $854,153 and the difference between the accrued amount and the settlement amount ($479,153)
has been recognized as miscellaneous income in the Company's financial statements.
In addition, the Company has entered into a settlement agreement with the insurance agent that represented the Company at the time the workers compensation insurance policies were purchased from Sir Lloyd's and SFIC. The agent has paid the Company the sum of $180,000 in full settlement of all claims and liabilities relating to SFIC and Sir Lloyd's Insurance Company. This amount has been recognized as miscellaneous income in the Company's financial statements.
The Company provides for its workers' compensation claims prior to September 1997 based upon the most recent information available from its insurance carrier concerning claims and estimated costs. However, in future years the Company may receive retroactive adjustments, both favorable and unfavorable, related to estimates of claim costs for previous years, which may be material to the Company's results of operations. No provision for retroactive adjustments to claim costs is recorded until the Company receives notification from its insurance carrier because this amount, if any, cannot be estimated. For claims incurred November 1993 to September 1997, the Company is generally responsible for the first $10,000 ($100,000 prior to November 1993) in claim costs for each workers' compensation injury. Currently the Company is covered by a fully insured workers compensation policy.
The Company is a defendant in various lawsuits generally incidental to its business. The Company does not believe that the ultimate resolution of such litigation will have a significant effect on the Company's financial position or results of operations.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no meeting of security holders of the Company during the fourth quarter of the fiscal year ended March 31, 1998, and no matters were submitted to a vote of security holders during such period.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under the symbol "TBDI". The following table sets forth, on a per share basis for the periods indicated, the range of high and low last reported sales prices as reported by NASDAQ. The quotations are inter- dealer prices without retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Price High Low Fiscal 1997 First Quarter $ 8 1/4 $ 6 3/4 Second Quarter 12 7 Third Quarter 12 8 Fourth Quarter 13 7/8 10 3/4
Fiscal 1998 First Quarter 14 1/2 9 Second Quarter 29 1/4 13 1/2 Third Quarter 33 1/4 14 3/8 Fourth Quarter 19 10 1/2
The transfer agent for the Company's Common Stock is American Stock Transfer & Trust Company, New York, New York.
On February 13, 1997, the Company privately placed 725,000 shares of its Common Stock to eleven accredited investors, at a per share price of $11.00. Rauscher Pierce Refsnes, Inc. ("Rauscher") served as placement agent for the offering. The net proceeds from the sale of the shares, approximately $7.47 million, were used to repay all of the Company's outstanding bank debt (approximately $4.5 million) and for general working capital purposes. As consideration for serving as placement agent, Rauscher received a 5% cash commission (an aggregate of $398,750), and a non-accountable expense allowance of $25,000. The Company also issued to Rauscher, for nominal consideration, a five-year stock purchase warrant to purchase 36,250 shares of the Company's Common Stock at an exercise price of $13.20 per share. The Common Stock was sold in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and Rule 506 of Regulation D under the Act.
On June 8, 1998, the outstanding shares of the Company's Common Stock were held of record by approximately 3,218 stockholders.
The Company has never declared or paid any cash dividends on its Common Stock and has no present intention to pay cash dividends in the future. The Company presently intends to retain all earnings to fund its operations and future growth. Under the terms of the Company's Credit Facility with its bank lender, the Company is prohibited from paying cash dividends to the holders of Common Stock without the written consent of the bank. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the Company's operations for each of the five years ended March 31, 1998. The data set forth in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and the Company's Financial Statements and related notes included elsewhere herein.
(a) During fiscal years ended March 31, 1998, 1997 and 1996, the Company recognized a non-cash charge of approximately $3,120,000, $171,000 and $2,624,000, respectively, due to a writedown of the carrying value of its oil and gas properties. This charge is a result of the adoption of Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires the Company to assess the need for an impairment of capitalized costs of oil and gas properties on a property-by-property basis in contrast to the Company's prior policy of evaluating the undiscounted future net revenues of its oil and gas properties in total. According to SFAS 121, if an impairment is indicated based on undiscounted future cash flows, then it is recognized to the extent that net capitalized costs exceed discounted future cash flows.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-K Annual Report ("Report") and the documents incorporated by reference in this Report include certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements, other than statements of historical facts, included in this Report that address activities, events or developments that the Company estimates, intends, projects, expects, believes or anticipates will or may occur in the future, including such matters as market conditions, future capital, development and exploration expenditures (including the amount and nature thereof), drilling rig utilization rates, drilling of wells, reserve estimates, business strategies and other plans and objectives, expansion and growth of the Company's operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions, expected future developments and other facts it believes are appropriate in the circumstances. Such statements are subject to a number of assumptions, risks and uncertainties, including the risk factors discussed above, general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward- looking statements.
Overview
Since 1982, the principal business of the Company has been the contract drilling of domestic onshore oil and gas wells. In 1987, the Company began acquiring oil and gas properties and participating in the exploration for and development of oil and gas reserves.
Contract Drilling Operations
Drilling revenues from footage and daywork contracts are recognized as work is performed utilizing the percentage-of-completion method. Costs under footage and daywork contracts are recognized in the period they are incurred. The Company utilizes the completed contract method to recognize drilling revenues and expenses relating to turnkey contracts. Expected losses on all in-process contracts are recognized in the period the loss can reasonably be determined.
Drilling equipment is depreciated on a units-of-production method based on the monthly utilization of the equipment. Drilling equipment which is not utilized during a month is depreciated using a minimum utilization rate of approximately 25%. Estimated useful lives range from four to eight years. Other property and equipment is depreciated using the straight-line method of depreciation with estimated useful lives of three to seven years.
The contract drilling industry remains highly competitive. Recently, the demand for drilling rigs has softened due to extremely weak oil prices and lower gas prices. The Company believes it owns a sufficient number of drilling rigs to remain competitive within its areas of operation. In addition, the Company believes it competes favorably with respect to the depth capabilities of its rigs, the experience level of its personnel, its reputation and its relationship with existing customers. However, the Company's operating results will continue to be directly affected by the level of drilling activity in the Company's service areas.
The following table sets forth certain information relating to the Company's contract drilling operations for the periods indicated:
Year Ended March 31, 1998 1997 1996 (In thousands, except %s)
Contract drilling revenues $34,891 $18,483 $21,298 Contract drilling expenses 23,163 14,190 17,252
Contract drilling expenses as a percent of drilling revenues 66.4% 76.8% 81.0%
Rig utilization 78.2% 51.6% 45.1%
Oil and Gas Operations
The Company's oil and gas producing activities are accounted for using the successful efforts method of accounting. Accordingly, the Company capitalizes all costs incurred to acquire oil and gas properties (proved and unproved), all development costs, and the costs of successful exploratory wells. The costs of unsuccessful exploratory wells are expensed. Geological and geophysical costs, including seismic costs, are charged to expense when incurred. In cases where the Company provides contract drilling for oil and gas properties in which it has an ownership interest, the Company's proportionate share of costs is capitalized as stated above, net of its working-interest share of profits from the related drilling contracts. Capitalized costs of undeveloped properties, which are not depleted until proved reserves can be associated with the properties, are periodically reviewed for possible impairment. Such unevaluated costs totaled approximately $111,000 and $196,000 as of March 31, 1998, and March 31, 1997, respectively.
For properties with proved or proved developed oil and gas reserves, depletion, depreciation and amortization of capitalized costs was calculated for fiscal 1998, 1997 and 1996 by applying the units-of- production method to the estimated amount of such reserves.
In fiscal 1998, 1997 and 1996, the Company recognized non-cash charges of approximately $3.1 million, $171,000 and $2.6 million, respectively, due to writedowns of the carrying value of its oil and gas properties. The writedowns are the result of the adoption in 1996 of Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires the Company to assess the need for an impairment of capitalized
costs of oil and gas properties on a property-by-property basis. This is in contrast to the Company's prior policy of evaluating the undiscounted future net revenues of its oil and gas properties in total. According to SFAS 121, if an impairment is indicated based on undiscounted future cash flows, then it is to be recognized to the extent that net capitalized costs exceed discounted future cash flows.
The following table sets forth certain information relating to the Company's oil and gas operations for the periods indicated:
Year Ended March 31, 1998 1997 1996 (In thousands)
Oil and gas revenues $2,126 $2,491 $1,683 Production expenses 944 924 554 Dry holes and abandonments 476 558 945 Depreciation, depletion and amortization 1,891 802 468 Writedown of properties 3,120 171 2,624
The Company has not entered into hedging arrangements and does not have any delivery commitments. While hedging arrangements reduce exposure to losses of resulting from unfavorable price changes, they also limit the ability to benefit from favorable market price changes.
RESULTS OF OPERATIONS
Comparison of Year Ended March 31, 1998 to Year Ended March 31, 1997
Contract drilling revenues in fiscal 1998 increased by 89% from the previous year. During fiscal 1998, the Company experienced very strong demand for its contract drilling services, which resulted in increased rig utilization and higher contract prices. Rig utilization was 78% in fiscal 1998 compared to 52% in the prior fiscal year.
Contract drilling expenses represented 66% of contract drilling revenues in fiscal 1998 versus 77% in fiscal 1997. The decrease is attributable to the increase in the average price received for drilling contracts.
Oil and gas revenues decreased by 15% during fiscal 1998. This decrease was a result of weaker oil and gas prices. Oil and gas production expenses remained relatively constant.
The Company participated as a working-interest owner in the drilling of 21 wells during fiscal 1998, of which nine were dry holes. In fiscal 1997, the Company participated as a working-interest owner in the drilling of 19 wells, of which seven were dry holes.
During the year ended March 31, 1998, the Company completed the assembly of two additional drilling rigs from its inventory of rig components. One of the rigs is capable of drilling to a depth of approximately 8,500 feet, the other to a depth of 10,000 feet. The addition of these two U-15 Unit rigs brings the Company's available fleet to 17 rigs. The increase in depreciation, depletion and amortization expense for fiscal 1998 reflects the added equipment(the two U-15 Unit drilling rigs, drill pipe and miscellaneous drilling equipment) as well as the larger number of producing wells in which the Company has an ownership interest (a total of 99 wells in fiscal 1998 versus 92 wells in 1997).
As noted above, the Company recognized a non-cash charge of $3.1 million in fiscal 1998 and $171,000 in fiscal 1997 related to the writedown of the carrying value of its oil and gas properties.
As described in "Item 3. Legal Proceedings", the Company was a defendant in a lawsuit filed by Texas Property and Casualty Insurance Guaranty Association that had resulted in the Company's accrual of approximately $854,000 for a contingent liability. On September 9, 1997, the Company entered into a settlement agreement with the Guaranty Association. The Company agreed to pay to the Guaranty Association the sum of $375,000 in full satisfaction of any liability relating to the Company's workers compensation programs with SFIC and Sir Lloyd's Insurance Company and the lawsuit brought by the Guaranty Association. As a result of the settlement, the Company recognized approximately $479,000 as miscellaneous income during the year ended March 31, 1998.
In addition, the Company entered into a settlement agreement with the insurance agent that represented the Company at the time the workers compensation insurance policies were purchased from Sir Lloyd's and SFIC. The agent paid the Company the sum of $180,000 in full settlement of all claims and liabilities relating to SFIC and Sir Lloyd's Insurance Company. This amount was recognized as miscellaneous income in the year ended March 31, 1998. The Company also recorded approximately $236,000 of miscellaneous income from the sale of junk drill bits.
Net working capital was $6.0 million at March 31, 1998, compared to $2.7 million at March 31, 1997. The gain in working capital is attributable to an increase in cash and trade receivables.
Comparison of Year Ended March 31, 1997 to Year Ended March 31, 1996
Contract drilling revenues for fiscal 1997 decreased by 13% from fiscal 1996. The decrease was due to a drop-off in the number of turnkey wells drilled by the Company (from 12 wells in fiscal 1996 to none in fiscal 1997).The decline in turnkey contracts, however, was partially offset by an increase from the prior year in the average prices the Company received for footage and daywork contracts.
Rig utilization rates in fiscal 1997 and 1996 were 52% and 45%, respectively. The fiscal 1997 rate, and therefore contract drilling revenues, were adversely affected by extremely low utilization in the first three months of the year. During the first quarter, drilling prices were depressed and the Company chose to underutilize its drilling equipment rather than subject it to additional wear and tear at unacceptable
operating margins. As a result, the utilization rate for the first quarter was only 34%. In the second quarter, however, demand for the Company's contract drilling services began to increase substantially, resulting in a fourth-quarter utilization rate of 70%. Rig utilization in the Company's operating market is difficult to project because of wide fluctuations in drilling activity. In addition, the number of rigs industrywide that are actually available for work cannot be accurately determined.
Contract drilling expenses equaled 77% and 81% of contract drilling revenues in fiscal 1997 and 1996, respectively. The decrease is attributable to the increase in the average price received for drilling contracts.
Oil and gas revenues increased by 48% in fiscal 1997. Accordingly, oil and gas production expenses increased 67% over the same period.
Depreciation, depletion and amortization expense also increased due to the addition of drill pipe and an increase in the number of producing wells in which the Company had an ownership interest during fiscal 1997.
Interest expense increased 100% for fiscal 1997 due to borrowings under the Company's credit facilities with its bank lender during this period. See "Liquidity and Capital Resources" below.
Net working capital was $2.7 million at March 31, 1997, compared to a negative $1.2 million at March 31, 1996. The improvement in working capital was due to an increase in accounts receivable, a decrease in accounts payable and an increase in cash and cash equivalents.
Income Taxes
At March 31, 1998, the Company had approximately $68.3 million of unused net operating loss ("NOL") carryforwards for tax purposes. Use of these carryforwards is dependent upon the Company's ability to generate taxable earnings in future periods. These carryforwards will begin to expire in the 1998 tax year. The Company's ability to utilize its NOL carryforwards may be substantially limited in the future under the Internal Revenue Code of 1986, as amended (the "Code"). If the Company experiences an ownership change under applicable provisions of the Code, the carryforward would be limited to an annual amount determined by specified interest rates and other variables. The Company does not believe an ownership change has occurred to date.
The effective tax rates for fiscal 1998 and 1997 differ from the statutory tax rate of 34% primarily due to the utilization of NOLs. Tax expense is generally limited to alternative minimum tax.
The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The Company has a deferred tax asset primarily due to its NOL carryforwards. The Company has provided a valuation allowance for the entire balance of deferred tax assets as it is likely that a portion of the NOLs may expire before the Company is able to use them.
Liquidity and Capital Resources
In January 1996, the Company entered into a loan agreement with its bank lender providing for a revolving credit facility (the "Credit Facility") originally maturing on January 15, 1998. The aggregate principal amount of the Company's borrowings outstanding at any one time under the revolving facility was limited to the lesser of $3.0 million or one-third of the borrowing base amount then in effect. The borrowing base amount was redetermined by the bank monthly. The Credit Facility was established to finance the Company's purchases of drill pipe and oil and gas exploration activities. Interest only was payable monthly. The entire principal amount was due and payable on January 15, 1998, which was extended to April 15, 1998. The Credit Facility bore interest at the bank's base rate and was secured by substantially all of the Company's accounts receivable, drilling rigs and related equipment. At March 31, 1998, there were no amounts outstanding under the Credit Facility.
In August 1996, the Company entered into a second loan agreement with its bank lender. This agreement provided for a $2.0 million revolving line of credit (the "Line of Credit") secured by substantially all of the Company's producing oil and gas properties. The Line of Credit was established to finance the Company's oil and gas exploration activities and for general corporate purposes. The Line of Credit bore interest at the bank's base rate, with interest only to be paid monthly. The original maturity date of February 15, 1998, was extended to April 15, 1998. At that time, the principal amount then outstanding was due and payable, plus any accrued and unpaid interest. At March 31, 1998, no amounts were outstanding under the Line of Credit.
On May 26, 1998, the Company renewed, extended and consolidated the prior loan facilities its bank lender. The amended and restated loan agreement provides for a $5.0 million revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under this line of credit bear interest at the Norwest Bank base rate and accrued interest is payable monthly. The loan facility matures on May 26, 2000.
The Company anticipates that funds for its capital expenditures in fiscal 1999 will be available from a combination of sources, including (i) borrowings under the line of credit , (ii) funds raised through issuances of equity or debt securities in public or private transactions, and (iii) internally generated funds.
The following table sets forth information regarding the capital expenditures made by the Company during the last three fiscal years.
Year Ended March 31, 1998 1997 1996 (In thousands) Oil and gas exploration and development..... $ 3,846 $3,424 $5,553 Drilling rigs, drill pipe and related equipment......................... 6,086 2,940 1,452 Other....................................... 249 390 11 ------ ----- ----- Total.................................. $10,181 $6,754 $7,016 ====== ===== =====
The Company presently anticipates making capital expenditures of approximately $5.5 million in its 1999 fiscal year. Of this amount, the Company expects that approximately $2.5 million will be spent for the acquisition of drill pipe, drill collars and related equipment, and approximately $3.0 million for oil and gas exploration and development activities. It is the Company's policy, however, to make capital expenditures based on prevailing economic conditions, the results of its drilling activities, and other factors affecting its business. Accordingly, the amounts actually spent in fiscal 1999 could differ substantially from the amounts estimated.
Trends and Prices
Although the Company achieved record growth, profitability and rig utilization in fiscal 1998, the contract drilling industry is currently experiencing decreased demand and declining prices for contract drilling services due to the weakening of oil and gas prices. The Company will certainly be affected by oil and gas industry conditions but cannot predict either the future level of demand for its contract drilling services or future conditions in the contract drilling industry.
In recent years, oil and gas prices have been extremely volatile. Prices are affected by market supply and demand factors as well as by actions of state and local agencies, the U.S. and foreign governments and international cartels. The Company has no way of accurately predicting the supply of and demand for oil and gas, domestic or international political events or the effects of any such factors on the prices received by the Company for its oil and gas.
Year 2000 Issues
The Company has reviewed the effect of the year 2000 issues relating to its information systems. The Company has determined that the year 2000 issues directly related to its information systems will not have a material impact on its business, operations nor its financial position. However, the Company cannot determine what effect, if any, the year 2000 issues affecting its vendors, customers and the numerous local, state, federal and other U. S. government entities with which it conducts business or which it is regulated or governed or taxed will have on its business or financial position.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standard Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income", which requires the presentation of comprehensive income in an entity's financial statements. Comprehensive income represents all changes in equity of an entity during the reporting period, including net income and charges made directly to equity which are excluded from net income. The adoption of this statement did not have a material impact on the Company's financial disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way public enterprises are to report information about operating segments in annual financial statements and requires the reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for periods beginning after December 15, 1997, at which time the Company will adopt the provision. This statement is not anticipated to have a material impact on the Company's financial disclosures.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Public Accountants 31
Balance Sheets, March 31, 1998 and 1997 32
Statements of Operations, Years ended March 31, 1998, 1997 and 1996 34
Statements of Stockholders' Equity, Years ended March 31, 1998, 1997 and 1996 35
Statements of Cash Flows, Years ended March 31, 1998, 1997 and 1996 36
Notes to Financial Statements 37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of TMBR/Sharp Drilling, Inc.:
We have audited the accompanying balance sheets of TMBR/Sharp Drilling, Inc. (a Texas corporation) as of March 31, 1998 and 1997, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1998. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TMBR/Sharp Drilling, Inc. as of March 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1996, the Company changed its method of accounting for impairment of long-lived assets.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas, May 26, 1998
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1998 and 1997
(In thousands, except share data)
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Balance Sheets
March 31, 1998 and 1997
(In thousands, except share data)
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Statements of Operations
Years Ended March 31, 1998, 1997 and 1996
(In thousands, except share data)
1998 1997 1996 ---- ---- ---- Revenues: Contract drilling $ 34,891 $ 18,483 $ 21,298 Oil and gas 2,126 2,491 1,683 ------ ------ ------ Total revenues 37,017 20,974 22,981 ------ ------ ------ Operating costs and expenses: Contract drilling 23,163 14,190 17,252 Oil and gas production 944 924 554 Dry holes and abandonments 476 558 945 Depreciation, depletion and amortization 4,080 1,784 907 Writedown of oil and gas properties 3,120 171 2,624 General and administrative 1,863 1,560 1,599 ------ ------ ------ Total operating costs and expenses 33,646 19,187 23,881 ------ ------ ------ Operating income (loss) 3,371 1,787 (900) ------ ------ ------ Other income (expense): Interest 133 (278) (139) Gain on sales of assets 179 65 26 Other, net 1,001 (13) 91 ------ ------ ------ Total other income (expense), net 1,313 (226) (22) ------ ------ ------ Net income (loss) before income tax provision 4,684 1,561 (922) Provision for income taxes (140) (16) (30) ------ ------ ------ Net income (loss) $ 4,544 $ 1,545 $ (952) ====== ====== ====== Net income (loss) per common share: Basic $ 0.98 $ 0.43 $ (0.29) Diluted 0.91 0.38 -- ========= ========= ========= Weighted average number of common shares outstanding: Basic 4,614,959 3,607,925 3,254,262 Diluted 5,013,981 4,105,882 4,074,567 ========= ========= =========
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Statements of Stockholders' Equity
Years Ended March 31, 1998, 1997 and 1996
(In thousands)
See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC. Statements of Cash Flows Years Ended March 31, 1998, 1997 and 1996 (In thousands)
1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 4,544 $ 1,545 $ (952) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 4,080 1,784 907 Dry holes and abandonments 476 558 945 Gain on sales of assets (179) (65) (26) Writedown of properties 3,120 171 2,624 Changes in assets and liabilities: Trade receivables (1,931) (3,276) (374) Deposits -- 350 90 Inventories and other assets (109) (262) (65) Trade payables (117) (597) 1,497 Accrued payables and other current liabilities (584) 585 117 -------- -------- -------- Total adjustments 4,756 (752) 5,715 -------- -------- -------- Net cash provided by operating activities 9,300 793 4,763 -------- -------- -------- Cash flows from investing activities: Additions to property and equipment (10,181) (6,754) (7,016) Proceeds from sales of property and equipment 412 102 44 -------- -------- -------- Net cash required by investing activities (9,769) (6,652) (6,972) -------- -------- -------- Cash flows from financing activities: Repayments of capital lease -- -- (92) Proceeds from issuance of common stock -- 7,780 -- Proceeds from exercise of stock options 1,044 88 136 Proceeds from bank loan -- 3,200 1,300 Repayments of bank loan -- (4,500) -- Leasehold borrowings and repayments of leasehold borrowings -- -- (386) -------- -------- -------- Net cash provided by financing activities 1,044 6,568 958 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 575 709 (1,251)
Cash and cash equivalents at beginning of year 1,048 339 1,590 -------- -------- -------- Cash and cash equivalents at end of year $ 1,623 $ 1,048 $ 339 ======== ======== ======== See accompanying notes to financial statements.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(1) Organization, Nature of Business and Summary of Significant Accounting Policies
Nature of Operations
TMBR/Sharp Drilling, Inc. (the "Company") was incorporated under the laws of Texas in October, 1982 under the name TMBR Drilling, Inc. In August, 1986, the Company changed its name to TMBR/Sharp Drilling, Inc.
The Company's principal businesses are the domestic onshore contract drilling of oil and gas wells for major and independent oil and gas producers, and, to a lesser extent, the exploration for, development and production of oil and natural gas. The Company's drilling activities are primarily conducted in the Permian Basin of west Texas and eastern New Mexico.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers highly liquid debt instruments which have an original maturity of three months or less to be cash equivalents. Cash payments for interest expense were approximately $0 in 1998, $278,000 in 1997 and $139,000 in 1996. Cash payments for taxes due totaled $29,000, $0 and $23,000 during 1998, 1997 and 1996, respectively.
Marketable Securities
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable securities, such as those owned by the Company, are classified as available-for-sale securities and are to be reported at market value, with unrealized gains and losses, net of income taxes, excluded from earnings and reported as a separate component of stockholders' equity. The market value of these securities at March 31, 1998 was not materially different from the historical cost, and therefore, no unrealized gains or losses have been recorded.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Inventories
Inventories consist primarily of casing and tubing. The Company values its inventories at the lower of cost or estimated net recoverable value using the specific identification method.
Property and Equipment
Drilling equipment is depreciated on a units-of-production method based on the monthly utilization of the equipment. Drilling equipment which is not utilized during a month is depreciated using a minimum utilization rate of approximately twenty-five percent. Estimated useful lives range from four to eight years. Other property and equipment is depreciated using the straight-line method of depreciation with estimated useful lives of three to seven years.
Oil and gas properties are accounted for using the successful efforts method of accounting. Accordingly, the costs incurred to acquire property (proved and unproved), all development costs and successful exploratory costs are capitalized, whereas the costs of unsuccessful exploratory wells are expensed. Geological and geophysical costs, including seismic costs, are charged to expense when incurred. In cases where the Company provides contract drilling services related to oil and gas properties in which it has an ownership interest, the Company's proportionate share of costs related to these properties is capitalized as stated above, net of the Company's working interest share of profits from the related drilling contracts. Capitalized costs of undeveloped properties, which are not depleted until proved reserves can be associated with the properties, are periodically reviewed for possible impairment. Such unevaluated costs totaled approximately $111,000 and $196,000 as of March 31, 1998 and 1997, respectively.
Depletion, depreciation and amortization of capitalized oil and gas property costs is provided using the units-of-production method based on estimated proved or proved developed oil and gas reserves, as applicable, of the respective property units.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Prior to 1996, the Company provided impairments for significant proved oil and gas properties to the extent that net capitalized costs exceeded aggregated undiscounted future net cash flows. During 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires the Company to assess the need for an impairment of capitalized costs of oil and gas properties on a property-by-property basis. According to SFAS 121, if an impairment is indicated based on undiscounted expected future cash flows, then it is recognized to the extent that net capitalized costs exceed discounted future cash flows. In connection with the adoption of SFAS 121, the Company provided an impairment of $2,624,000 in 1996. Additional impairments of $3,120,000 and $171,000 were recorded in 1998 and 1997, respectively. Management's estimate of future cash flows is based on their estimate of reserves and prices. It is reasonably possible that a change in reserve or price estimates could occur in the near term and adversely impact management's estimate of future cash flows and consequently the carrying value of properties.
Major renewals and betterments are capitalized in the appropriate property accounts while the cost of repairs and maintenance is charged to operating expense in the period incurred. For assets sold or otherwise retired, the cost and related accumulated depreciation amounts are removed from the accounts and any resulting gain or loss is recognized.
Drilling Revenues and Costs
Drilling revenues from footage and daywork contracts are recognized as
work is performed utilizing the percentage-of-completion method. Costs on footage and daywork contracts are recognized in the period incurred. The Company utilizes the completed contract method to recognize drilling revenues and expenses relating to turnkey contracts. Expected losses on all in-process contracts are recognized in the period the loss can reasonably be determined.
Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates with regard to these financial statements include the estimate of proved oil and gas reserve volumes and the related present value of estimated future net revenues therefrom (see Note 8), and the valuation allowance for deferred taxes (see Note 4).
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Net Income (Loss) Per Share of Common Stock
On April 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share" which superseded Accounting Principles Board Opinion No. 15 ("APB 15") "Earnings Per Share." SFAS 128 simplifies earnings per share ("EPS") calculations by replacing previously reported primary EPS with basic EPS which is calculated by dividing reported earnings available to common shareholders by the weighted average shares outstanding. No dilution for potentially dilutive securities is included in basic EPS. Previously reported fully diluted EPS is called diluted EPS which includes all potentially dilutive securities.
Stock Based Employee Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for various stock based compensation plans. SFAS 123 encourages the adoption of a fair value based method of accounting for employee stock options, but permits continued application of the accounting method prescribed by Accounting Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to Employees." The Company has elected to continue to apply the provisions of Opinion 25. Under Opinion 25, if the exercise price of the Company's stock options equals the market value of the underlying stock on the date of grant, no compensation expense is recognized. SFAS 123 requires disclosure of pro forma information regarding net income and earnings per share as if the Company had accounted for its employee stock options under the fair value method of the statement. See Note 3 "Stockholders' Equity."
(2) Debt
Line of Credit
On January 16, 1996, the Company entered into a loan agreement with Norwest Bank Texas, Midland, N.A. (Norwest) that provided for a $3,000,000 revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the line of credit bore interest at the Norwest Bank Minnesota, National Association base rate and the interest was payable monthly. The loan agreement had an extended maturity date of April 15, 1998, at which time, the outstanding principal and all of the accrued and unpaid interest were due and payable.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In August, 1996, the Company entered into a second loan agreement with Norwest. The second loan agreement provided for a $2,000,000 revolving line of credit secured by substantially all of the Company's producing oil and gas properties. Borrowings under the line of credit bore interest at the Norwest base rate and the interest was payable monthly. The line of credit had an extended maturity date of April 15, 1998, at which time, the principal amount outstanding was due and payable, plus any accrued and unpaid interest. The borrowings under both loan agreements were paid in full in February, 1997.
On May 26, 1998, the Company renewed and extended the prior loan agreements with Norwest Bank Texas, N.A.. The amended and restated loan agreement provides for a $5,000,000 revolving line of credit secured by the Company's drilling rigs and related equipment, accounts receivable and inventory. Borrowings under the renewed and extended line of credit bear interest at the Norwest Bank base rate and the interest is payable monthly. The renewed and extended loan agreement matures on May 26, 2000.
Leasehold Purchase Obligation
On December 9, 1994, the Company entered into an agreement with Paladin Exploration Co., Inc. ("Paladin") to acquire certain oil and gas leases. The Company agreed to reimburse Paladin an aggregate amount of approximately $629,000 (including imputed interest at a rate of 9.5% per annum) for leasehold acquisition, legal and seismic costs incurred by Paladin associated with the acquisition of such leases. At March 31, 1996, the obligation outstanding to Paladin had been satisfied.
(3) Stockholders' Equity
(a) Common Stock
On February 13, 1997, the Company closed a private placement of 725,000 shares of common stock at a price of $11.00 per share. The net proceeds from the placement were approximately $7.4 million.
(b) Stock Option Plans
1984 Stock Option Plan
In August of 1984, the Company adopted the 1984 Stock Option Plan (the "Plan") which initially authorized 375,000 shares of the Company's common stock to be issued as either incentive stock options or nonqualified stock options. This Plan was amended in August 1986 to increase the authorized shares to 475,000 shares of the Company's common stock. In January 1988,
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
the Plan was amended to reduce the option price on certain options issued prior to March 31, 1986, to reflect the then current fair market value of the Company's common stock. The Plan provides that options may be granted to key employees or directors for various terms at a price not less than the fair market value of the shares on the date of the grant. Options to purchase 100,000 shares of common stock are currently exercisable and outstanding under the Plan. No additional shares are available for grant as the Plan expired by its own terms in August 1994. The options that were granted prior to the expiration of the Plan, and which are outstanding, remain subject to the terms of the Plan.
1994 Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan") which authorized the grant of options to purchase up to 750,000 shares of the Company's common stock. These options may be issued as either incentive or nonqualified stock options. The 1994 Plan provides that options may be granted to key employees or directors for various terms at a price not less than the fair market value of the shares on the date of grant. The 1994 Plan was ratified and approved by the stockholders at the Company's annual meeting of stockholders held on August 30, 1994.
On September 3, 1996, the Company granted 465,000 shares of nonqualified stock options to key employees under the 1994 Plan. The following sets forth certain information concerning these nonqualified options.
Number Option Price of --------------------- Shares Per Share Total ------ --------------------- Outstanding March 31, 1996 -- -- --
Granted 465,000 $7.75 $3,603,750 ------- ---- --------- Outstanding March 31, 1997 465,000 $7.75 $3,603,750
Exercised 127,500 7.75 988,125 ------- ---- --------- Outstanding March 31, 1998 337,500 $7.75 $2,615,625 ======= ==== =========
All of the nonqualifed stock options granted on September 3, 1996 are earned and exercisable as of May 1, 1997.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
In addition to the aforementioned options, during fiscal year 1989, an additional 500,000 shares of nonqualified stock options were granted to another director who is also an officer. These options were granted at an exercise price of $0.25 per share (estimated fair market value at date of grant). On April 4, 1990, the Board of Directors also approved an additional 500,000 shares of nonqualified stock options granted to another director at an exercise price of $0.25 per share (estimated fair market value at date of grant).
The following sets forth certain information concerning these nonqualified options:
Option Price Number ------------ of Shares Per Share Total --------- --------- ----- Outstanding March 31, 1996 698,000 $0.25 $174,500 Exercised (329,200) 0.25 (82,300) --------- ------- Outstanding March 31, 1997 368,800 $0.25 $ 92,200
Exercised (149,300) 0.25 (37,325) --------- ------- Outstanding March 31, 1998 219,500 $0.25 $ 54,875 ========= =======
All nonqualified options outstanding were earned and exercisable as of March 31, 1998.
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal 1997: no dividend yield, expected volatility of 68.32% and a risk free interest rate of 6.7%.
Year of Option Exercise Expected Fair Grant Shares Price Life Value ------- ------ -------- -------- ----- 1997 465,000 $7.75 5.0 $4.87
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1998 1997 -------------------- -------------------- As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- (In thousands, except share amounts)
Net income (loss) from continuing operations $4,544 $4,261 $1,545 $(436)
Net income (loss) from continuing operations per share (basic) $0.98 $0.92 $0.43 $(0.10)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts, as SFAS 123 does not apply to awards prior to 1995 and additional awards are anticipated in future years.
(4) Income Taxes
At March 31, 1998, the Company had approximately $68,297,000 of net operating loss carryforwards for tax purposes. Realization of the benefits of these carryforwards is dependent upon the Company's ability to generate taxable earnings in future periods. If these carryforwards are not utilized, they will begin to expire in 1998. The Company's ability to utilize its net operating loss carryforwards may be substantially limited in the future under Section 382 of the Internal Revenue Code (IRC). If the Company encounters a change of control as defined in IRC Section 382, the carryforward would be limited to an annual amount calculated based on market value. The Company does not believe a change of control, as defined, has occurred to date.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The major components of deferred tax assets and liabilities follows:
March 31, 1998 March 31, 1997 -------------- -------------- Deferred Tax Assets (Liabilities) Federal NOL Carryforwards $ 23,220,964 $ 24,372,057 Allowance for Bad Debts 385,803 385,803 Book over tax depreciation and amortization 739,967 112,171 Accrued Workers Compensation 139,574 423,170 Other accrued expenses 27,353 40,689 ---------- ---------- Total deferred tax assets 24,513,661 25,333,890 Valuation allowance (24,513,661) (25,333,890) ---------- ---------- Net deferred tax asset $ -- $ -- ========== ==========
The Company has provided a valuation allowance for the entire balance of deferred tax assets at March 31, 1998 and March 31, 1997, as it is more likely than not that the deferred tax asset will not be realized.
The effective tax rates for the years ended March 31, 1998, 1997 and 1996 differ from the statutory tax rate of 34% primarily due to utilization of net operating loss carryforwards. Tax expense is generally limited to alternative minimum tax.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following table sets forth a reconciliation of the tax provision using statutory rates to the actual tax provision provided in the statements of operations:
1998 1997 1996 ---- ---- ----
Tax provision (benefit) utilizing statutory rates $ 1,545 $ 525 $(313)
Utilization of NOL (1,405) (509) 343 ----- --- --- Tax provision $ 140 $ 16 $ 30 ===== === ===
(5) Related Parties
During 1998, 1997 and 1996, the Company sold $113,000, $190,000 and $791,000 and purchased $139,000, $119,000 and $427,000, respectively, of goods and services from entities affiliated with individuals serving as officers and/or directors of the Company. These purchases and sales are transacted using market rates. These transactions are included in "contract drilling revenue" and "contract drilling expense" or "other income or expense" in the accompanying statements of operations.
The related party transactions discussed in the preceding paragraph are noninterest-bearing and are settled in the normal course of business.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(6) Business Segments and Significant Customers
The Company is engaged in contract drilling of oil and gas wells and, to a lesser extent, in oil and gas production. Information concerning the Company's business segments follows:
Years Ended March 31, ---------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (In thousands) Revenues: Contract drilling $ 34,891 $ 18,483 $ 21,298 Oil and gas 2,126 2,491 1,683 -------- -------- -------- $ 37,017 $ 20,974 $ 22,981 ======== ======== ======== Net income (loss) (a): Contract drilling $ 8,838 $ 1,937 $ 2,245 Oil and gas (4,427) (114) (3,058) -------- -------- -------- 4,411 1,823 (813) Corporate income (expenses) (b) 133 (278) (139) -------- -------- -------- $ 4,544 $ 1,545 $ (952) ======== ======== ======== Identifiable assets: Contract drilling $ 17,775 $ 11,711 $ 6,415 Oil and gas 4,325 6,179 4,322 -------- -------- -------- 22,100 17,890 10,737 Corporate assets (c) 2,548 1,871 923 -------- -------- -------- $ 24,648 $ 19,761 $ 11,660 ======== ======== ======== Depreciation, depletion and amortization: Contract drilling $ 2,188 $ 982 $ 439 Oil and gas 1,892 802 468 -------- -------- -------- $ 4,080 $ 1,784 $ 907 ======== ======== ======== Capital expenditures: Contract drilling $ 6,334 $ 3,330 $ 1,463 Oil and gas 3,847 3,424 5,553 -------- -------- -------- $ 10,181 $ 6,754 $ 7,016 ======== ======== ========
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(a) General and administrative costs and other income are allocated between segments based on identifiable assets.
(b) Corporate income and expenses consist of interest income and expense.
(c) Corporate assets are those assets which are not specifically identifiable with a segment and consist primarily of cash and cash equivalents, short-term investments and prepaid expenses.
For the years ended March 31, 1998, 1997 and 1996, contract drilling revenues earned from individual customers constituting 10% or more of total contract drilling revenues were:
(a) two customers in 1998 individually represented approximately 14%, and 12% of drilling revenues,
(b) four customers in 1997 individually represented approximately 21%, 18%, 12% and 10% of drilling revenues,
(c) three customers in 1996 individually represented approximately 19%, 18% and 14% of drilling revenues.
The loss of one or more of the above customers could have a material adverse effect on the Company, depending upon the demand for drilling rigs at the time of such loss and the Company's ability to find new customers.
(7) Contingencies
In March, 1992, the Company was notified by the Texas Department of Insurance that the Company's former workers' compensation insurance carriers, Sir Lloyd's Insurance Company and its affiliate, Standard Financial Indemnity Corporation ("SFIC"), had been placed in liquidation by order of the 201st District Court of Travis County, Texas, on March 12, 1992 in Cause No. 92-12765, The State of Texas vs. Sir Lloyd's Insurance Company and Sir Insurance Agency, Inc., and in Cause No. 91-12766, The State of Texas vs. Standard Financial Indemnity Corporation. Approximately two months before being ordered into liquidation, SFIC requested that the Company pay policy premiums in the approximate amount of $646,476. On July 22, 1993 the special deputy receiver of SFIC billed the Company approximately $1,061,000 for retrospective premiums, but adjusted the amount to $854,153 on January 12, 1994.
In November, 1995, the Company was notified that a lawsuit had been filed in Travis County, Texas styled Texas property and Casualty Insurance
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
Guaranty Association vs. TMBR/Sharp Drilling, Inc. (Cause No. 95-12318). The Texas Property and Casualty Insurance Guaranty Association ("Guaranty Association") was seeking a recovery of past workers' compensation claims advanced by the Guaranty Association related to the Company's workers compensation insurance program with SFIC. The Guaranty Association was seeking to recover a total of $803,057.11.
On September 9, 1997, the Company entered into a settlement agreement with the Guaranty Association. The Company agreed to pay to the Guaranty Association the sum of $375,000 in full satisfaction of any liability relating the Company's workers compensation insurance program with SFIC and Sir Lloyd's Insurance Company and the lawsuit brought by the Guaranty Association. The Company originally accrued $854,153 relating to the Guaranty Association's claim for reimbursement. As a result of the settlement, the Company has eliminated the accrual of $854,153 and the difference between the accrued amount and the settlement amount ($479,153) has been recognized as miscellaneous income in the Company's financial statements.
In addition, the Company has entered into a settlement agreement with the insurance agent that represented the Company at the time the workers compensation insurance policies were purchased from Sir Lloyd's and SFIC. The agent has paid the Company the sum of $180,000 in full settlement of all claims and liabilities relating to SFIC and Sir Lloyd's Insurance Company. This amount has been recognized as miscellaneous income in the Company's financial statements.
The Company provides for its workers' compensation claims prior to September 1997 based upon the most recent information available from its insurance carrier concerning claims and estimated costs. However, in future years the Company may receive retroactive adjustments, both favorable and unfavorable, related to estimates of claim costs for previous years, which may be material to the Company's results of operations. No provision for retroactive adjustments to claim costs is recorded until the Company receives notification from its insurance carrier because this amount, if any, cannot be estimated. For claims incurred November 1993 to September 1997, the Company is generally responsible for the first $10,000 ($100,000 prior to November 1993) in claim costs for each workers' compensation injury. Currently the Company is covered by a fully insured workers compensation policy.
The Company is a defendant in various lawsuits generally incidental to its business. The Company does not believe that the ultimate resolution of such litigation will have a significant effect on the Company's financial position or results of operations.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
(8) Supplemental Information Related to Oil and Gas Activities
The Company's capitalized cost of oil and gas properties is as follows:
March 31, --------- 1998 1997 ---- ---- (In thousands)
Oil and gas properties $15,452 $13,102
Accumulated depreciation, depletion and amortization (11,127) (6,923) ------- ------- $ 4,325 $ 6,179 ======= =======
The Company's costs incurred related to oil and gas property acquisition, exploration and development activities are as follows:
Years Ended March 31, --------------------- 1998 1997 1996 ---- ---- ---- (In thousands)
Property acquisition costs $ 275 $ 194 $ 970
Exploration costs 1,430 920 3,969
Development costs 2,141 2,310 614 ------- ------- ------- $ 3,846 $ 3,424 $ 5,553 ======= ======= =======
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The Company's results of operations from oil and gas producing activities are as follows:
Years Ended March 31, --------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Revenues $ 2,126 $ 2,491 $ 1,683
Production costs 944 924 554
Dry holes and abandonments 476 558 945
Depreciation, depletion and amortization 1,892 802 468
Writedown of oil and gas properties 3,120 171 2,624
Income tax provision -- -- -- ------- ------- ------- Results of operations from producing activities (excluding corporate overhead and interest costs) $(4,306) $ 36 $(2,908) ======= ======= =======
(9) Unaudited supplemental oil and gas reserve information
The reserve information presented below are only estimates. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the Company. Reserve engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. The quantities of oil and gas that are ultimately recovered, production and operating costs, the amount and timing of future development expenditures and future oil and gas prices may all differ from those assumed in such estimates.
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
The following sets forth proved oil and gas reserves at March 31, 1998, 1997 and 1996:
TMBR/SHARP DRILLING, INC.
Notes to Financial Statements
March 31, ----------------------- 1998 1997 ---- ---- (In thousands)
Standardized Measure
Future cash inflows $10,065 $12,848
Future production and development costs (3,205) (4,201) ------- ------- Future net cash flows 6,860 8,647
10% discount factor (2,200) (2,982) ------- ------- Discounted future net cash flows 4,660 5,665
Discounted income taxes -- -- ------- ------- Standardized Measure $ 4,660 $ 5,665 ======= =======
1998 1997 1996 ---- ---- ---- (In thousands)
Standardized measure, beginning of year $ 5,665 $ 4,954 $ 2,879
Revisions Prices and costs (1,889) 813 235 Accretion of discount 567 495 288 ------- ------- -------- Net revisions (1,322) 1,308 523
Discoveries and additions 1,499 970 2,681 Production (1,182) (1,567) (1,129) ------- ------- ------- Standardized measure, end of year $ 4,660 $ 5,665 $ 4,954 ======= ======= =======
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and officers of the Company at June 10, 1998 are as follows:
Director or Officer Name Age Position with Company since
Thomas C. Brown 71 Chairman of the Board of Directors and Chief Executive Officer 1982
Joe G. Roper 69 Director and President 1982
Donald L. Evans (1) 51 Director 1982
David N. Fitzgerald (1) 75 Director 1984
Don H. Lawson 59 Vice President - Operations 1992
Jeffrey D. Phillips 37 Vice President - Production 1997
Patricia R. Elledge 40 Controller/Treasurer 1994
James M. Alsup 61 Secretary 1982
-------------------------- (1) Member of Compensation and Audit Committees
Directors of the Company serve until the annual meeting of stockholders to be held in August, 1998, and until their successors in office are elected and qualified. Each officer is appointed annually by the Company's Board of Directors to serve at the Board's discretion and until his successor in office is elected and qualified.
Mr. Brown has served as a Director of the Company since the Company's formation in 1982. He is presently Chairman of the Board of Directors and Chief Executive Officer of the Company and has served in such capacities since 1990. Mr. Brown is also a Director of Tom Brown, Inc., the former parent of the Company.
Mr. Roper has served as a Director of the Company since the Company's formation in 1982. He served as Chairman of the Board of Directors and Chief Executive Officer of the Company from 1982 until 1990 when he became President of the Company.
Mr. Evans has been a Director of the Company since the Company's formation in 1982. He served as President of the Company from 1982 until 1990 when Mr. Roper was elected to the office of President. Mr. Evans is currently the Chairman of the Board of Directors and Chief Executive Officer of Tom Brown, Inc., positions he has held since 1990 and 1985, respectively.
Mr. Fitzgerald has served as a Director of the Company since his initial election to the Board of Directors in 1984. He is the President and a shareholder of Dave Fitzgerald, Inc., a privately held oilfield equipment sales company that Mr. Fitzgerald has owned and operated since 1963. Mr. Fitzgerald is also a Director of Mineral Development, Inc.
Mr. Lawson has been employed by the Company since 1967. He has been the Vice President - Operations of the Company since 1992.
Mr. Phillips has been employed by the Company since 1995. He has been the Vice President - Production since 1997. From 1993 to 1995 he was Operations Manager for Staley Operating Co., a privately held exploration and production company.
Ms. Elledge was employed by the Company from September, 1989 to December, 1993 when she resigned to relocate. Ms. Elledge returned to the employ of the Company in September, 1994 in her current capacity as Controller - Treasurer.
Mr. Alsup has been the Secretary of the Company since the Company's formation in 1982. He has been a partner in the law firm of Lynch, Chappell & Alsup since 1970.
There are no family relationships between any of the Directors or officers of the Company, except that Patricia R. Elledge is the daughter of Joe G. Roper.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The discussion under "Executive Compensation" in the Company's definitive proxy statement for the 1998 annual meeting of shareholders is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion under "Principal Shareholders" and the information appearing under "Election of Directors" in the Company's definitive proxy statement for the 1998 annual meeting of shareholders is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The discussion under "Executive Compensation - Certain Transactions" in the Company's definitive proxy statement for the 1998 annual meeting of stockholders is incorporated herein by reference.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a)1. See Index to Financial Statements at Item 8 30
(a)2. Financial Statement Schedules Years ended March 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying Accounts . . . . 59
All other schedules are omitted as the required information is inapplicable or the information is presented in the Financial Statements or related notes.
(a)3. Exhibits:
Exhibit 3.1 - Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 in Registrant's Annual Report on Form 10-K dated June 28, 1991)
Exhibit 3.2 - Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.2 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Executive Compensation Plans and Arrangements (Exhibits 10.1 through and including Exhibit 10.9 constitute executive compensation plans and arrangements of the Registrant)
Exhibit 10.1 - Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.3 in Registrant's Registration Statement on Form 10 as amended, effective October 9, 1984)
Exhibit 10.2 - Nonqualified Stock Option Agreement dated August 29, 1990, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.15 in Registrant's Annual Report on form 10-K dated June 25, 1993)
Exhibit 10.3 - Nonqualified Stock Option Agreement dated August 30, 1988, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.17 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.4 - Incentive Stock Option Agreement dated November 16, 1993 between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Exhibit 10.5 - Incentive Stock Option Agreement dated December 4, 1992 between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.6 - Incentive Stock Option Agreement dated December 4, 1992 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.7 - Incentive Stock Option Agreement dated November 16, 1993 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Exhibit 10.8 - 1994 Stock Option Plan. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 28, 1995)
Exhibit 10.9 - TMBR/Sharp Drilling, Inc. Employee Retirement Plan. (Incorporated by reference to Exhibit 10.11 in Registrant's Annual Report on Form 10-K dated June 28, 1995)
Exhibit 10.10 - Form of Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and the stockholders named therein (Incorporated by reference to Exhibit 10.1 in the Registrant's Registration Statement on Form S-3, No. 333-23391)
Exhibit 10.11 - Bonus Agreement dated October 2, 1997, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.12 - Bonus Agreement dated October 2, 1997, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.2 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.13 - Bonus Agreement dated October 2, 1997, between David N. Fitzgerald and the Registrant. (Incorporated by reference to Exhibit 10.3 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.14 - Bonus Agreement dated October 2, 1997, between Donald L. Evans and the Registrant. (Incorporated by reference to Exhibit 10.4 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.15 - Bonus Agreement dated October 2, 1997, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.16 - Bonus Agreement dated October 2, 1997, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.6 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.17 - Bonus Agreement dated October 2, 1997, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.7 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
*Exhibit 10.18 - Loan Agreement dated May 26, 1998 between Norwest Bank, Texas N. A. and the Registrant.
*Exhibit 23.1 - Consent of Arthur Andersen LLP
*Exhibit 23.2 - Consent of Joe C. Neal & Associates
*Exhibit 27 - Financial Data Schedule
---------------------------------- *Filed herewith
(b) No reports on Form 8-K were filed during the last quarter of fiscal 1998.
Schedule II -----------
TMBR/SHARP DRILLING, INC.
Valuation and Qualifying Accounts
Years ended March 31, 1998, 1997 and 1996
(In thousands)
Recoveries Balance at Additions or other Balance beginning charged to reserve at end Description of year operations reductions of year --------------------- ---------- ---------- ---------- -------
Allowance for doubtful accounts:
1998 $ 1,135 $ -- $ -- $ 1,135
1997 $ 1,225 $ -- $ 90 $ 1,135
1996 $ 1,225 $ -- $ -- $ 1,225
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TMBR/SHARP DRILLING, INC.
June 26, 1998 By /s/ Thomas C. Brown Thomas C. Brown, Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
June 26, 1998 /s/ Thomas C. Brown Thomas C. Brown, Chairman of the Board of Directors (Principal Executive Officer)
June 26, 1998 /s/ Joe G. Roper Joe G. Roper, President and Director
June 26, 1998 /s/ Patricia R. Elledge Patricia R. Elledge, Controller/ Treasurer (Principal Financial Officer)
June 26, 1998 /s/ David N. Fitzgerald David N. Fitzgerald, Director
June 26, 1998 /s/ Donald L. Evans Donald L. Evans, Director
INDEX TO EXHIBITS
Description Page No. ----------- --------
Exhibit 3.1 Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3.1 in Registrant's Annual Report on Form 10-K dated June 28, 1991)
Exhibit 3.2 Bylaws of the Company, as amended. (Incor- porated by reference to Exhibit 3.2 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Executive Compensation Plans and Arrangements (Exhibits 10.1 through and including Exhibit 10.9 constitute executive compensation plans and arrangements of the Registrant)
Exhibit 10.1 Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.3 in Registrant's Registration Statement on Form 10, as amended, effective October 9, 1984)
Exhibit 10.2 Nonqualified Stock Option Agreement dated August 29, 1990, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.15 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.3 Nonqualified Stock Option Agreement dated August 30, 1988, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.17 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.4 Incentive Stock Option Agreement dated November 16, 1993 between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Exhibit 10.5 Incentive Stock Option Agreement dated December 4, 1992 between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.20 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.6 Incentive Stock Option Agreement dated December 4, 1992 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.21 in Registrant's Annual Report on Form 10-K dated June 25, 1993)
Exhibit 10.7 Incentive Stock Option Agreement dated November 16, 1993 between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 27, 1994)
Exhibit 10.8 1994 Stock Option Plan. (Incorporated by reference to Exhibit 10.10 in Registrant's Annual Report on Form 10-K dated June 28, 1995)
Exhibit 10.9 TMBR/Sharp Drilling, Inc. Employee Retirement Plan. (Incorporated by reference to Exhibit 10.11 in Registrant's Annual Report on Form 10-K dated June 28, 1995)
Exhibit 10.10 Form of Stock Purchase Agreement, dated as of February 13, 1997, between the Registrant and the stockholders named therein (Incorporated by reference to Exhibit 10.1 in the Registrant's Registration Statement on Form S-3, No. 333-23391)
Exhibit 10.11 Bonus Agreement dated October 2, 1997, between Joe G. Roper and the Registrant. (Incorporated by reference to Exhibit 10.1 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.12 Bonus Agreement dated October 2, 1997, between Thomas C. Brown and the Registrant. (Incorporated by reference to Exhibit 10.2 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.13 Bonus Agreement dated October 2, 1997, between David N. Fitzgerald and the Registrant. (Incorporated by reference to Exhibit 10.3 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.14 Bonus Agreement dated October 2, 1997, between Donald L. Evans and the Registrant. (Incorporated by reference to Exhibit 10.4 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.15 Bonus Agreement dated October 2, 1997, between Patricia R. Elledge and the Registrant. (Incorporated by reference to Exhibit 10.5 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.16 Bonus Agreement dated October 2, 1997, between Don H. Lawson and the Registrant. (Incorporated by reference to Exhibit 10.6 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
Exhibit 10.17 Bonus Agreement dated October 2, 1997, between Jeffrey D. Phillips and the Registrant. (Incorporated by reference to Exhibit 10.7 in Registrant's Quarterly Report on Form 10-Q dated February 11, 1998)
*Exhibit 10.18 Loan Agreement dated May 26, 1998 between Norwest Bank, Texas N. A. and the Registrant.
*Exhibit 23.1 Consent of Arthur Andersen LLP 64
*Exhibit 23.2 Consent of Joe C. Neal & Associates 65
*Exhibit 27 Financial Data Schedule 66
-------------------- *Filed herewith
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (registration no. 33-46699 and no. 33-89878) and the Company's previously filed registration statement on Form S-3, No. 333-23391.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas, May 26, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the incorporation by reference of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 (registration no. 33-46699 and no. 33-898878) and the Company's previously filed registration statement on Form S-3, No. 333-23391.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas June 26, 1998