<PAGE> 1
AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
PATTERSON ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2504748
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
(915) 573-1104
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CLOYCE A. TALBOTT
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
(915) 573-1104
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS H. MAXFIELD, ESQ. ROBERT V. JEWELL, ESQ.
BAKER & HOSTETLER ANDREWS & KURTH L.L.P.
SUITE 1100 SUITE 4200
303 EAST SEVENTEENTH AVENUE 600 TRAVIS
DENVER, COLORADO 80203 HOUSTON, TEXAS 77002
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
=============================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share........ 1,986,050 Shares $25.875 $51,389,044 $15,572
=============================================================================================================
</TABLE>
(1) Includes 259,050 shares to cover the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of
the average of the high and low reported sale prices of the Registrant's
Common Stock on December 16, 1996, as reported on the Nasdaq National
Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION -- DATED DECEMBER 18, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
1,727,000 Shares
PATTERSON ENERGY, INC.
Common Stock
- --------------------------------------------------------------------------------
Of the shares of common stock, par value $0.01 per share (the "Common Stock"),
offered hereby, 1,500,000 shares are being sold by Patterson Energy, Inc., a
Delaware corporation ("Patterson" or the "Company") and 227,000 shares are being
sold by the selling stockholders (the "Selling Stockholders"). The Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
The Common Stock is quoted in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "PTEN." On December 17, 1996, the
last reported sales price of the Common Stock on the Nasdaq National Market was
$26.00 per share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" ON PAGES 8 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=======================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
- -------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $ $
=======================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 259,050 additional shares of Common Stock on the
same terms and conditions set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to Company will be $ and the total
Proceeds to Selling Stockholders will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
January , 1997
<PAGE> 3
PRINCIPAL AREAS OF ACTIVITY
[MAP DEPICTING THE LOCATION OF THE COMPANY'S OFFICES AND
PRINCIPAL AREAS OF OPERATIONS IN THE STATE OF TEXAS,
AS WELL AS OUTLINES OF THE AUSTIN CHALK TREND,
PERMIAN BASIN AND HARDEMAN BASIN AND FOLD OUT
PAGES WITH PHOTOS OF DRILLING RIGS.]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus and in the documents incorporated by reference into this Prospectus.
Unless the context indicates otherwise, (i) the terms "Company" and "Patterson"
refer to the Company and its subsidiaries, (ii) the information in this
Prospectus includes the effects of the restatement of Patterson's financial,
operating and reserve information to include Tucker Drilling Company, Inc.
("Tucker") on a combined basis effective for all periods as a result of the
merger of Patterson and Tucker on July 30, 1996, which was accounted for as a
pooling of interests, (iii) all information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and (iv) references to
numbers of drilling rigs include only drilling rigs that the Company considers
operable. See "Glossary of Industry Terms" at the back of this Prospectus for
definitions of industry terms used in this Prospectus.
THE COMPANY
Patterson Energy, Inc. ("Patterson" or the "Company") is one of the leading
providers of domestic land drilling services to major and independent oil and
natural gas companies. Formed in 1978, the Company focuses its operations in the
Permian Basin, the Austin Chalk Trend and the Hardeman Basin, primarily in
Texas. With a fleet of 61 drilling rigs, 52 of which are currently operable, the
Company ranked third in 1995 in both land footage and horizontal wells drilled
in the U.S. The Company is also engaged in the development, exploration,
acquisition and production of oil and natural gas.
The Company 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. Additionally, the Company has the in-house capability to design,
manufacture, repair and modify its drilling rigs. Of the Company's drilling
rigs, 46 are capable of drilling to depths greater than 10,000 feet, including
five that are capable of drilling to depths greater than 15,000 feet. During the
nine months ended September 30, 1996, the Company drilled 314 wells totaling 2.6
million feet for 92 different customers. The Company believes that it has one of
the highest utilization rates in the U.S. land drilling industry, with an
average utilization rate in excess of 80% during the fourth quarter of 1996.
The Company's oil and natural gas activities are designed to complement its
land drilling operations. These activities are focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 13% of the Company's revenues for
the nine months ended September 30, 1996. As of September 30, 1996, the
Company's proved developed reserves were 1,919 MBOE and had a SEC PV-10 Value of
$12.6 million.
Over the past five years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1991, the Company has
acquired 49 drilling rigs, 40 of which are presently operable. From 1991 (prior
to giving effect to the Tucker merger) to 1995, the Company's revenues increased
from $21.9 million to $64.4 million, and its EBITDA increased from $2.7 million
to $11.2 million.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
From 1982 until recently, the U.S. land drilling industry has been
characterized by an over supply of drilling equipment as demand for land
drilling services decreased. During the past 14 years, the available land
drilling rig fleet declined from 5,139 drilling rigs in 1982 to 1,425 drilling
rigs in 1996. Industry profitability also suffered, and in many cases,
insufficient cash flow was generated to support proper drilling rig maintenance.
To maintain operation of drilling equipment in that environment, drilling
contractors frequently removed drill pipe, parts and components from less
desirable drilling rigs. The available domestic drilling fleet has been further
reduced through the mobilization of drilling equipment to international markets.
Many drilling contractors have used up most of their internal inventories
of drilling rig components and drill pipe and have begun to experience rising
costs for the components necessary to maintain their drilling rigs in working
condition. These increased capital costs have strained the economic resources of
many small land
3
<PAGE> 5
drilling operators, resulting in an environment that encourages industry
consolidation. These factors have led to a reduction in the number of domestic
drilling contractors from 388 in 1993 to 289 in 1996. In addition, approximately
one-third of the land footage drilled in the U.S. during 1995 was drilled by
only 10 companies, down from 25 in 1993.
During the last two years, however, demand for domestic onshore drilling
services has increased as a result of stronger oil and natural gas prices and
technological advances (such as 3-D seismic, new drilling techniques and
improved completion methods) that have reduced exploration, development and
production costs. As a consequence, the Company has recently begun to realize
modest price increases for the first time in many years.
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in
good operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize its utilization rates and pricing.
GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities exist to further expand its drilling rig fleet. In
evaluating potential acquisitions, the Company seeks to identify drilling rigs
and related equipment that complement the Company's existing drilling rig fleet
and enable it to expand its market share in its core geographic operating areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the highest ratios of EBITDA to revenues in the U.S.
land drilling industry during the first nine months of 1996. The Company has
produced these results from the combination of providing premium contract
drilling services and operating under an efficient cost structure. In addition,
the Company has achieved cost reductions and efficiencies through acquisition
related synergies. The Company also uses its fleet of trucks and trailers to rig
down, transport and rig up its drilling rigs, which increases efficiency by
reducing the time and costs associated with these ancillary operations.
COMPLEMENTARY OIL AND NATURAL GAS OPERATIONS. The Company believes that
its oil and natural gas operations provide it with the additional financial
flexibility to generate cash flow during downturns in the land drilling market.
The Company's ability to participate in oil and natural gas wells also generates
opportunities to serve as the land drilling contractor for other operators or on
its own behalf.
RECENT DEVELOPMENTS
During July 1996, the Company acquired Tucker for Common Stock valued at
$26.4 million. A total of 1,577,514 shares of Common Stock was issued to the
stockholders of Tucker pursuant to the merger, and an additional 74,592 shares
of Common Stock were reserved for issuance upon exercise of then outstanding
Tucker stock options. Tucker was engaged in onshore contract drilling in the
Permian and Hardeman Basins and, to a lesser extent, in the exploration,
development and production of oil and natural gas, primarily in the Permian
Basin. At the time of the merger, Tucker owned 13 drilling rigs. While all of
the drilling rigs were operable, their utilization rate was approximately 50%.
The utilization rate for these drilling rigs is now approximately 80%.
4
<PAGE> 6
During October 1996, the Company purchased six drilling rigs and related
assets through the acquisition of Gene Sledge Drilling Corporation ("Sledge").
The net purchase price for Sledge was $8.9 million which, in addition to the
drilling rigs, included an inventory of drilling equipment valued by the Company
at approximately $4.4 million. Sledge's contract drilling operations were
conducted in the Permian Basin. Five of the six drilling rigs were operable at
the time of the transaction and the sixth became operable in November. Sledge's
utilization rates were comparable to the Company's utilization rates.
During November and December 1996, in two separate transactions, the
Company acquired 15 drilling rigs and related assets. The consideration paid for
these assets was approximately $4.2 million, consisting of $2.4 million cash, a
$400,000 promissory note and 52,000 shares of the Company's Common Stock valued
at approximately $1.4 million. Six of the drilling rigs were operable at the
time of the transactions, but were underutilized. Two additional drilling rigs
are expected to become operable by the end of 1996, and the seven remaining
drilling rigs are expected to become operable during 1997. The Company has
budgeted approximately $7.5 million to modify and upgrade the drilling rigs
acquired in these two transactions.
During December 1996, the Company entered into an agreement to sell, for
approximately $2.4 million, certain producing oil and natural gas properties
acquired in the Tucker merger. As of September 30, 1996, these properties had a
SEC PV-10 Value of approximately $1.7 million.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
By the Company.................................... 1,500,000 shares
By the Selling Stockholders....................... 227,000 shares
Total..................................... 1,727,000 shares
Common Stock to be Outstanding after the Offering... 6,441,371 shares(1)
Use of Proceeds..................................... Repayment of indebtedness, drilling rig
modifications and upgrades and other
general corporate purposes, including
possible drilling rig and equipment
acquisitions. The Company will not
receive any of the proceeds from the
sale of shares by the Selling
Stockholders. See "Use of Proceeds."
Nasdaq National Market Symbol....................... PTEN
</TABLE>
- ---------------
(1) Does not include 378,910 shares issuable upon exercise of outstanding stock
options and warrants held by management, non-employee directors and others,
at a weighted average exercise price of $9.51 per share.
RISK FACTORS
See "Risk Factors" for a discussion of certain considerations relevant to
an investment in the Common Stock offered hereby.
5
<PAGE> 7
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth certain summary selected consolidated
financial data of the Company for each of the periods indicated. The financial
data for the three-year period ended December 31, 1995 have been derived from
the Company's audited consolidated financial statements. The data presented as
of December 31, 1991 and 1992 have not been audited and were prepared by the
Company using these periods' stand alone audited financial statements of the
Company and Tucker. The financial data for the nine months ended September 30,
1995 and 1996 are derived from unaudited consolidated financial statements of
the Company. The Company's previously reported data for 1996 and prior years
have been restated to reflect the merger with Tucker under the pooling of
interests method of accounting. The summary consolidated financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements, notes thereto and other information included elsewhere in
this Prospectus and the documents incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenues:
Drilling................................ $33,614 $34,417 $37,746 $54,823 $57,599 $42,656 $47,725
Oil and gas............................. 4,028 4,171 5,147 4,707 6,845 4,905 7,331
-------- -------- -------- -------- -------- -------- --------
Total............................. 37,642 38,588 42,893 59,530 64,444 47,561 55,056
-------- -------- -------- -------- -------- -------- --------
Operating costs and expenses:
Direct drilling costs................... 29,090 29,376 30,631 43,036 46,505 34,431 38,818
Oil and gas related costs............... 1,618 1,800 1,920 2,654 2,669 1,671 2,423
Depreciation, depletion and
amortization.......................... 4,976 4,338 4,655 4,912 7,682 5,286 7,913
General and administrative.............. 3,310 3,686 4,014 4,793 5,063 3,607 3,944
-------- -------- -------- -------- -------- -------- --------
Total............................. 38,994 39,200 41,220 55,395 61,919 44,995 53,098
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................... (1,352) (612) 1,673 4,135 2,525 2,566 1,958
-------- -------- -------- -------- -------- -------- --------
Other income (expenses):
Interest expense........................ (523) (416) (331) (366) (1,065) (762) (985)
Non-recurring acquisition costs......... -- -- -- -- -- -- (2,268)
Other................................... 1,413 1,011 397 1,045 954 752 1,006
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary items..................... (462) (17) 1,739 4,814 2,414 2,556 (289)
-------- -------- -------- -------- -------- -------- --------
Income tax expense (benefit):
Current................................. 57 79 123 213 213 264 112
Deferred................................ (8) -- -- (406) (1,000) (208) (2,531)
Charge in lieu of income taxes.......... 131 312 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before extraordinary
items................................... (642) (408) 1,616 5,007 3,201 2,500 2,130
Extraordinary items....................... 131 458 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $ (511) $ 50 $ 1,616 $ 5,007 $ 3,201 $ 2,500 $ 2,130
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common share:
Primary................................. $ (.17) $ .02 $ .51 $ 1.24 $ .73 $ .59 $ .43
Fully diluted........................... $ (.17) $ .02 $ .51 $ 1.24 $ .71 $ .55 $ .43
OTHER FINANCIAL DATA:
EBITDA(1)................................. $ 5,037 $ 4,834 $ 6,725 $10,092 $11,161 $ 8,604 $10,877(3)
Operating cash flow(2).................... 4,172 4,060 6,542 10,181 10,300 7,615 9,281(3)
Total capital expenditures(4)............. 5,763 4,869 5,534 12,496 20,588 15,575 11,047
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------
PRO
PRO FORMA
ACTUAL FORMA(5) AS ADJUSTED(6)
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 9,450 $ 8,625 $
Total assets................................................................. 68,498 85,678
Notes payable................................................................ 15,655 26,480
Total stockholders' equity................................................... 39,237 40,667
</TABLE>
(See Notes on following page)
6
<PAGE> 8
- ---------------
(1) EBITDA (earnings before interest expense, taxes and depreciation, depletion
and amortization) is presented to provide additional information about the
Company's operations. EBITDA should not be considered as an alternative to
net income as an indicator of the Company's operating performance or as an
alternative to cash flow from operating activities under generally accepted
accounting principles as a better measure of liquidity.
(2) Operating cash flow is defined as net income plus depreciation, depletion
and amortization, write-down due to impairment of long-lived assets and dry
holes and abandonments minus net gain on sale of assets and deferred income
tax benefit. Operating cash flow should not be considered as an alternative
to net income as an indicator of the Company's operating performance or as
an alternative to cash flow from operating activities under generally
accepted accounting principles as a better measure of liquidity.
(3) Adjusted to exclude $2.3 million (before-tax) and $1.5 million (after-tax)
of non-recurring acquisition costs associated with the Tucker merger.
(4) Capital expenditures include dry hole costs.
(5) Gives effect to the acquisition of six drilling rigs and related assets from
Sledge in October 1996 and the acquisition of 15 (six operable) drilling
rigs and related assets in two separate transactions during November and
December 1996. See "-- Recent Developments" and "The Company."
(6) Pro forma to give effect to the acquisition of six drilling rigs and related
assets from Sledge in October 1996 and the acquisition of 15 (six operable)
drilling rigs and related assets in two separate transactions during
November and December 1996 and as adjusted to reflect the issuance and sale
of the 1,500,000 shares of Common Stock offered hereby by the Company and
the application of the net proceeds therefrom. See "-- Recent Developments,"
"The Company" and "Use of Proceeds."
SUMMARY OPERATING AND OIL AND NATURAL GAS DATA
The following table sets forth operating and oil and natural gas data for
the Company for each of the periods indicated which have been restated to
reflect the merger of the Company and Tucker. The reserve data set forth below
represent only estimates, which are based on various assumptions and, therefore,
are inherently imprecise. In addition, the reserve data may be subject to upward
or downward revisions depending upon, among other factors, production history
and prevailing oil and gas prices. See "Risk Factors -- Volatility of Oil and
Natural Gas Prices and -- Uncertainty of Oil and Natural Gas Reserve Estimates"
and "Business and Properties."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
RIG ACTIVITY DATA:
Number of wells drilled............................ 333 460 395 327 314
Average rigs available for service................. 25 31 36 35 39
Average rig utilization rate....................... 75% 76% 69% 70% 70%
PRODUCTION DATA:
Average net daily production:
Oil (Bbl)........................................ 399 340 524 509 630
Natural Gas (Mcf)................................ 1,946 2,356 3,731 3,675 4,539
Total (BOE)...................................... 723 733 1,146 1,122 1,387
Average sales price per unit:
Oil (Bbl)........................................ $17.05 $16.40 $ 17.48 $17.40 $ 20.03
Natural Gas (Mcf)................................ 2.02 1.68 1.51 1.41 1.96
Average production (lifting) costs per BOE......... $ 4.57 $ 4.27 $ 3.61 $ 3.50 $ 3.86
RESERVE DATA:
Proved Developed Reserves (MBOE)................. 767 1,228 1,635 - 1,919
SEC PV-10 Value (in thousands)................... $4,575 $6,621 $10,826 - $12,615
</TABLE>
7
<PAGE> 9
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas, both with respect to its contract
drilling operations and its oil and natural gas operations. In recent years, oil
and natural gas prices and, therefore, the level of drilling, exploration,
development and production, have been extremely volatile. Prices are affected by
market supply and demand factors as well as actions of state and local agencies,
the U.S. and foreign governments and international cartels. All of these factors
are beyond the control of the Company. Any significant or extended decline in
oil and/or natural gas prices will have a material adverse effect on the
Company's financial condition and operations and could impair access to sources
of capital.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business is currently experiencing increased demand for drilling services
primarily due to stronger oil and natural gas prices. However, the market for
onshore contract drilling services has generally been depressed since 1982, when
crude oil and natural gas prices began to weaken. A particularly sharp decline
in demand for contract drilling services occurred in 1986 because of the
world-wide collapse in oil prices (to approximately $10.00 per Bbl in April 1986
in the U.S.). Since this time and except during occasional upturns, there have
been substantially more drilling rigs available than necessary to meet demand in
most operating and geographic segments of the domestic drilling industry. As a
result, drilling contractors have had difficulty sustaining profit margins. In
addition to adverse effects that future declines in demand could have on the
Company, ongoing movement or reactivation of onshore drilling rigs or new
construction of drilling rigs could adversely affect contract drilling rates and
drilling rig utilization levels, even in an environment of stronger oil and
natural gas prices and increased drilling activity. The Company cannot predict
either the future level of demand for its contract drilling services or future
conditions in the contract drilling industry.
SHORTAGE OF DRILL PIPE IN THE CONTRACT DRILLING INDUSTRY. Currently, there
is a growing shortage of drill pipe in the contract drilling industry in the
U.S. This shortage has caused the price of drill pipe to increase significantly
over the past 30 months and has required orders for new drill pipe to be placed
at least 150 to 180 days in advance of expected use. The price increase and the
delay in delivery caused the Company to substantially increase capital
expenditures in its contract drilling segment over the approximately 30-month
period ending September 30, 1996, primarily with respect to new drill pipe
purchases. In the event of an extended shortage, the Company may be unable to
obtain the drill pipe required for its contract drilling operations.
MANAGEMENT OF GROWTH. The Company has experienced substantial growth over
the past three years, particularly in its contract drilling segment, and intends
to further expand its drilling fleet through selected acquisitions. Continued
growth could strain the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to manage
growth effectively or that it will be successful in maintaining the market share
attributable to operable drilling rigs acquired by the Company. If the Company
is unable to manage its growth, its business, results of operations and
financial condition could be materially adversely affected.
ABILITY TO GROW THROUGH ACQUISITIONS. The Company's growth has been
enhanced materially by strategic acquisitions that have substantially increased
the Company's drilling rig fleet. One element of the Company's strategy is to
make acquisitions in markets in which it currently competes. While the Company
believes that the land drilling industry is highly fragmented and that
significant acquisition opportunities are available, there can be no assurance
that suitable acquisition candidates can be found, and the Company is likely to
face competition from other companies for available acquisition opportunities.
In addition, if the prices paid by buyers of drilling rigs continue to rise, the
Company may find fewer acceptable acquisition opportunities. There can be no
assurance that the Company will have sufficient capital resources to complete
acquisitions, that acquisitions can be completed on terms acceptable to the
Company or that any completed
8
<PAGE> 10
acquisition would improve the Company's financial condition, results of
operations, business or prospects in any material manner.
LABOR SHORTAGES. Increases in domestic drilling demand since mid-1995 and
recent increases in contract drilling activity have resulted in a shortage of
qualified drilling rig personnel in the industry. If the Company is unable to
attract and retain sufficient qualified personnel, its ability to market and
operate its drilling rigs will be restricted. Further, labor shortages could
result in wage increases, which could reduce the Company's operating margins.
RELIANCE ON KEY PERSONNEL. The Company is highly dependent upon its
executive officers and key employees. The unexpected loss of the services of any
of these individuals, particularly Cloyce A. Talbott or A. Glenn Patterson, the
Chief Executive Officer and the President of the Company, respectively, could
have a detrimental effect on the Company. The Company has no employment
agreements with any of its executive officers. The Company maintains key man
insurance on the lives of Messrs. Talbott and Patterson in the amount of $3
million each.
RISKS OF OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND PRODUCTION. The
search for oil and natural gas often results in unprofitable efforts, not only
from dry holes, but also from wells which, though productive, do not produce oil
or natural gas in sufficient quantities to return a profit on the costs
incurred. No assurance can be given that any oil or natural gas reserves located
by the Company in the future will be commercially productive. In addition, the
cost of drilling, completing and operating wells is often uncertain, and
drilling may be delayed or cancelled as a result of many factors, including
unacceptably low oil and natural gas prices, oil and natural gas property title
problems, inclement weather conditions and financial instability of well
operators and working interest owners. Furthermore, the availability of a ready
market for the Company's oil and natural gas depends on numerous factors beyond
its control, including demand for and supply of oil and natural gas, general
economic conditions, proximity of natural gas reserves to pipelines, weather
conditions and government regulation.
COMPETITION. The Company encounters intense competition in its contract
drilling operations from other drilling contractors. The competitive environment
for contract drilling services involves such factors as drilling rates,
availability and condition of drilling rigs and equipment, reputation and
customer relations. The Company faces strong competition from major oil
companies, independent oil and natural gas companies and individual producers
and operators in acquiring oil and natural gas leases for exploration and
development. Many of the competitors in each of the Company's lines of business
have substantially greater financial and other resources than the Company.
OPERATING RISKS AND INSURANCE. Contract drilling and oil and natural gas
activities are subject to a number of risks and hazards which could cause
serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir damages. The occurrence of a significant
event, including pollution or environmental damage, could materially affect the
Company's operations and financial condition. Although the Company believes that
it is adequately insured against normal and foreseeable risks in its operations
in accordance with industry standards, such insurance may not be adequate to
protect the Company against liability from all consequences of well disasters,
extensive fire damage or damage to the environment. No assurance can be given
that the Company will be able to maintain adequate insurance in the future at
rates it considers reasonable or that any particular types of coverage will be
available. Furthermore, a portion of the Company's contract drilling is done on
a turnkey basis, which involves substantial economic risks.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. The Company's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells, including
laws and regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent years,
and
9
<PAGE> 11
may in certain circumstances impose strict liability, rendering a person liable
for environmental damage without regard to negligence or fault on the part of
such person. To date, the Company has not been required to expend significant
resources in order to comply with applicable environmental laws and regulations
nor has it incurred any fines or penalties for noncompliance. However,
compliance costs under existing legal requirements and under any new
requirements could become material, and the Company could incur liability in the
future for noncompliance. Additional matters subject to governmental regulation
include discharge permits for drilling operations, performance bonds, reports
concerning operations, spacing of wells, unitization and pooling of properties,
disposal of produced water and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. In addition, although the
Company performed visual inspections on three yards acquired by it during 1996,
the Company did not obtain Phase I environmental reports on any of the yards,
which reports, if obtained, may have revealed potential environmental
liabilities not otherwise apparent from the Company's visual inspection. The
Company typically does not have indemnifications from the respective sellers of
the yards for preclosing liabilities, including environmental liabilities.
Accordingly, any loss resulting from environmental liabilities from any of these
yards will be borne by the Company.
UNCERTAINTY OF OIL AND NATURAL GAS RESERVE ESTIMATES. Estimates of the
Company's proved developed reserves and future net revenues are based on
engineering reports prepared by an independent petroleum engineer based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. These estimates are based on several
assumptions that the Securities and Exchange Commission requires oil and natural
gas companies to use, including for example, constant oil and natural gas
prices. Such estimates are inherently imprecise indications of future net
revenues. Actual future production, revenues, taxes, production costs and
development costs may vary substantially from those assumed in the estimates.
Any significant variance could materially affect the estimates. In addition, the
Company's reserves might be subject to upward or downward adjustment based on
future production, results of future exploration and development, prevailing oil
and natural gas prices and other factors.
CONFLICTS OF INTEREST. Certain of the Company's directors and executive
officers and their respective affiliates have participated and may continue to
participate from time to time in oil and natural gas prospects and properties in
which the Company has an interest. Conflicts of interest may arise between such
persons and the Company as to the advisability of conducting drilling and
recompletion activities on these properties. Of the 266 wells operated by the
Company at September 30, 1996, the Company's directors, officers and/or their
respective affiliates were working interest owners in approximately 104 wells.
See "Management -- Related Party Transactions."
ANTI-TAKEOVER MEASURES. The Company, a Delaware corporation, is subject to
the General Corporation Law of the State of Delaware, including Section 203, an
anti-takeover law enacted in 1988. The Company has also enacted certain
anti-takeover measures. As a result of these provisions, potential acquirors of
the Company may find it more difficult or be discouraged from attempting to
effect an acquisition transaction with the Company, thereby possibly depriving
holders of the Company's securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the offering, the
Company will have 6,441,371 shares of Common Stock outstanding (6,700,421 shares
if the Underwriters' over-allotment option is exercised in full), 5,499,750
(5,758,800 if the Underwriters' over-allotment option is exercised in full) of
which will be freely tradeable without substantial restriction or the
requirement of future registration under the Securities Act of 1933, as amended
(the "Securities Act"). Of the remaining 941,621 shares, 691,621 shares will be
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act, and may be sold subject to the provisions of Rule 144 and
the contractual restrictions described below and 250,000 shares (all of which
are "restricted securities" under Rule 144) are held by a third party. These
250,000 shares are entitled to certain registration rights and also may be sold
subject to the provisions of Rule 144. In addition, the Company has reserved for
issuance 75,000 shares of Common Stock pursuant to the exercise of outstanding
warrants held by a third party which are entitled to certain registration
rights. The Company and the Selling Stockholders have agreed that they will not,
for a period of 120 days from the date of this
10
<PAGE> 12
Prospectus, and the executive officers and directors of the Company that are not
also Selling Stockholders have agreed that they will not, for a period of 120
days from the date of this Prospectus, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, pledge,
contract of sale, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock or other capital stock of the Company or any
securities convertible into, or exercisable or exchangeable for, any shares of
Common Stock or other capital stock of the Company without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
except that such agreement does not prevent the Company from granting additional
options under the Patterson Energy, Inc. 1993 Stock Incentive Plan (the "1993
Plan") or the Company's Non-Employee Directors' Stock Option Plan (the
"Non-Employee Director Plan"). Upon the expiration of these lockup agreements,
all 691,621 shares held by such executive officers and directors which are not
sold in this offering will become eligible for sale in the public market,
subject to the applicable volume and manner-of-sale limitations of Rule 144,
191,910 shares of Common Stock issuable upon exercise of outstanding warrants
and options that are vested will be eligible for sale and 7,000 shares of Common
Stock issuable upon exercise of options that are not vested will become eligible
for sale as such options become vested. In addition, a total of 105,000 shares
of Common Stock issuable upon exercise of outstanding options are eligible for
sale under a shelf registration statement. Sales of substantial amounts of
Common Stock in the public market could adversely affect the prevailing market
price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
SUPERIOR RIGHTS OF PREFERRED STOCK. The Company has a class of authorized
Preferred Stock. The Board of Directors, without stockholder approval, may issue
shares of the Preferred Stock with rights and preferences adverse to the voting
power or other rights of the holders of the Common Stock. No Preferred Stock has
been issued.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and documents incorporated by reference in this Prospectus
include certain statements that may be deemed to be "forward-looking statements"
within the meaning of Section 27A of the Securities Act 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
Prospectus that address activities, events or developments that the Company
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, repayment of debt, business
strategies and other plans and objectives of management of the Company for
future operations and activities, 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. Prospective investors are cautioned that any such statements are
not guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the foregoing matters.
11
<PAGE> 13
THE COMPANY
The Company is engaged in onshore contract drilling for oil and natural gas
and, to a lesser extent, in the development, exploration, acquisition and
production of oil and natural gas. The Company's operations are conducted in the
Permian Basin, the Austin Chalk Trend, South Texas and the Hardeman Basin,
primarily in Texas. The Company was organized as a Texas corporation in January
1978 and was reorganized as a Delaware corporation in October 1993. The Company
completed an initial public offering in December 1993. Since that time, the
Company has expanded its drilling rig fleet from 13 to 61 drilling rigs (52 of
which are currently operable) through a series of strategic acquisitions:
- In July 1994, nine operable drilling rigs, a yard in Victoria, Texas and
16 rig hauling trucks were acquired by the Company from Questor Drilling
Corp., a wholly owned subsidiary of Phibro Energy USA, Inc., for $6.4
million consisting of cash and Common Stock.
- In April 1995, an approximate 58% undivided interest in each of two
operable drilling rigs in which the Company owned the remaining interest
was acquired for a price of $434,000 in cash.
- In May 1995, three inoperable drilling rigs and related equipment were
acquired for $1.1 million consisting of cash and Common Stock. Two of
these drilling rigs became operable in May and September 1995 and one
became operable in May 1996.
- In May 1995, one operable drilling rig was purchased for a price of
$360,000 in cash.
- In July 1996, 13 operable drilling rigs, related equipment and a yard in
San Angelo, Texas, were acquired from Tucker in consideration for Common
Stock valued at $26.4 million.
- In October 1996, six drilling rigs, related equipment and inventory and a
yard were acquired from Sledge for a net purchase price of $8.9 million
in cash. Five drilling rigs were operable at the time of the acquisition
and the remaining drilling rig was placed in service in November 1996.
- In November and December 1996, 15 drilling rigs, related equipment and a
yard were acquired in two separate transactions for aggregate net
consideration of $4.2 million. Of these drilling rigs, six were operable
at the time of acquisition, two have become operable since that time and
seven are expected to become operable at various times over the next
12-month period. See "Business and Properties -- Recent Developments."
The Company's headquarters are located at 4510 Lamesa Highway, Snyder,
Texas 79549, and its telephone number at that address is (915) 573-1104. The
Company also has small offices in Austin, Houston and Midland, Texas and yard
facilities in Snyder, LaGrange, Victoria, Odessa, Midland, San Angelo and
Wichita Falls, Texas.
12
<PAGE> 14
USE OF PROCEEDS
Assuming an offering price of $ per share (the last reported sales
price of the Common Stock on the Nasdaq National Market on ,
1996), the net proceeds to be received by the Company from the sale of the
1,500,000 shares of Common Stock offered by the Company hereby are estimated to
be $ ($ if the Underwriters' over-allotment option is
exercised in full), after deducting underwriting discounts and commissions and
estimated expenses. The Company intends to use the net proceeds approximately as
follows: (i) $25.5 million to repay indebtedness as set forth in the table
below; (ii) $7.5 million for drilling rig modifications and upgrades; and (iii)
the remaining $ million for other general corporate purposes, including
possible drilling rig and equipment acquisitions. Pending use thereof, the
Company intends to invest the net proceeds in short-term, investment grade or
government interest-bearing securities.
The Company will not receive any of the proceeds from the sale of the
Common Stock being sold by the Selling Stockholders.
The following table sets forth certain information concerning the
indebtedness to be paid with the net proceeds of this offering:
<TABLE>
<CAPTION>
PRINCIPAL
OUTSTANDING
AT PRINCIPAL ANNUAL
NOVEMBER 30, TO BE INTEREST MATURITY
NAME OF LENDER 1996 REPAID(1) RATE DATE
-------------- ------------- --------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Norwest Bank, N.A.
("Norwest")................... $ 3,600(2) $ 3,600 Prime(3) June 1998
The CIT Group/Equipment One month
Financing, Inc. ("CIT")....... 21,899(4) 21,899 LIBOR(5) August 2002
plus 2.75%
------- -------
Totals................ $25,499 $25,499
======= =======
</TABLE>
- ---------------
(1) Does not include accrued interest and, in the case of the CIT loan, a
prepayment fee of approximately $200,000.
(2) Loan proceeds were used to refinance an existing credit facility with
Norwest in November 1996.
(3) Based on the prime rate announced from time to time by Chase Manhattan Bank,
N.A. (8.25% at November 30, 1996).
(4) Loan proceeds were used to refinance existing credit facilities with CIT and
U.S. Bancorp Leasing and Financial in September 1996, and the balance was
used to acquire drilling rigs and related equipment in October 1996.
(5) London Interbank Offered Rate (5.4375% at November 30, 1996).
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is included in the Nasdaq National Market under the symbol
"PTEN." The following table sets forth the high and low sale prices of the
Common Stock for the periods indicated as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995:
-----
First quarter...................................................... $ 7.75 $ 6.00
Second quarter..................................................... 10.25 7.00
Third quarter...................................................... 13.88 9.25
Fourth quarter..................................................... 14.63 10.50
1996:
-----
First quarter...................................................... $15.63 $11.25
Second quarter..................................................... 18.13 13.25
Third quarter...................................................... 20.25 15.00
Fourth quarter.....................................................
1997:
-----
First quarter (through January , 1997)........................... $ $
</TABLE>
On January , 1997, the reported last sales price of the Common Stock on
the Nasdaq National Market was $ . As of December 9, 1996, there were
approximately 255 holders of record of the Common Stock.
The Company has not declared or paid cash dividends on the Common Stock in
the past and does not expect to declare or pay any cash dividends on the Common
Stock in the foreseeable future. The terms of an existing bank credit facility
prohibit payment of dividends by the Company without the prior written consent
of the bank. This bank line will be repaid in full with proceeds of this
offering received by the Company.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the current maturities of notes payable and
capitalization of the Company at September 30, 1996, pro forma to give effect to
acquisition of six drilling rigs and related assets from Sledge in October 1996
and the acquisition of 15 drilling rigs and related assets in two separate
transactions during November and December 1996 and as adjusted to give effect to
the sale of the 1,500,000 shares of Common Stock by the Company and the
application of the estimated net proceeds therefrom (assuming a public offering
price of $ per share, the last reported sales price by the Nasdaq
National Market on ).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of notes payable(1)................ $ 4,040 $ 4,440 $
======= ======= ========
Notes payable, less current maturities(1)............. $11,615 $22,040 $
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued..................... -- -- --
Common Stock, $0.01 par value, 9,000,000 shares
authorized, 4,810,689 shares issued and
outstanding; 6,441,371 shares issued and
outstanding after the offering(2)................ 48 49
Additional paid-in capital.......................... 19,256 20,685
Retained earnings................................... 19,933 19,933 19,933
------- ------- --------
Total stockholders' equity....................... 39,237 40,667
------- ------- --------
Total capitalization............................. $50,852 $62,707 $
======= ======= ========
</TABLE>
- ---------------
(1) For information regarding the Company's indebtedness, see Notes 5 and 17 of
Notes to Consolidated Financial Statements.
(2) The number of outstanding shares on an as adjusted basis does not include
378,910 shares issuable upon exercise of outstanding options and warrants
held by management, non-employee directors and others, at a weighted average
exercise price of $9.51 per share.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company as of December 31,
1993, 1994 and 1995, and for each of the three years then ended, were derived
from the consolidated financial statements of the Company which have been
audited by Coopers & Lybrand L.L.P., independent accountants. This data and the
selected consolidated financial data presented below as of September 30, 1996,
and for each of the nine months ended September 30, 1995 and 1996, should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included elsewhere in this Prospectus. Such data for the nine
months ended September 30, 1995 and 1996 is unaudited, and, in the opinion of
management of the Company, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations and
financial position for, and as of the end of, such periods have been included.
The data presented as of December 31, 1991 and 1992 and for each of the two
years then ended have not been audited and were prepared by the Company using
those periods' stand alone audited financial statements of the Company and
Tucker. The Company's previously reported data for 1996 and for prior years have
been restated to reflect the Tucker merger under the pooling of interests method
of accounting. The results of operations for the nine months ended September 30,
1996 are not necessarily indicative of the results to be achieved for the entire
year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling............................................. $33,614 $34,417 $37,746 $54,823 $57,599 $42,656 $47,725
Oil and gas sales.................................... 3,038 3,289 3,914 3,594 5,400 3,831 5,940
Well operation fees.................................. 868 823 1,064 980 1,296 940 1,111
Other................................................ 122 59 169 133 149 134 280
------- ------- ------- ------- ------- ------- -------
Total.......................................... 37,642 38,588 42,893 59,530 64,444 47,561 55,056
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Direct drilling costs................................ 29,090 29,376 30,631 43,036 46,505 34,431 38,818
Lease operating and production....................... 1,085 1,362 1,207 1,141 1,509 1,071 1,468
Write-down due to impairment of long lived assets.... -- -- -- -- 159 -- 159
Exploration costs.................................... -- -- 317 234 369 227 343
Dry holes and abandonments........................... 533 438 396 1,279 791 373 612
Depreciation, depletion and amortization............. 4,976 4,338 4,655 4,912 7,523 5,286 7,754
General and administrative........................... 3,310 3,686 4,014 4,793 5,063 3,607 3,944
------- ------- ------- ------- ------- ------- -------
Total.......................................... 38,994 39,200 41,220 55,395 61,919 44,995 53,098
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................................ (1,352) (612) 1,673 4,135 2,525 2,566 1,958
------- ------- ------- ------- ------- ------- -------
Other income (expense):
Net gain on sale of assets........................... 818 765 138 611 374 336 533
Interest income...................................... 301 173 141 409 545 422 376
Interest expense..................................... (523) (416) (331) (366) (1,065) (762) (985)
Non-recurring acquisition costs...................... -- -- -- -- -- -- (2,268)
Other................................................ 294 73 118 25 35 (6) 97
------- ------- ------- ------- ------- ------- -------
Total.......................................... 890 595 66 679 (111) (10) (2,247)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
items................................................ (462) (17) 1,739 4,814 2,414 2,556 (289)
------- ------- ------- ------- ------- ------- -------
Income tax expense (benefit):
Current.............................................. 57 79 123 213 213 264 112
Deferred............................................. (8) -- -- (406) (1,000) (208) (2,531)
Charge in lieu of income taxes....................... 131 312 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total.......................................... 180 391 123 (193) (787) 56 (2,419)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary items............... (642) (408) 1,616 5,007 3,201 2,500 2,130
------- ------- ------- ------- ------- ------- -------
Extraordinary items:
Utilization of NOL................................... 131 361 -- -- -- -- --
Gain on extinguishment of debt....................... -- 97 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................................... $ (511) $ 50 $ 1,616 $ 5,007 $ 3,201 $ 2,500 $ 2,130
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common share:
Primary.............................................. $ (0.17) $ 0.02 $ 0.51 $ 1.24 $ 0.73 $ 0.59 $ 0.43
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... $ (0.17) $ 0.02 $ 0.51 $ 1.24 $ 0.71 $ 0.55 $ 0.43
======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares outstanding:
Primary.............................................. 3,080 3,073 3,176 4,030 4,379 4,261 4,950
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... 3,080 3,073 3,176 4,030 4,521 4,533 4,980
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............................ $ 5,685 $ 4,143 $ 6,121 $ 6,845 $ 9,344 $10,255 $ 9,450
Working capital...................................... 4,851 3,819 10,100 13,768 15,096 13,791 11,254
Total assets......................................... 27,786 27,877 35,525 49,509 62,991 62,213 68,498
Notes payable........................................ 4,708 4,374 2,459 6,886 13,816 12,963 15,655
Total stockholders' equity........................... 16,922 16,866 25,610 30,310 37,656 36,614 39,237
</TABLE>
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are generated from the sale of onshore contract
drilling services and, to a lesser extent, from its oil and natural gas
operations. As a leading provider of domestic land drilling services to major
oil companies and independent producers, the Company focuses its operations in
the Austin Chalk Trend and the Permian and Hardeman Basins, primarily in Texas.
These drilling services are provided primarily pursuant to standard daywork and
footage contracts. The Company's oil and natural gas activities accounted for
approximately 13% of the Company's revenues for the nine months ended September
30, 1996.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors that are
beyond the control of the Company. See "-- Volatility of Oil and Natural Gas
Prices." Operating margins are affected by (i) contract drilling rates, which
have recently begun to increase, (ii) operating costs, which are also
increasing, and (iii) drilling rig utilization, which was lower in the nine
months ended September 30, 1996 as a result of the Tucker merger in July 1996.
At November 30, 1996, however, rig utilization was in excess of 80%, as the 13
Tucker rigs were put into service.
In anticipation of rising drill pipe prices and to keep its drilling fleet
in good operating condition, the Company paid $5.7 million and $2.7 million in
capital expenditures for the purchase of drill pipe during the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
These capital expenditures have resulted in increased depreciation expense of
approximately $1.0 million for the nine months ended September 30, 1996. Despite
the adverse effect of the increased depreciation on earnings, the Company
believes that it has benefited from the recent procurements of drill pipe at
prices below current market prices.
During 1996, the Company expanded its drilling rig fleet by 24 operable and
10 inoperable drilling rigs through selective acquisitions, the most significant
of which was the Tucker merger in July 1996. Similar to the Company at the time
of the merger, Tucker was engaged in the sale of onshore contract drilling
services and, to a lesser extent, the exploration, development and production of
oil and natural gas. The Tucker merger was accounted for using the pooling of
interests method of accounting which, after conforming accounting methods
previously used by Tucker to those used by the Company, combines previously
reported results as though the combination had occurred at the beginning of the
periods being presented. Merger costs have been expensed during the nine months
ended September 30, 1996. The financial statements of the Company and Tucker for
1996 and prior years have been restated and adjusted for the Tucker merger. Due
to the restatement, these financial statements are not comparable to the
financial statements for the same periods previously presented by the Company.
The following description should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the nine months ended September 30, 1996, contract drilling revenues
were approximately $47.7 million as compared to $42.7 million for the same
period in 1995, an increase of 12%. Direct contract drilling costs for the nine
months ended September 30, 1996 and 1995 were approximately $38.8 million and
$34.4 million, respectively, representing approximately 81% of contract drilling
revenues. The increase in contract drilling revenues and direct contract
drilling costs was due primarily to the increased number of drilling rigs
included in the Company's operating drilling rig fleet. The Company placed one
rig into operation during May 1995 and two additional drilling rigs during the
latter part of the third quarter of 1995. These drilling rigs were operational
during the nine months ended September 30, 1996. An additional drilling rig was
added during May 1996, increasing the total number of operable drilling rigs to
39. Average rig utilization was 70% for the nine months ended September 30, 1996
and 1995. General and administrative expense for the contract drilling
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<PAGE> 19
segment was approximately $2.8 million for the nine months ended September 30,
1996 as compared to approximately $2.7 million for the same period in 1995.
Depreciation expense for the contract drilling segment was approximately $4.9
million for the nine months ended September 30, 1996, compared to $3.7 million
for the same period in 1995. Of the $1.2 million increase in depreciation
expense, approximately $1.0 million was attributable to the Company's purchases
of new drill pipe during the fourth quarter of 1995 and the nine months ended
September 30, 1996. These higher levels of depreciation expense will continue
for the foreseeable future. For the nine months ended September 30, 1996, income
from this segment was approximately $1.7 million as compared to approximately
$2.1 million for the same period in 1995, largely as a result of the increase in
depreciation.
Oil and natural gas revenue was approximately $5.9 million for the nine
months ended September 30, 1996, as compared to approximately $3.8 million for
the nine months ended September 30, 1995. The increase in revenue was
attributable to increases in both production volumes and prices. The Company
sold approximately 173,000 and 139,000 Bbls of oil and approximately 1,244,000
and 1,003,000 Mcf of natural gas for the nine months ended September 30, 1996
and 1995, respectively. The average price per Bbl was $20.03 for the nine months
ended September 30, 1996 as compared to $17.40 for the same period in 1995, and
the average price per Mcf of natural gas was $1.96 for the nine months ended
September 30, 1996 as compared to $1.41 for the same period in 1995. Lease
operating and production costs were $3.86 per BOE for the nine months ended
September 30, 1996 as compared to $3.50 per BOE for the same period in 1995.
Exploration costs increased by 51% to approximately $344,000 for the nine months
ended September 30, 1996 as a result of the staffing and associated costs of an
exploration and production office in Midland, Texas during June 1995.
Depreciation, depletion and amortization for the oil and natural gas segment was
approximately $2.8 million for the nine months ended September 30, 1996 as
compared to approximately $1.5 million for the same period in 1995. The increase
is due primarily to increased production of crude oil and natural gas as
discussed above. General and administrative expense for the oil and natural gas
segment was approximately $1.1 million for the first nine months of 1996 as
compared to $948,000 for the first nine months of 1995. For the nine months
ended September 30, 1996, income from the oil and natural gas segment was
approximately $885,000 as compared to $795,000 for the same period in 1995.
For the nine months ended September 30, 1996, interest expense was
approximately $985,000 as compared to $762,000 for the same period in 1995. This
increase was primarily attributable to an approximate 48% increase in the
average outstanding principal balance of the Company's notes payable as compared
to the same period in 1995. At September 30, 1996, the Company recognized a net
gain on the sale of certain fixed assets in approximately $533,000 as compared
to approximately $336,000 recognized a year earlier. This increase was primarily
attributable to the sale of six drilling rig generator sets and approximately
25,000 feet of used drill pipe. During the nine months ended September 30, 1996,
the Company incurred approximately $2.3 million of non-recurring acquisition
costs associated with the Tucker merger.
For the nine months ended September 30, 1996, the Company recorded net
income tax benefits of approximately $2.4 million as compared to net income tax
expense of approximately $56,000 for the same period in 1995. This significant
change resulted from an approximate $2.5 million deferred tax benefit generated
from the reduction of valuation allowances previously recorded against the
Company's deferred tax assets. The valuation allowance reduction was caused by
management's estimate that it was more likely than not that the Company's
deferred tax assets, which are primarily comprised of net operating loss
carryforwards, will be substantially realized.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
For the year ended December 31, 1995, contract drilling revenues were
approximately $57.6 million as compared to $54.8 million for the same period in
1994, an increase of 5%. Direct contract drilling costs for 1995 and 1994 were
approximately $46.5 million and $43.0 million, respectively, representing
approximately 81% of contract drilling revenues in 1995 as compared to 78% in
1994. Average rig utilization was 69% in 1995 as compared to 76% in 1994. The
increase in contract drilling revenues and direct contract drilling costs was
due primarily to the increased number of drilling rigs included in the Company's
operating drilling fleet. The decrease in gross profit margin in 1995 was due to
a decrease in rig utilization and certain contracts being
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<PAGE> 20
renegotiated from footage to daywork contracts. The daywork contracts resulted
in lower revenues and costs per day and lower risk and profitability for the
Company. General and administrative expense for the contract drilling segment
was approximately $3.5 million in 1995 as compared to approximately $3.4 million
in 1994. The increase in general and administrative expense was due primarily to
the increase in lease payments of the aircraft used by the Company, starting in
January 1995, from $4,500 to $9,200 per month, the increase in fuel costs due to
increased usage of the plane during 1995 and increased compensation payments
made to one of the Company's investor relations consultants. Depreciation
expense for the contract drilling segment was approximately $5.0 million in 1995
as compared to $3.5 million in 1994. The increase in depreciation expense was
due primarily to the Company's significant purchases of new drill pipe during
the fourth quarter of 1995, the Questor acquisition in 1994 and the addition of
three drilling rigs in 1995. In 1995, income from this segment was approximately
$3.7 million as compared to approximately $6.0 million in 1994.
Oil and natural gas revenue was approximately $5.4 million in 1995 as
compared to approximately $3.6 million for 1994. The volume of crude oil and
natural gas sold increased by 54% and 58%, respectively, for 1995 as compared to
1994. The Company sold approximately 191,000 Bbls of oil in 1995 as compared to
124,000 Bbls in 1994 and approximately 1,362,000 Mcf of natural gas in 1995 as
compared to 860,000 Mcf of natural gas for 1994. The average price per Bbl was
$17.48 for 1995 as compared to $16.40 for 1994, and the average price per Mcf of
natural gas was $1.51 for 1995 as compared to $1.68 for 1994. Lease operating
and production costs were $3.61 per BOE in 1995 as compared to $4.27 per BOE in
1994. Depreciation, depletion and amortization for the oil and natural gas
segment was approximately $2.4 million in 1995 as compared to approximately $1.3
million in 1994. The increase was due primarily to increased production of oil
and natural gas as discussed above. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million in 1995 as compared
to $1.2 million in 1994. In 1995, the loss from the oil and natural gas segment
was approximately $51,000 as compared to $489,000 in 1994.
In 1995, interest expense was approximately $1.1 million as compared to
$366,000 in 1994. This increase was primarily attributable to a substantial
increase in the outstanding principal balance of the Company's notes payable as
compared to 1994.
In 1995, the Company recorded net income tax benefits of approximately
$787,000 as compared to approximately $193,000 in 1994. The increase was due
primarily from a deferred tax benefit of approximately $1.0 million which was
the result of revisions in management's estimates with regard to the Company's
deferred tax assets, which are primarily comprised of net operating loss
carryforwards. The deferred tax benefit in 1995 exceeded that of 1994 by
approximately $594,000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND 1993
For the year ended December 31, 1994, contract drilling revenues were
approximately $54.8 million as compared to $37.7 million for the same period in
1993, an increase of 45%. Direct contract drilling costs for 1994 and 1993 were
approximately $43.0 million and $30.6 million, respectively, representing
approximately 78% of contract drilling revenues in 1994 as compared to 81% in
1993. Average rig utilization was 76% for 1994 as compared to 75% in 1993. The
increase in contract drilling revenues and direct contract drilling costs was
due primarily to the increase in the average number of drilling rigs included in
the Company's operable drilling fleet from 25 to 31. The increase in gross
profit margin in 1994 was due to an increase in rig utilization and negotiation
of certain contracts on a footage basis that provided higher profit margins than
generally experienced by the Company. General and administrative expense for the
contract drilling segment was approximately $3.4 million for 1994 as compared to
approximately $3.1 million for 1993. The increase in general and administrative
expense was due primarily to an increase in general and administrative salaries
of approximately $160,000, an allowance for doubtful accounts of $90,000,
accrued contributions to the employee 401(k) profit sharing plan of $75,000 and
an increase in professional fees and other costs related primarily to becoming a
public company of approximately $365,000. General and administrative expenses
for 1993 included an allowance of 100% of a doubtful receivable in the
approximate amount of $356,000. In 1994, income from this segment was
approximately $6.0 million as compared to approximately $2.6 million for 1993.
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<PAGE> 21
Oil and natural gas revenue was approximately $3.6 million for 1994 as
compared to approximately $3.9 million for 1993. Included in oil and natural gas
revenues in 1994 was a nonrecurring recognition of approximately $115,000 in oil
and natural gas revenues from the settlement of litigation. The volume of crude
oil sold decreased by 15% while the volume of natural gas sold increased by 21%
for 1994 as compared to 1993. Oil volumes decreased due primarily to the sale of
the Company's interest in a producing oil and gas field. The Company sold
approximately 124,000 Bbls in 1994 as compared to 146,000 Bbls in 1993 and
approximately 860,000 Mcf of natural gas in 1994 as compared to 710,000 Mcf of
natural gas for 1993. The average price per Bbl was $16.40 for 1994 as compared
to $17.05 for 1993, and the average price per Mcf of natural gas was $1.68 for
1994 as compared to $2.02 for 1993. Lease operating and production costs were
$4.27 per BOE in 1994 as compared to $4.57 per BOE for 1993. General and
administrative expense for the oil and natural gas segment was approximately
$1.2 million in 1994 as compared to $1.1 million in 1993. Dry holes and
abandonments were $1.3 million in 1994 as compared to $396,000 in 1993. The
increase was due primarily to the drilling of five dry holes ($646,000) and the
write off of certain oil and natural gas leases that expired by their terms
($195,000). For 1994, the loss from the oil and natural gas segment was
approximately $489,000 as compared to income of $45,000 for 1993.
In 1994, interest expense was approximately $366,000 as compared to
$330,000 in 1993. This increase is primarily attributable to an increase in the
interest rates and an increase in the outstanding principal balance of the
Company's notes payable as compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, the Company generated net
cash from operations of approximately $7.7 million, a decrease of approximately
$1.2 million or 13% for the same period in 1995. The decrease was primarily
attributable to non-recurring acquisition costs of approximately $2.3 million
incurred during the nine months ended September 30, 1996 in connection with the
Tucker acquisition. The net increase of approximately $1.0 million before
nonrecurring acquisition costs was primarily attributable to the introduction of
five additional drilling rigs into the Company's contract drilling operations
during the period from May 1995 to May 1996, as well as increases in both
production volumes and prices in the Company's oil and gas segment.
During 1995, the Company's net cash from operations increased by 16% to
$9.5 million due to the inclusion of a greater number of drilling rigs in the
Company's operating fleet and increases in oil and gas volumes and oil prices.
Partly offsetting these gains was the reduction of revenues as a result of the
conversion of certain footage contracts to daywork contracts.
The Company's capital expenditures during 1993, 1994, 1995 and the nine
months ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
------ ------- ------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Contract drilling:
Acquisitions........................... $ 470 $ 4,500 $ 5,256 $ 661
Modifications, upgrades and drill pipe
purchases........................... 2,909 4,149 9,543 5,315
Oil and gas.............................. 1,884 2,968 5,107 4,578
------ ------- ------- -------
$5,263 $11,617 $19,906 $10,554
====== ======= ======= =======
</TABLE>
Beginning in the third quarter of 1995, the Company accelerated its drill
pipe replacement program in response to the 25% increase in drill pipe prices
since April 1994. During 1995 and the first nine months of 1996, the Company
spent approximately $8.4 million for drill pipe, representing 42% of total
capital expenditures for contract drilling during that period.
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<PAGE> 22
During the nine months ended September 30, 1996, the Company's oil and
natural gas segment incurred capital expenditures of approximately $4.6 million
relating primarily to its activities in the Austin Chalk Trend, South Texas and
in the Permian Basin. The Company has budgeted approximately $5.0 million in
capital expenditures for 1997, consisting of approximately $2.0 million for the
development of its properties in the Austin Chalk Trend, $500,000 in South Texas
and $2.5 million in the Permian Basin.
Through several acquisitions, the Company has expanded its operable
drilling rig fleet, adding 48 drilling rigs (39 currently operable) in three
years, and has also enhanced its ability to upgrade and maintain its fleet using
the additional parts and equipment acquired in these transactions. In 1994, the
Company acquired certain assets of Questor Drilling Corp. for $6.4 million,
including $4.5 million in cash and 250,000 shares of the Company's Common Stock.
These assets included nine drilling rigs. During October 1996, the Company
acquired Sledge for a net purchase price of $8.9 million. Included with the six
drilling rigs acquired in this transaction was an inventory of drilling
equipment valued by the Company at approximately $4.4 million. The Company
acquired 15 (six operable) additional drilling rigs and other related assets in
two separate transactions during the last two months of 1996 for a total
purchase price of approximately $4.2 million, consisting of approximately $2.4
million in cash, a $400,000 promissory note and 52,000 shares of the Company's
Common Stock. The Company has budgeted approximately $7.5 million to modify and
upgrade these drilling rigs.
During September 1996, the Company entered into a credit facility with CIT
under which the Company has borrowed $22 million. Collateralized by the
Company's drilling rigs, the loan is a revolving loan until August 1997, at
which time it will be converted into a 60-month term loan. The proceeds from the
loan were used to repay loans of approximately $3.8 million and $7.7 million to
U.S. Bancorp Leasing and Financing, Inc. and CIT, respectively, and to fund the
cash portion of the purchase price in the Sledge acquisition. When the CIT and
Norwest loans are repaid with net proceeds from this offering, the Company will
not have an available credit facility. The Company believes that it will be able
to obtain a new credit facility on acceptable terms when necessary, although
there can be no assurance that such credit will be available.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations and the net proceeds
from the sale of the Common Stock offered hereby, should be sufficient to meet
the Company's immediate capital needs. From time to time, the Company reviews
acquisition opportunities relating to its business segments. While the Company
has no definitive agreements to acquire additional assets, suitable
opportunities may arise in the future. The timing, size or success of any
acquisition and the associated capital commitments are unpredictable. Should
further opportunities for growth requiring additional capital arise, the Company
believes it would be able to satisfy these needs through a combination of
working capital, cash generated from operations and either debt or equity
financing. However, there can be no assurance that such capital will be
available.
INCOME TAXES
At December 31, 1995, the Company had tax net operating loss ("NOL")
carryforwards of approximately $8.0 million ($5.5 million for Patterson and $2.5
million for Tucker). These NOL carryforwards expire at various dates from 1998
through 2008, subject to certain limitations. Prior to August 3, 1995, the
Company realized substantial federal income tax savings due to the NOL
carryforwards. The utilization of these NOL carryforwards prior to that date
effectively reduced the current federal income tax rate from approximately 34%
to approximately 2.5%. Due to a change of over 50% in the stock ownership of the
Company during the three-year period ended August 3, 1995 (primarily from the
Company's initial public offering in 1993 and the exercise of the Company's
redeemable warrants in 1995), the NOL carryforwards became subject to an annual
limitation. The amount of the limitation on the $5.5 million NOL will be equal
to approximately $1.8 million and the amount of the limitation on the $2.5
million NOL will be approximately $1.5 million. This limitation on the use of
the Company's NOL carryforwards could increase the federal income tax liability
of the Company and thereby affect the Company's net income.
During 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes." The Company recognized
the benefit of deferred income taxes of
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<PAGE> 23
approximately $407,000 during 1994, which increased to approximately $1.4
million during 1995, and further increased to approximately $3.1 million in
1996. The benefit of deferred income taxes during each of these periods
represented management's estimate of future benefits to be received by the
Company primarily from its NOL carryforwards. SFAS 109 required a change from
the deferred method under Accounting Principles Board Opinion 11, to the asset
and liability method of accounting for income taxes. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. As a result
of the Company's recognizing the benefit of its deferred income taxes, in the
future, as these benefits are utilized, the Company will incur deferred income
tax expense in a like amount. This deferred income tax expense will
significantly increase the income tax expense of the Company and adversely
affect the Company's net income.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
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<PAGE> 24
BUSINESS AND PROPERTIES
OVERVIEW
The Company is one of the leading providers of domestic land drilling
services to major and independent oil and natural gas companies. Formed in 1978,
the Company focuses its operations in the Permian Basin, the Austin Chalk Trend
and the Hardeman Basin, primarily in Texas. With a fleet of 61 drilling rigs, 52
of which are currently operable, the Company ranked third in 1995 in both land
footage and horizontal wells drilled in the U.S. (according to Land Rig
Newsletter). The Company is also engaged in the development, exploration,
acquisition and production of oil and natural gas.
The Company 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. Additionally, the Company has the in-house capability to design,
manufacture, repair and modify its drilling rigs. Of the Company's drilling
rigs, 46 are capable of drilling to depths greater than 10,000 feet, including
five that are capable of drilling to depths greater than 15,000 feet. During the
nine months ended September 30, 1996, the Company drilled 314 wells totaling 2.6
million feet for 92 different customers. The Company believes that it has one of
the highest utilization rates in the U.S. land drilling industry, with an
average utilization rate in excess of 80% during the fourth quarter of 1996.
The Company's oil and natural gas activities are designed to complement its
land drilling operations. These activities are focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 13% of the Company's revenues for
the nine months ended September 30, 1996. As of September 30, 1996, the
Company's proved developed reserves were 1,919 MBOE and had a SEC PV-10 Value of
$12.6 million.
Over the past five years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1991, the Company has
acquired 49 drilling rigs, 40 of which are presently operable. From 1991 (prior
to giving effect to the Tucker merger) to 1995, the Company's revenues increased
from $21.9 million to $64.4 million, and its EBITDA increased from $2.7 million
to $11.2 million.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
From 1982 until recently, the U.S. land drilling industry has been
characterized by an over supply of drilling equipment as demand for land
drilling services decreased. During the past 14 years, the available land
drilling rig fleet declined from 5,139 drilling rigs in 1982 to 1,425 drilling
rigs in 1996. Industry profitability also suffered, and in many cases,
insufficient cash flow was generated to support proper drilling rig maintenance.
To maintain operation of drilling equipment in that environment, drilling
contractors frequently removed drill pipe, parts and components from less
desirable drilling rigs. The available domestic drilling fleet has been further
reduced through the mobilization of drilling equipment to international markets.
Many drilling contractors have used up most of their internal inventories
of drilling rig components and drill pipe and have begun to experience rising
costs for the components necessary to maintain their drilling rigs in working
condition. These increased capital costs have strained the economic resources of
many small land drilling operators, resulting in an environment that encourages
industry consolidation. These factors have led to a reduction in the number of
domestic drilling contractors from 388 in 1993 to 289 in 1996 (according to the
annual Reed Tool census). In addition, Land Rig Newsletter reports that
approximately one-third of the land footage drilled in the U.S. during 1995 was
drilled by only 10 companies, down from 25 in 1993.
During the last two years, however, demand for domestic onshore drilling
services has increased as a result of stronger oil and natural gas prices and
technological advances (such as 3-D seismic, new drilling techniques and
improved completion methods) that have reduced exploration, development and
production costs. As a consequence, the Company has recently begun to realize
modest price increases for the first time in many years.
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<PAGE> 25
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in
good operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize its utilization rates and pricing.
GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities exist to further expand its drilling rig fleet. In
evaluating potential acquisitions, the Company seeks to identify drilling rigs
and related equipment that complement the Company's existing drilling rig fleet
and enable it to expand its market share in its core geographic operating areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the highest ratios of EBITDA to revenues in the U.S.
land drilling industry during the first nine months of 1996. The Company has
produced these results from the combination of providing premium contract
drilling services and operating under an efficient cost structure. In addition,
the Company has achieved cost reductions and efficiencies through acquisition
related synergies. The Company also uses its fleet of 50 trucks and 64 trailers
to rig down, transport and rig up its drilling rigs, which increases efficiency
by reducing the time and costs associated with these ancillary operations.
COMPLEMENTARY OIL AND NATURAL GAS OPERATIONS. The Company believes that
its oil and natural gas operations provide it with the additional financial
flexibility to generate cash flow during downturns in the land drilling market.
The Company's ability to participate in oil and natural gas wells also generates
opportunities to serve as the land drilling contractor for other operators or on
its own behalf.
RECENT DEVELOPMENTS
During July 1996, the Company acquired Tucker for Common Stock valued at
$26.4 million. A total of 1,577,514 shares of Common Stock was issued to the
stockholders of Tucker pursuant to the merger, and an additional 74,592 shares
of Common Stock were reserved for issuance upon exercise of then outstanding
Tucker stock options. Tucker was engaged in onshore contract drilling in the
Permian and Hardeman Basins and, to a lesser extent, in the exploration,
development and production of oil and natural gas, primarily in the Permian
Basin. At the time of the merger, Tucker owned 13 drilling rigs. While all of
the drilling rigs were operable, their utilization rate was approximately 50%.
The utilization rate for these drilling rigs is now approximately 80%.
During October 1996, the Company purchased six drilling rigs and related
assets through the acquisition of Sledge. The net purchase price for Sledge was
$8.9 million which, in addition to the drilling rigs, included an inventory of
drilling equipment valued by the Company at approximately $4.4 million. Sledge's
contract drilling operations were conducted in the Permian Basin. Five of the
six drilling rigs were operable at the time of the transaction and the sixth
became operable in November. Sledge's utilization rates were comparable to the
Company's utilization rates.
During November and December 1996, in two separate transactions, the
Company acquired 15 drilling rigs and related assets. The consideration paid for
these assets was approximately $4.2 million, consisting of $2.4 million cash, a
$400,000 promissory note and 52,000 shares of the Company's Common Stock valued
at approximately $1.4 million. Six of the drilling rigs were operable at the
time of the transactions, but were underutilized. Two additional drilling rigs
are expected to become operable by the end of 1996, and the seven
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<PAGE> 26
remaining drilling rigs are expected to become operable during 1997. The Company
has budgeted approximately $7.5 million to modify and upgrade the drilling rigs
acquired in these two transactions.
During December 1996, the Company entered into an agreement to sell, for
approximately $2.4 million, certain producing oil and natural gas properties
acquired in the Tucker merger. As of September 30, 1996, these properties had a
SEC PV-10 Value of approximately $1.7 million.
CONTRACT DRILLING OPERATIONS
General. The Company markets its contract drilling services to major oil
companies and independent oil and natural gas producers. The Company owns 61
drilling rigs, 52 of which are currently operable. Fourteen of the operable
drilling rigs are based in the Austin Chalk Trend and South Texas, 33 are based
in the Permian Basin and five are based in the Hardeman Basin. The drilling rigs
have rated maximum depth capabilities ranging from 9,000 feet to 22,000 feet.
The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling. Wells drilled with Company drilling rigs in the Permian and
Hardeman Basins are primarily vertical wells. Both vertical wells and horizontal
wells are drilled with Company drilling rigs in the Austin Chalk Trend.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant importance to
prospective customers. The Company has and will continue to strive to maintain
its drilling fleet in good working condition. In addition to normal repair and
maintenance expenses, the Company spends significant funds each year on an
ongoing program of modifying and upgrading its drilling rigs. The Company also
strives to employ experienced and dedicated drilling supervisors for its various
drilling rigs in the field. The Company intends to continue its ongoing rig
maintenance program and to continue to retain high quality, experienced drilling
supervisors in order to build upon its reputation in the market place. In
addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
Drilling Contracts. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
25
<PAGE> 27
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the Company generally does not incur any costs
due to "inhole" losses (such as time delays for various reasons, including stuck
drill strings and blow-outs).
Footage contracts usually require the Company to bear some of the drilling
costs in addition to providing the drilling rig. Under a footage contract, the
Company would normally determine the manner of drilling and type of equipment to
be used, subject to certain customer specifications, and also would bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems. Compensation is based on a
rate-per-foot-drilled basis at completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling operation revenues attributable
to daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -------------
TYPE OF REVENUES 1993 1994 1995 1995 1996
---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Daywork............................................. 27% 32% 51% 57% 54%
Footage............................................. 66 65 45 37 37
Turnkey............................................. 7 3 4 6 9
</TABLE>
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have been in short supply from
time to time. As favorable buying opportunities arise, the Company stockpiles
bits and other drilling rig parts. Currently there is a substantial shortage of
drill pipe in the contract drilling industry in the United States. This shortage
has caused the price of drill pipe to increase significantly over the past 30
months. In addition, new drill pipe must be placed on order at least 150 to 180
days in advance of expected use. See "Risk Factors -- Shortage of Drill Pipe in
the Contract Drilling Industry" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" for information
concerning the impact of this shortage on the Company's capital expenditures and
operations due to higher levels of depreciation.
The Company's ability to drill wells for which it has contracts may be
delayed by inclement weather. Sustained periods of inclement weather may have a
material adverse effect on the Company's revenues and cash flows.
26
<PAGE> 28
Contract Drilling Activity. The following table sets forth certain
information regarding the Company's contract drilling activity for each of the
years in the three-year period ended December 31, 1995, and for both nine-month
periods ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of wells drilled......................... 333 460 395 327 314
Average rigs available for service.............. 25 31 36 35 39
Average rig utilization rate.................... 75% 76% 69% 70% 70%
</TABLE>
The Company has substantial experience drilling horizontal wells in the
Austin Chalk Trend. During the three-year period ended December 31, 1995, the
Company drilled a total of 139 horizontal wells as follows: 31 in 1993, 54 in
1994, 54 in 1995 and 36 in the nine months ended September 30, 1996.
Customers. For the year ended December 31, 1995, the Company drilled wells
for 108 nonaffiliated customers. This compares with 99 nonaffiliated customers
for the year ended December 31, 1994. No customer for contract drilling
accounted for 10% or more of the Company's consolidated revenues in the fiscal
year ended December 31, 1995. The Company does not believe that the loss of any
one customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included Snyder Oil
Corporation, Chevron U.S.A., Union Pacific Resources, Co., IP Petroleum Company,
Inc., Mobil Exploration & Producing U.S., Inc., Swift Energy Company, Louis
Dreyfus Natural Gas Company, Mitchell Energy Corporation, Burlington Resources
Oil & Gas Company, Enron Oil & Gas Company and Union Oil Company of California.
As of September 30, 1996, the Company was drilling a total of 30 wells, all
of which were for nonaffiliated customers. Fifteen of these wells were located
in the Permian Basin, two were located in the Hardeman Basin and 13 were located
in South and Southeast Texas, primarily in the Austin Chalk Trend.
Drilling Rigs and Related Equipment. The following table provides certain
information concerning the drilling rigs owned by the Company as of the date of
this Prospectus:
<TABLE>
<CAPTION>
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
------------------ ---------- ---------------
<S> <C> <C>
7,000 to 10,000.............................................. 6 --
10,000 to 15,000.............................................. 40(1) 7
15,000 to 22,000.............................................. 4(2) 4(3)
-- --
Totals...................................................... 50 11
== ==
</TABLE>
--------------------
(1) Includes six inoperable rigs.
(2) Includes one inoperable rig.
(3) Includes two inoperable rigs.
The Company owns 50 trucks and 64 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs. The Company is not
dependent upon third parties for these ancillary services, which contributes to
increased operating efficiencies and reduced expenses.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities in Snyder, LaGrange, Victoria, San
Angelo and Odessa, Texas. The Company believes that its operable drilling rigs
and related equipment are in good operating condition. In addition to normal
repair and maintenance expenses, the Company historically has spent significant
funds for its ongoing program of modifying and upgrading its equipment.
27
<PAGE> 29
OIL AND NATURAL GAS OPERATIONS
Overview. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities are primarily concentrated in three operating areas
of Texas: (i) the Austin Chalk Trend, (ii) the Permian Basin and (iii) South
Texas. The Company has budgeted approximately $5.0 million in capital
expenditures for development of these three areas during 1997.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. The oil and
natural gas operations complement the Company's land drilling operations by
providing supplemental cash flow during downturns in the land drilling market.
During the downturn in the land drilling market beginning in 1982, the Company's
oil and natural gas operations provided supplemental cash flow through
production and property sales. In addition, the oil and natural gas operations
generate opportunities for the Company to participate in wells for which it
serves as the land drilling contractor. At September 30, 1996, the Company was
the operator of 266 wells, of which it was the drilling contractor for 51 wells.
The Company has a significant concentration of proved developed reserves in
the fractured carbonates of the Austin Chalk Trend, which is currently one of
the most active oil and natural gas areas in the U.S. The primary producing
intervals in the Austin Chalk Trend are the Austin Chalk, Buda and Georgetown
formations. The Company's activities in the Austin Chalk Trend encompass Brazos,
Fayette, Grimes and Robertson Counties, Texas. Since 1991, the Company has
drilled 20 horizontal wells in the Austin Chalk Trend, 19 of which are still
producing, including four in 1996. The Company believes that these results are
attributable to its ability to identify hydrocarbon bearing fractures, relying
on its expertise in seismic data analysis, electric log analysis, and its
ability to drill and operate horizontal wells. In addition, the Company has
acquired approximately 60,000 gross acres to provide flexibility in designing
its horizontal drilling program. The Company currently plans to drill an
additional 10 horizontal development wells in the fractured carbonates of the
Austin Chalk Trend in 1997 and has budgeted approximately $2.0 million. The
Company's average working interest in the acreage and horizontal wells varies
from approximately 15% to 25%.
In the Permian Basin, the Company's reserves are concentrated in Borden,
Dickens, Garza, Howard and Nolan Counties, Texas. During 1996, the Company
increased its ownership in the North Nena Lucia Unit in Nolan County from
approximately 18% to 40%. This unit is a waterflood project that covers 6,500
acres and is currently producing approximately 200 Bbls (gross) of oil per day
and 1.1 MMcf (gross) of natural gas per day. The Company is the operator of the
unit and plans to conduct a 3-D seismic survey across the unit beginning in the
first quarter of 1997 at a cost to the Company of approximately $200,000.
Depending on the results of the 3-D seismic survey, the Company anticipates
participating in the drilling of the unit on 20 acre spacing. During the last
half of 1995 and 1996, the Company completed three wells in the Happy Sprayberry
area that are producing the maximum rate allowable by the State of Texas (92
Bbls (gross) of oil per day). The Company completed an 11 square mile 3-D
seismic survey over its Happy Sprayberry area in 1996. The results of the
interpretation of the seismic data have been completed, and the Company plans to
drill a development well in the first quarter of 1997. Depending on the results
of this well, the Company will consider participating in the drilling of an
additional three to five wells in the Happy Sprayberry area during 1997. The
Company's average working interest in the Happy Sprayberry area is approximately
23%. In the Permian Basin, the Company has budgeted approximately $2.3 million
for capital expenditures for 1997.
In 1995 and 1996, the Company acquired three 3-D seismic surveys covering
approximately 30 square miles in Jackson, Wharton and Victoria Counties of South
Texas. The primary production objectives for these surveys are the Miocene,
Frio, Yegua and Wilcox formations. The Company's acreage option position in
these areas covers approximately 21,000 gross acres. During 1996, the Company
participated in four Miocene, five Frio and one Yegua wells with an average
working interest to the Company of approximately 15% to 17%. Of those 10 wells,
eight wells were completed and seven are currently producing. The Company
currently plans to participate in 10 wells during the first half of 1997 in the
Miocene, Frio or Yegua formations and has budgeted approximately $500,000. The
Company participated in one Wilcox well during 1996 which is currently being
completed.
28
<PAGE> 30
Oil and Natural Gas Reserves. The Company engaged M. Brian Wallace, P.E.,
Dallas, Texas, an independent petroleum engineer, to estimate the Company's
proved developed reserves, projected future production and estimated future net
revenues from production of proved developed reserves on its existing properties
as of December 31, 1993, 1994 and 1995 and September 30, 1996. Mr. Wallace's
estimates were based upon a review of production histories and other geologic,
economic, ownership and engineering data provided by the Company. In determining
the estimates of the reserve quantities that are economically recoverable, Mr.
Wallace used oil and gas prices and estimated average development and production
costs provided by the Company.
The following table sets forth information as of the end of each of the
years in the three year period ended December 31, 1995 and as of September 30,
1996 derived from the reserve reports of Mr. Wallace. The SEC PV-10 Values shown
in the table are not intended to represent the current market value of the
estimated oil and natural gas reserves owned by the Company. For further
information concerning the present value of estimated future net revenue from
these proved developed reserves, see Note 14 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls)........................... 346,773 600,069 756,942 1,004,472
Gas (Mcf)............................ 2,522,614 3,769,248 5,269,924 5,487,179
Total (BOE).......................... 767,209 1,228,277 1,635,263 1,919,002
Estimated future net revenue before
income taxes (in thousands)....... $ 5,728 $ 8,627 $ 13,813 $ 18,118
Present value of estimated future net
revenues before income taxes,
discounted at 10% (in
thousands)........................ $ 4,461 $ 6,433 $ 10,295 $ 12,615
</TABLE>
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise. In
addition, the reserve data may be subject to upward or downward revisions
depending upon, among other factors, production history and prevailing oil and
gas prices. Oil and gas prices have fluctuated widely in recent years. There is
no assurance that prices will be higher or lower than prices used in estimating
the Company's reserves. See "Risk Factors -- Volatility of Oil and Natural Gas
Prices and -- Uncertainty of Oil and Natural Gas Reserve Estimates."
Drilling Activities. The following tables set forth the results of the
Company's participation in the drilling of development and exploratory wells
during the three-year period ended December 31, 1995 and during the nine-month
period ended September 30, 1996:
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
---------------------------------- --------------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
YEAR ENDED --------------- -------------- ------------- --------------
DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
------------ ----- ----- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993.................... 12 2.50 4 2.10 1 .03 3 .43
1994.................... 23 2.88 6 .87 2 .45 12 1.64
1995.................... 43 7.12 15 2.68 2 .24 4 .73
-- -- - --
----- ---- --- ----
Total......... 78 12.50 25 5.65 5 .72 19 2.80
== ===== == ==== = === == ====
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
--------------------------------- --------------------------------
NINE MONTHS PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
ENDED -------------- -------------- ------------- --------------
SEPTEMBER 30, GROSS NET GROSS NET GROSS NET GROSS NET
------------- ----- ---- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996..................... 19 2.92 13 3.08 1 .16 5 .80
== ==== == ==== = === = ===
</TABLE>
29
<PAGE> 31
Production. The Company's wells in the Austin Chalk Trend and South Texas
produce primarily natural gas and in the Permian Basin produce primarily oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1993 1994 1995 1996
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Average net daily production:
Oil (Bbls)................................ 399 340 524 630
Gas (Mcf)................................. 1,946 2,356 3,731 4,539
Total (BOE)............................... 723 733 1,146 1,387
Average sales price per unit:
Oil (Bbls)................................ $ 17.05 $ 16.40 $ 17.48 $ 20.03
Gas (Mcf)................................. 2.02 1.68 1.51 1.96
Average production (lifting) costs per
BOE....................................... $ 4.57 $ 4.27 $ 3.61 $ 3.86
</TABLE>
Productive Wells. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
September 30, 1996. One or more completions in the same well bore are counted as
one well.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
----- ------
<S> <C> <C>
Oil.......................................... 296 78.99
Gas.......................................... 65 13.55
--- -----
Total.............................. 361 92.54
=== =====
</TABLE>
Developed and Undeveloped Acreage. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of September 30, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------- ------------------
LOCATION GROSS NET GROSS NET
-------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Austin Chalk Trend and South Texas............... 8,546 1,389 22,614 5,796
Permian Basin.................................... 5,360 959 23,313 6,598
------ ----- ------ -----
Total.................................. 13,906 2,348 45,927 12,394
====== ===== ====== =====
</TABLE>
Marketing of Crude Oil and Natural Gas. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman of the Board and Chief
Executive Officer, is a first purchaser of most of the oil produced from
Company-operated leases. See "Management -- Related Party Transactions."
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1995, or for the
nine months ended September 30, 1996.
30
<PAGE> 32
COMPETITION
Contract Drilling Operations. Demand for drilling rigs and utilization has
improved from previous years. However, the contract drilling industry remains
highly competitive. Price is generally the most important competitive factor in
the drilling industry. Other competitive factors include the availability of
drilling equipment and experienced personnel at or near the time and place
required by customers, the reputation of the drilling contractor in the drilling
industry and its relationship with existing customers. The Company believes that
it competes favorably with respect to all of these factors. Competition is
usually on a regional basis, although drilling rigs are mobile and can be moved
from one region to another in response to increased demand. An oversupply of
drilling rigs in any region may result. Demand for land drilling equipment is
also dependent on the exploration and development programs of oil and natural
gas companies, which are in turn influenced primarily by the financial condition
of such companies, by general economic conditions, by prices of oil and natural
gas and, from time to time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of the Company, some of which have substantially greater resources and longer
operating histories than the Company. Also, in recent years, many drilling
companies have consolidated or merged with other companies as a result of the
downturn in the domestic contract drilling industry. Although this consolidation
has decreased the total number of competitors, management of the Company
believes that competition for drilling contracts will continue to be intense for
the foreseeable future.
Oil and Natural Gas Operations. There is substantial competition for the
acquisition of oil and natural gas leases suitable for exploration and for the
hiring of experienced personnel. The Company's competitors in oil and natural
gas exploration, development and production include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies,
drilling and production purchase programs and individual producers and
operators. The ability of the Company to increase its holdings of oil and
natural gas reserves in the future is directly dependent upon the Company's
ability to select, acquire and develop suitable prospects in competition with
these companies. Many competitors have financial resources, staffs, facilities
and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated with compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material, and the Company could incur liability
for noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental hazards which would
materially affect its operations, but it has not initiated environmental due
diligence associated with its recent acquisitions.
The contract drilling industry is dependent on demand for services from the
oil and natural gas exploration industry and, accordingly, is affected by
changing tax laws, price controls and other laws relating to the energy business
generally. The Company's business is affected generally by political
developments and by federal, state, foreign and local laws and regulations which
relate to the oil and natural gas industry. The adoption of laws and regulations
affecting the oil and gas natural industry for economic, environmental and other
policy reasons could increase costs relating to drilling and production, which
could have an adverse effect on the Company's operations. Several state and
federal environmental laws and regulations currently apply to the Company's
operations and may become more stringent in the future. Although the Company has
utilized
31
<PAGE> 33
operating and disposal practices that were or are currently standard in the
industry, hydrocarbons and other materials may have been disposed of or released
in or under properties owned or operated by the Company. In addition, some of
these properties have been operated by third parties over whom the Company has
no control as to such entities' treatment of hydrocarbon and other materials and
the manner in which such materials may have been disposed of or released. The
federal Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986
(collectively, "CERCLA"), and comparable state statutes impose strict liability
on owners and operators of sites and on persons who disposed of or arranged for
the disposal of "hazardous substances" found at sites. The federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes govern the
disposal of "hazardous wastes." Although CERCLA currently excludes petroleum
from the definition of "hazardous substances," and RCRA also excludes certain
classes of exploration and production wastes from regulation, such exemptions by
Congress under both CERCLA and RCRA may be deleted, limited or modified in the
future. If such changes are made to CERCLA and/or RCRA, the Company could be
required to remove and remediate previously disposed of materials (including
materials disposed of or released by prior owners or operators) from properties
(including ground water contaminated with hydrocarbons) and to perform removal
or remedial actions to prevent future contamination.
The Federal Water Pollution Control Act ("FWPCA") and the Oil Pollution Act
of 1990 ("OPA") and implementing regulations govern the prevention of
discharges, including oil and produced water spills, and liability for damages
into waters. The OPA is more comprehensive and stringent than previous oil
pollution liability and prevention laws and imposes strict liability for a
comprehensive and expansive list of damages from an oil spill into waters from
facilities. Liability may be imposed for oil removal costs and a variety of
public and private damages. Penalties may also be imposed for violation of
federal safety, construction and operating regulations, and for failure to
report a spill or to cooperate fully in a clean-up. The OPA also expands the
authority and capability of the federal government to direct and manage oil
spill clean-up and operations, plus requires operators to prepare oil spill
response plans in cases where it can reasonably be expected that substantial
harm will be done to the environment by discharges on or into navigable waters.
The Company has spill protection control countermeasure (SPCC) plans in place
for its oil and natural gas properties in each of the areas in which it
operates. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
actions. Although the liability for owners and operators is the same under the
FWPCA, the damages recoverable under the OPA are potentially much greater and
can include natural resource damages.
The operations of the Company are also subject to federal, state and local
regulations for the control air emissions. The federal Clean Air Act ("CAA"), as
amended, and various state and local laws impose certain air quality
requirements on the Company. Amendments to the CAA revised the definition of
"major source" such that emissions from both wellhead and associated equipment
involved in oil and gas production may be added to determine if a source is a
"major source." As a consequence, more facilities may become major sources and
thus would be required to obtain operating permits. This permitting process may
require capital expenditures in order to comply with permit limits.
RISKS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including blow-outs, cratering, fires and explosions. These
hazards could cause personal injury or death, suspend drilling operations or
seriously damage or destroy the equipment involved and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damage to the environment, including property contamination
in the form of either soil or ground water contamination, could also result from
the Company's operations, particularly through oil or produced water spillage,
natural gas leaks and extensive, uncontrolled fires. In addition, the Company
could become subject to liability for reservoir damage. The occurrence of a
significant event, including pollution or environmental damage, could materially
affect the Company's operations and financial condition. As a protection against
operating hazards, the Company maintains insurance coverage considered by the
Company to be adequate, including all-risk physical damage, employer's
liability, commercial general liability and workers compensation insurance. The
Company
32
<PAGE> 34
currently has general liability insurance of $1,000,000 per occurrence with an
aggregate of $3,000,000 and excess liability and umbrella coverages of up to
$20,000,000 per occurrence with a $20,000,000 aggregate. The Company's customers
generally require the Company to have at least $1,000,000 of third party
liability coverage. Since April 1, 1992, the Company has carried workers'
compensation insurance, with a deductible of $100,000 per occurrence. If
multiple workers' compensation claims are filed, the Company could incur
significant expenses, which in turn could have a material adverse impact on its
financial condition and operations.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to or
loss of its drilling rigs; however, it does not carry insurance against loss of
earnings resulting from such damage or loss. The Company's lenders have a
security interest in the drilling rigs owned by the Company and are named as
loss payee on the physical damage insurance on such drilling rigs. In view of
the difficulties that may be encountered in renewing such insurance at
reasonable rates, no assurance can be given that the Company will be able to
maintain the type and amount of coverage that it considers adequate at
reasonable rates or that any particular types of coverage will be available.
TITLE TO OIL AND NATURAL GAS PROPERTIES
Title to the Company's oil and natural gas properties is subject to
royalty, overriding royalty, carried working, and other similar interests and
cost sharing arrangements customary in the oil and natural gas industry
(including farmout agreements, operating agreements and joint venture
arrangements), liens for current taxes not yet due, and to other minor defects
and encumbrances. The Company believes that such burdens do not materially
detract from the value of such properties or from the Company's interest therein
or materially interfere with the operation of the Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
EMPLOYEES
The Company employed a total of 945 full-time persons (33 as office
personnel and 912 as field personnel) at September 30, 1996. The number of
drilling rig employees will fluctuate depending upon the number of operable
drilling rigs and the demand for contract drilling services. The Company
considers its employee relations to be satisfactory. None of the Company's
employees is represented by a union.
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
Cloyce A. Talbott 61 Chairman of the Board; Chief Executive
Officer
A. Glenn Patterson 50 President; Chief Operating Officer;
Director
James C. Brown 45 Vice President -- Finance; Secretary;
Treasurer; Chief Financial Officer
Robert C. Gist(1) 56 Director
Kenneth E. Davis(1) 73 Director
Vincent A. Rossi, Jr. 39 Director
</TABLE>
- ---------------
(1) Member of Audit Committee and Compensation Committee.
Cloyce A. Talbott has served as a Director of the Company since its
incorporation in 1978. Mr. Talbott is a co-founder of the Company, served as
Vice President from 1978 to 1983 and has served as Chairman of the Board and
Chief Executive Officer of the Company since 1983. He also serves as Chairman of
the Board and Chief Executive Officer of the Company's three subsidiaries. Mr.
Talbott is primarily responsible for the Company's oil and natural gas
activities. Mr. Talbott received a Bachelor of Science degree in Petroleum
Engineering in 1958 from Texas Tech University, Lubbock, Texas.
A. Glenn Patterson has served as a Director of the Company since its
incorporation in 1978. Mr. Patterson is a co-founder of the Company and has
served as its President since 1978 and also as Chief Operating Officer since
1983. Mr. Patterson also serves as a director and as President of the Company's
three subsidiaries. Mr. Patterson is primarily responsible for the day-to-day
management of the Company and directs its contract drilling activities. Mr.
Patterson received his Bachelor of Science degree in Business in 1970 from
Angelo State University, San Angelo, Texas.
James C. Brown has served as Secretary and Treasurer of the Company since
June 1993 and as Chief Financial Officer since August 1993. Mr. Brown served as
Vice President from 1982 until June 1990, as a Director of the Company from
February 1985 until June 1990, and as Controller from June 1983 until June 1990.
Mr. Brown also serves as a director and as Vice President-Finance, Treasurer,
Secretary and Chief Financial Officer of the Company's three subsidiaries. Mr.
Brown is responsible for managing all office personnel of the Company involved
with general financial and tax accounting activities. Mr. Brown received a
Bachelor of Science degree in Business Administration in 1973 from Tarleton
State University, Stephenville, Texas. He is a certified public accountant in
the State of Texas and a member of the American Institute of Certified Public
Accountants.
Robert C. Gist has served as a Director of the Company since 1985. Mr. Gist
has served as general legal counsel and advisor to the Company since 1987. Mr.
Gist received a Bachelor of Science degree in Economics in 1965 and a law degree
in 1968 from Southern Methodist University. He is currently self-employed as an
attorney and has been for at least the past five years. He has over 20 years
experience in the oil and natural gas industry.
Kenneth E. Davis has served as a Director of the Company since 1978 and
served as Treasurer from 1978 to June 1993. Mr. Davis received a Bachelor of
Arts degree in Business from University of North Texas, Denton, Texas, in 1950.
He was the owner and director of Fluid Transports, Inc., an oil field trucking
company, until he sold that company in December 1994 and retired.
Vincent A. Rossi, Jr. has served as a director of the Company since July
30, 1996. Since 1995, Mr. Rossi has served as a Managing Director of Turnberry
Capital Management L.P., an investment advisory firm. From March 1991 through
1994, he was a Managing Director of CS First Boston and co-founder of the First
Boston Special Situations Fund where he was jointly responsible for capital
commitment. From 1989 to March 1991,
34
<PAGE> 36
he was responsible for proprietary capital commitment in the Distressed
Securities Group at CS First Boston. During the prior two years, he was a senior
member of the Reorganizations Group at CS First Boston. Mr. Rossi joined CS
First Boston in 1987 from Odyssey Partners. He is a 1984 graduate of the Harvard
Business School and received a B.S., summa cum laude, from the Wharton School,
University of Pennsylvania in 1980.
In August 1993, the Company established an Audit Committee and a
Compensation Committee of the Board of Directors consisting in each case of
Kenneth E. Davis and Robert C. Gist. Each of these persons has continued to
serve in these capacities. The Audit Committee's function is to review and
approve the services of the outside public accounting firm. The Compensation
Committee's function is to review and approve proposals by management as to
compensation for officers and other employees of the Company and to administer
the Patterson Energy, Inc. 1993 Stock Incentive Plan.
The directors hold office until the next annual meeting of stockholders, or
until their successors are duly elected and qualified. The officers hold office
until their successors are appointed by the Board of Directors. All officers of
the Company are employed on a full-time basis. There are no arrangements or
understandings between any of the directors or officers and any other person
pursuant to which he was or is to be selected as a director, nominee or officer.
There is no family relationship between any director and executive officer of
the Company other than between Messrs. Talbott and Patterson, who are
brothers-in-law.
RELATED PARTY TRANSACTIONS
The Company leases a 1981 Beech King-Air 90 airplane owned by Talbott
Aviation, Inc., a company wholly-owned by Cloyce A. Talbott, Chief Executive
Officer of the Company. Under the terms of the lease, the Company pays a monthly
rental of $9,200 and the costs of fuel, insurance, taxes and maintenance of the
aircraft. The Company also pays the salary of the pilot, who is a full-time
employee of the Company. The total cost to the Company for the aircraft
(exclusive of the pilot's salary) was $174,455 in 1995 and $191,415 (including
$70,000 of repairs) during the nine months ended September 30, 1996. The
Company's headquarters are located approximately 100 miles from the nearest
major airport. The Company's management believes that the lease of the aircraft
is necessary for the efficient operation of its business.
The Company sells substantially all of the oil produced from
Company-operated wells to BHT Marketing, Inc. ("BHT"), a corporation in which a
son of Mr. Talbott is a stockholder, director and officer, under terms of crude
oil purchase contracts entered into on October 19, 1994 and October 24, 1995
(the "Purchase Contracts"). The purchase price for the oil is the posted monthly
average price plus a bonus per Bbl of oil less basic sediment and water
deductions. The bonus is determined by competitive bid. The Purchase Contracts
can be terminated by either party upon at least 30 days' prior written notice.
Crude oil sales to BHT in 1995 were approximately $5.9 million. Simultaneously
with the execution of the Purchase Contracts, the Company and BHT entered into
participation agreements (the "Participation Agreements") pursuant to which the
Company and BHT agreed to share equally in the net sales proceeds received by
BHT from the sale of all oil purchased by BHT under the Purchase Contracts. The
term "net sales proceeds" generally means the gross proceeds received by BHT for
the oil less all payments paid to the Company under the Purchase Contracts,
pipeline tariffs and all other costs and expenses actually incurred by BHT
associated with the transportation and sale of such oil. The proceeds received
by the Company under these Participation Agreements were approximately $83,500
in 1995 and $206,544 in the nine months ended September 30, 1996.
Certain of the Company's directors, executive officers and key employees
and their family members (principally Cloyce A. Talbott, A. Glenn Patterson,
Kenneth E. Davis, Lee W. Staiger and Kenneth C. Nelson, collectively referred to
herein as "Affiliated Persons") have participated, either individually or
through entities they control, in oil and natural gas prospects or properties in
which the Company has an interest. These participations, which have been on a
working interest basis, have been in prospects or properties originated or
acquired by the Company. In substantially every property in which any of the
Affiliated Persons has been a working interest participant, the Company also has
sold working interests to nonaffiliated persons on the same basis. At September
30, 1996, Affiliated Persons were working interest owners in 104 of the 266
wells then being operated by the Company. Of the 104 wells, the Company also
sold
35
<PAGE> 37
working interests in 91 wells to nonaffiliated persons. In some cases, the
interests sold to affiliated and nonaffiliated participants were sold on a
promoted basis requiring these participants to pay a portion of the Company's
costs. As is the case of sales of working interests by the Company in its
properties to nonaffiliated persons, sales of working interests to Affiliated
Persons are made to reduce the Company's economic risk in the properties. The
Company believes that each of the participations by Affiliated Persons has been
on terms no less favorable to the Company than it could have obtained from
nonaffiliated participants. It is expected that joint participations with the
Company, by affiliated persons, will occur from time to time in the future.
Conflicts of interest may arise between such directors and officers and the
Company as to the advisability of conducting drilling and recompletion
activities on those properties. During the two years ended December 31, 1994 and
1995 and the 10 months ended October 31, 1996, the Affiliated Persons received
aggregate production revenues (net of state severance taxes) of $12.5 million
and paid aggregate joint interest billings of $11.6 million. These numbers do
not necessarily represent their profits or losses from these interests because
the joint production costs do not include the parties' related drilling and
leasehold acquisition costs incurred prior to January 1, 1994. In order to
minimize these conflicts, no Affiliated Person will (i) have an interest in any
property larger than the Company's interest, (ii) participate in an interest
that does not bear costs (such as an overriding royalty interest) or (iii)
borrow any money from the Company to fund his participation.
Any future transactions between the Company and its officers, directors,
key employees, 5% stockholders and their family members and affiliates will
continue to be subject to the prior approval of a majority of disinterested
members of the Board of Directors and will continue to be on terms no less
favorable to the Company than those that could be negotiated with nonaffiliated
parties.
In 1993, 1994 and 1995, the Company provided contract drilling services for
which it received approximately $960,000, $338,000 and $598,000, respectively,
from HAT Oil & Gas, Inc., a company in which a son of Mr. Talbott is a
stockholder, director and officer. The Company competitively bids for these
drilling services on the same basis as it bids for the performance of drilling
services for other third parties. The Company also owns a minor working interest
in oil and gas properties operated by that company.
36
<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of November 30, 1996, with
respect to the beneficial ownership of the Company's Common Stock by (i) each
stockholder known by the Company to own beneficially more than 5% of the
outstanding Common Stock, (ii) each director and the Chief Executive Officer and
the President of the Company, (iii) all executive officers and directors of the
Company as a group and (iv) each Selling Stockholder. Except as otherwise
indicated below, each of the persons named in the table has sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by him as set forth opposite his name.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP BENEFICIAL
PRIOR TO OWNERSHIP
OFFERING(1) AFTER OFFERING(1)
------------------- -------------------
NUMBER NUMBER NUMBER
OF OF SHARES OF
NAME AND ADDRESS SHARES PERCENT BEING OFFERED SHARES PERCENT
- ----------------------------------------- ------- ------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
Metropolitan Life Insurance Company...... 250,000(2) 5.06% -- 250,000 3.88%
One Madison Avenue
New York, NY 10010
C.A. Delaney Capital Management, Ltd. ... 280,500(3) 5.68% -- 280,500 4.35%
Suite 5100
161 Bay Street
P.O. Box 713
Toronto, Ontario M5J 2S1
Cloyce A. Talbott(4)..................... 639,974(5) 12.95% 49,840 494,974 7.68%
2500 Towle Park Road
Snyder, TX 79549
H.A. and Audrey Talbott Trust(6)......... 37,862 * 37,862 -- --
SSI Oil and Gas, Inc.(7)................. 57,298 1.16 57,298 -- --
A. Glenn Patterson(4).................... 248,721(8) 4.96% 30,000 161,423 2.48%
Kenneth E. Davis(4)...................... 71,554(9) 1.45% -- 71,554 1.11%
Robert C. Gist(4)........................ 17,943(10) * -- 17,943 *
Vincent A. Rossi, Jr.(4)................. -- -- -- --
Phoenix Drilling, Inc. .................. 28,000(11) * 28,000 -- --
Imperial Equipment Co. .................. 19,750(11) * 19,750 -- --
Rig I Group, Inc. ....................... 4,250(11) * 4,250 -- --
All executive officers and directors as a
group (6 persons)...................... 971,621(12) 19.25% 175,000 796,621 12.17%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage ownership of the person
holding the options, but not deemed outstanding for computing the
percentage ownership of any other person.
(2) Number of shares stated was obtained from a Schedule 13G filed with the
Securities and Exchange Commission by Metropolitan Life Insurance Company.
State Street Research and Management Company, an affiliate of Metropolitan
Life Insurance Company, has also filed a 13G with the Securities and
Exchange Commission for the same shares.
(3) Number of shares was obtained from a Schedule 13G filed with the Securities
and Exchange Commission by C.A. Delaney Capital Management, Ltd.
(4) An executive officer and/or director of the Company.
(5) Includes 37,862 shares owned by H.A. and Audrey Talbott Trust, of which Mr.
Talbott is a beneficiary and co-trustee and 57,298 shares owned by SSI Oil
& Gas, Inc., a Texas corporation owned 50% by an affiliate of Mr. Talbott
and 50% by Mr. Patterson.
37
<PAGE> 39
(6) An affiliate of Mr. Talbott.
(7) An affiliate of Messrs. Talbott and Patterson.
(8) Includes 70,000 shares purchasable under currently exercisable employee
stock options and the 57,298 shares owned by SSI Oil and Gas, Inc. (see
Note 5 above).
(9) Includes 5,474 shares owned by the wife of Mr. Davis and 5,000 shares
purchasable under exercisable Non-Employee Directors' Stock Options.
(10) Includes 5,000 shares purchasable under exercisable Non-Employee Directors'
Stock Options.
(11) Issued on December 5, 1996 in partial consideration for the acquisition of
three drilling rigs. These shares are being sold pursuant to the exercise
of registration rights granted in the acquisition.
(12) Includes a total of 105,000 shares purchasable under currently exercisable
employee stock options including the 70,000 shares referenced in Note (8)
above for Mr. Patterson and 10,000 shares purchasable under Non-Employee
Directors' Stock Options (see Notes 9 and 10 above).
38
<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue (i) 9,000,000 shares of Common Stock,
$0.01 Par Value, of which shares are issued and outstanding as of
December 31, 1996, and (ii) 1,000,000 shares of Preferred Stock, $0.01 Par
Value, of which no shares have been issued.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record on all matters submitted to a vote of stockholders. Holders
of a majority of the shares of Common Stock outstanding may authorize a merger,
consolidation, dissolution of the Company, the sale of all or substantially all
of the Company's assets if not made in the usual or ordinary course of the
Company's business, or an amendment of the Company's Restated Certificate of
Incorporation. In the event of liquidation, holders of Common Stock are entitled
to share pro rata in any distribution of the Company's assets to holders of
Common Stock after payment of liabilities and liquidation preferences, if any,
granted to holders of Preferred Stock. There are no preemptive, subscription,
conversion or redemption rights regarding the Common Stock. Holders of Common
Stock are entitled to receive such dividends as may be declared on the Common
Stock by the Board of Directors in its discretion out of funds legally available
for that purpose.
PREFERRED STOCK
Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Certificate of Incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of Preferred Stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The Board of Directors may authorize
the issuance of Preferred Stock which ranks senior to the Common Stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present intention to issue shares of Preferred Stock.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Delaware, like many other states, permits a corporation to adopt a number
of measures through amendment of the corporate charter or bylaws or otherwise,
which may have the effect of delaying or deterring any unsolicited takeover
attempts. In connection with the Company's reincorporation, the right of
stockholders to cumulate votes in the election of directors was eliminated. In
addition, Section 203 of the Delaware General Corporation Law ("DGCL"), which
will apply to the Company since the Common Stock has been approved for quotation
on the Nasdaq National Market, restricts certain "business combinations" with an
"interested stockholder" for three years following the date such person becomes
an interested stockholder, unless the Board of Directors approves the business
combination. "Business combinations" is defined to include mergers, sale of
assets and other similar transactions with an "interested stockholder." An
"interested stockholder" is defined as a person who, together with affiliates
and associates, owns (or, within the prior three years, did own) 15% or more of
the corporation's voting stock. By delaying or deterring unsolicited takeover
attempts, these provisions could adversely affect prevailing market prices for
the Company's Common Stock.
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that could discourage potential takeover attempts and make
more difficult attempts by stockholders to change management. The following
paragraphs set forth a summary of these provisions:
Special Meetings of Stockholders. The Restated Certificate of Incorporation
provides that special meetings of stockholders may be called only by the Board
of Directors (or a majority of the members thereof),
39
<PAGE> 41
the Chief Executive Officer, the President or the holders of a majority of the
outstanding stock entitled to vote at such special meeting. This provision will
make it more difficult for stockholders to call a special meeting.
No Stockholder Action By Written Consent. The Restated Certificate of
Incorporation provides that stockholder action may be taken only at annual or
special meetings and not by written consent of the stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to,
or mailed and received at, the principal executive offices of the Company not
less than 30 days nor more than 60 days prior to the meeting as originally
scheduled; provided that in the event less than 40 days written notice is given
to stockholders, notice by the stockholder to be made timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed. The Bylaws also
specify certain requirements for a stockholders notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual meeting or from making nominations for
directors at an annual meeting.
Authorized Class of Preferred Stock. See "-- Preferred Stock" for
information concerning the Company's Preferred Stock.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company, New York, New York.
40
<PAGE> 42
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,441,371 shares of
Common Stock outstanding (6,700,421 shares if the Underwriters' over-allotment
option is exercised in full), 5,499,750 (5,758,800, if the Underwriters'
over-allotment option is exercised in full) of which will be freely tradeable
without substantial restriction or the requirement of future registration under
the Securities Act. Of the remaining 941,621 shares, 691,621 shares will be held
by "affiliates" of the Company, as that term is defined in Rule 144, and may be
sold subject to the provisions of Rule 144 and the contractual restrictions
described below and 250,000 shares (all of which are "restricted securities"
under Rule 144) are held by a third party. These 250,000 shares are entitled to
certain registration rights and also may be sold subject to the provisions of
Rule 144. In addition, the Company has reserved for issuance 75,000 shares of
Common Stock pursuant to the exercise of outstanding warrants held by a third
party which are entitled to certain registration rights. The Company and the
Selling Stockholders have agreed that they will not, for a period of 120 days
from the date of this Prospectus, and the executive officers and directors of
the Company that are not also Selling Stockholders have agreed that they will
not, for a period of 120 days from the date of this Prospectus, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, pledge, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital stock
of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock or other capital stock of the
Company without the prior written consent of Prudential Securities Incorporated,
on behalf of the Underwriters, except that such agreement does not prevent the
Company from granting additional options under the 1993 Plan or the Non-Employee
Director Plan. Upon the expiration of these lockup agreements, all 691,621
shares held by such executive officers and directors which are not sold in this
offering will become eligible for sale in the public market, subject to the
applicable volume and manner-of-sale limitations of Rule 144, 191,910 shares of
Common Stock issuable upon exercise of outstanding warrants and options that are
vested will be eligible for sale and 7,000 shares of Common Stock issuable upon
exercise of options that are not vested will become eligible for sale as such
options become vested. Under Rule 144, the volume limitations permit the sale of
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 64,414 shares immediately
after the offering) or the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the sale,
subject to the filing of a Form 144 with respect to such sale and certain other
limitations and restrictions. The Company has filed registration statements
under the Securities Act to register shares of Common Stock reserved for
issuance under its employee stock plans, thus permitting the resale of such
shares of Common Stock by non-affiliates in the public market without
restriction under the Securities Act. A total of 175,000 shares (including
shares subject to outstanding options) are reserved for issuance under the 1993
Plan and 30,000 shares are reserved for issuance under the Company's
Non-Employee Director Plan. In addition, a total of 105,000 shares of Common
Stock issuable upon exercise of outstanding options are eligible for sale under
a shelf registration statement.
The Common Stock has been included in the Nasdaq Stock Market's National
Market since November 1993. Nevertheless, sales of substantial amounts of Common
Stock in the public market could adversely affect the prevailing market price
and could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Risk Factors -- Volatility of Stock
Price and -- Shares Eligible for Future Sale."
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<PAGE> 43
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Morgan Keegan & Company, Inc. and Raymond James &
Associates, Inc. are acting as representatives (collectively, the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated....................................
Morgan Keegan & Company, Inc. ........................................
Raymond James & Associates, Inc. .....................................
---------
Total....................................................... 1,727,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
offering price and the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 259,050 additional
shares of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of additional shares as the number of shares set forth next
to such Underwriter's name in the preceding table bears to 1,727,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Company, its directors and executive officers, the Selling Stockholders
and certain other stockholders holding an aggregate of approximately 796,621
shares of Common Stock (exclusive of shares of Common Stock being sold by the
Selling Stockholders) have agreed that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock, without the prior
written consent of Prudential Securities Incorporated on behalf of the
Underwriters, for a period of 120 days after the date of this Prospectus, except
for shares offered pursuant to this offering and issuances pursuant to the
exercise of options granted under employee benefit plans existing as of the date
of this Prospectus or pursuant to the terms of convertible securities or
warrants of the Company outstanding as of the date of this Prospectus.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market, may engage
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<PAGE> 44
in passive market making transactions in the Common Stock of the Company on the
Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act,
during the two business day period before commencement of offers or sale of the
Common Stock. Passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Baker & Hostetler, Denver, Colorado.
Certain legal matters relating to this offering will be passed upon for the
Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995, included in
this Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The consolidated balance sheets of the Company as of December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995, incorporated by reference in this Prospectus from the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The supplemental consolidated balance sheets as of December 31, 1994 and
1995, and the related supplemental consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, incorporated by reference in this Prospectus from the
Company's Current Report on Form 8-K/A (Amendment No. 2), have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The financial statements of Tucker, as of March 31, 1996 and 1995, and for
each of the three years in the period ended March 31, 1996, incorporated by
reference in this Prospectus and elsewhere in the Registration Statement, have
been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods indicated in their reports, and are incorporated
herein by reference in reliance upon the authority of said firm as experts in
giving said reports.
The estimated reserve evaluations and related calculations of M. Brian
Wallace, P.E., Dallas, Texas, an independent petroleum engineer, as of December
31, 1993, 1994 and 1995 and September 30, 1996, have been included herein in
reliance upon the authority of Mr. Wallace as an expert in petroleum
engineering.
43
<PAGE> 45
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements, and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the
following regional offices: 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common
Stock is traded on the Nasdaq National Market. The foregoing materials can also
be inspected at the National Association of Securities Dealers, Inc., 1735 K.
Street, N.W., Washington, D.C. 20006.
The Company has also filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the shares offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the shares offered hereby, reference is made to the
Registration Statement, copies of which may be inspected without charge at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which
may be obtained from the Commission upon payment of the prescribed fees. In
addition, the Commission maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Company is such a filer. The
Commission's web site address is (http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are hereby incorporated by reference into this Prospectus:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995.
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(c) The Company's Current Report on Form 8-K dated April 22, 1996.
(d) The Company's Current Report on Form 8-K dated April 30, 1996.
(e) The Company's Current Report on Form 8-K dated May 16, 1996.
(f) The Company's Current Report on Form 8-K dated July 30, 1996, as
amended by Form 8-K/A dated July 30, 1996, and as further amended by Form
8-K/A (Amendment No. 2) dated July 30, 1996.
(g) The Company's Current Report on Form 8-K dated July 30, 1996.
(h) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
(i) The Company's Current Report on Form 8-K dated September 27, 1996.
(j) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996
(k) The Company's Current Report on Form 8-K dated October 23, 1996.
(l) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A dated November 2, 1993.
All documents filed by the Company after the date of this Prospectus
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such
44
<PAGE> 46
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed except as so modified or
superseded, to constitute a part of this Prospectus. The Company will provide,
without charge to each person to whom a copy of this Prospectus is delivered,
upon the written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, other than exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies should be directed to James C.
Brown, Vice President -- Finance, Patterson Energy, Inc., at the Company's
principal executive offices located at 4510 Lamesa Highway, Snyder, Texas 79549.
Telephone requests may be directed to Mr. Brown at (915) 573-1104.
45
<PAGE> 47
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants; Coopers & Lybrand L.L.P............................ F-2
Report of Independent Public Accountants; Arthur Andersen LLP......................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996
(unaudited)...................................................................... F-4
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995 and for the nine months ended September 30, 1995 and 1996 (unaudited)....... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995 and for the nine months ended September 30, 1995 and 1996
(unaudited)...................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995 and for the nine months ended September 30, 1995 and 1996 (unaudited)... F-7
Notes to Consolidated Financial Statements.......................................... F-8
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
We have audited the consolidated balance sheets of Patterson Energy, Inc.
and Subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These consolidated 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 did not audit the financial statements of Patterson Drilling
Company (formerly Tucker Drilling Company, Inc.) which financial statements
reflect 36 and 30 percent of supplemental consolidated total assets as of
December 31, 1994 and 1995, respectively, and 42, 41 and 28 percent in 1993,
1994 and 1995, respectively, of consolidated total operating revenues. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Patterson Drilling Company is based solely on the report of the other
auditors.
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 consolidated financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 28, 1996, except as to
the Tucker Drilling Company, Inc.
merger discussed in Note 2
for which the date is
September 13, 1996
F-2
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Tucker Drilling Company, Inc.
We have audited the balance sheets of Tucker Drilling Company, Inc. (a
Delaware corporation) as of March 31, 1996 and 1995, and the related statements
of operations, changes in stockholder's equity and cash flows for the three
years ended March 31, 1996, prior to the restatement (and, therefore, are not
presented herein) for the pooling of interests as described in Note 2 to the
consolidated financial statements of Patterson Energy, Inc., and Subsidiaries
included in the Registration Statement on Form S-3. 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 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 Tucker Drilling Company,
Inc. as of March 31, 1996 and 1995, and the results of its operations and its
cash flows for the three years ended March 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
May 16, 1996
F-3
<PAGE> 50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 6,845,059 $ 9,344,494 $ 9,450,477
Marketable securities.............................. 2,570,459 524,323 524,323
Accounts receivable:
Trade:
Billed........................................ 11,445,058 10,570,891 10,809,438
Unbilled...................................... 1,929,055 2,048,782 2,170,650
Oil and gas sales............................... 593,861 712,497 820,202
Costs of uncompleted drilling contracts in excess
of related billings............................. -- -- 330,557
Equipment inventory................................ 426,897 413,677 490,342
Deferred income taxes.............................. 406,515 1,058,947 614,567
Undeveloped oil and gas properties held for
resale.......................................... 1,385,781 2,122,112 2,549,906
Other current assets............................... 1,072,485 351,579 416,379
----------- ----------- ------------
Total current assets....................... 26,675,170 27,147,302 28,176,841
----------- ----------- ------------
Property and equipment, at cost, net................. 21,538,030 34,385,345 36,660,298
Deferred income taxes................................ -- 347,892 2,531,395
Deposits on workers' compensation insurance policy... 556,864 343,760 343,760
Other assets......................................... 738,739 766,546 785,290
----------- ----------- ------------
Total assets............................... $49,508,803 $62,990,845 $ 68,497,584
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable................ $ 918,834 $ 909,634 $ 4,039,952
Accounts payable:
Trade........................................... 8,534,535 7,115,697 8,174,718
Revenue distribution............................ 967,020 1,686,626 2,226,419
Other........................................... 648,668 297,184 16,582
Accrued expenses................................... 1,838,588 2,042,254 2,465,439
----------- ----------- ------------
Total current liabilities.................. 12,907,645 12,051,395 16,923,110
----------- ----------- ------------
Deferred liabilities................................. 324,650 376,746 722,786
Notes payable, less current maturities............... 5,966,710 12,906,473 11,614,622
----------- ----------- ------------
6,291,360 13,283,219 12,337,408
----------- ----------- ------------
Commitments and contingencies........................ -- -- --
Stockholders' equity:
Preferred stock -- par value $.01; authorized
1,000,000 shares, no shares issued.............. -- -- --
Common stock -- par value $.01; authorized
5,000,000 shares with 4,168,632 shares issued at
December 31, 1994 and 4,747,083 shares issued at
December 31,1995 and authorized 9,000,000 shares
with 4,810,689 issued at September 30, 1996..... 41,687 47,471 48,107
Additional paid-in capital......................... 14,907,454 19,047,037 19,255,879
Retained earnings.................................. 15,360,657 18,561,723 19,933,080
----------- ----------- ------------
Total stockholders' equity................. 30,309,798 37,656,231 39,237,066
----------- ----------- ------------
Total liabilities and stockholders'
equity................................... $49,508,803 $62,990,845 $ 68,497,584
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Drilling........................... $37,746,477 $54,822,766 $57,599,180 $42,655,844 $47,724,707
Oil and gas sales.................. 3,913,746 3,593,786 5,399,536 3,831,366 5,939,900
Well operation fees................ 1,063,629 979,756 1,296,257 940,135 1,110,813
Other.............................. 168,926 133,240 148,976 133,919 280,234
----------- ----------- ----------- ----------- -----------
42,892,778 59,529,548 64,443,949 47,561,264 55,055,654
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs.............. 30,631,392 43,035,526 46,504,502 34,431,381 38,817,618
Lease operating and production..... 1,206,796 1,141,391 1,509,206 1,070,674 1,468,390
Write-down due to impairment of
long-lived assets............... -- -- 159,403 -- 159,403
Exploration costs.................. 317,085 233,547 369,133 227,258 343,581
Dry holes and abandonments......... 395,508 1,279,133 791,221 373,270 611,732
Depreciation, depletion and
amortization.................... 4,654,697 4,911,929 7,522,695 5,285,551 7,753,384
General and administrative......... 4,013,766 4,793,484 5,062,940 3,607,326 3,943,887
----------- ----------- ----------- ----------- -----------
41,219,244 55,395,010 61,919,100 44,995,460 53,097,995
----------- ----------- ----------- ----------- -----------
Operating income..................... 1,673,534 4,134,538 2,524,849 2,565,804 1,957,659
----------- ----------- ----------- ----------- -----------
Other income (expense):
Net gain on sale of assets......... 138,272 611,009 373,567 335,961 532,684
Interest income.................... 141,067 408,945 545,463 422,475 376,734
Interest expense................... (330,739) (366,152) (1,064,523) (761,638) (985,373)
Non-recurring acquisition costs.... -- -- -- -- (2,268,331)
Other.............................. 117,463 25,020 34,946 (6,110) 97,185
----------- ----------- ----------- ----------- -----------
66,063 678,822 (110,547) (9,312) (2,247,101)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.... 1,739,597 4,813,360 2,414,302 2,556,492 (289,442)
----------- ----------- ----------- ----------- -----------
Income tax expense (benefit):
Current............................ 123,309 213,349 213,560 264,275 112,030
Deferred........................... -- (406,515) (1,000,324) (208,052) (2,531,395)
----------- ----------- ----------- ----------- -----------
123,309 (193,166) (786,764) 56,223 (2,419,365)
----------- ----------- ----------- ----------- -----------
Net income........................... $ 1,616,288 $ 5,006,526 $ 3,201,066 $ 2,500,269 $ 2,129,923
=========== =========== =========== =========== ===========
Net income per common share:
Primary............................ $ 0.51 $ 1.24 $ 0.73 $ .59 $ .43
=========== =========== =========== =========== ===========
Assuming full dilution............. $ 0.51 $ 1.24 $ 0.71 $ .55 $ .43
=========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Primary............................ 3,175,957 4,029,669 4,379,236 4,261,488 4,949,593
=========== =========== =========== =========== ===========
Assuming full dilution............. 3,175,957 4,029,669 4,520,588 4,532,679 4,979,510
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 52
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------------- ----------------------- ADDITIONAL
NUMBER NUMBER PAID-IN RETAINED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992........ 3,331,760 $33,318 351,158 $(730,292) $ 9,003,283 $ 8,737,843 $17,044,152
Sale of treasury stock............ -- -- (97,554) 49,172 3,935 -- 53,107
Issuance of common stock and
redeemable warrants............. 835,000 8,350 -- -- 4,662,925 -- 4,671,275
Net income........................ -- -- -- -- -- 1,616,288 1,616,288
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1993........ 4,166,760 41,668 253,604 (681,120) 13,670,143 10,354,131 23,384,822
Issuance of common stock.......... 250,000 2,500 -- -- 1,872,500 -- 1,875,000
Retirement of treasury stock...... (253,604) (2,536) (253,604) 681,120 (678,584) -- --
Exercise of stock options......... 5,476 55 -- -- 43,395 -- 43,450
Net income........................ -- -- -- -- -- 5,006,526 5,006,526
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1994........ 4,168,632 41,687 -- -- 14,907,454 15,360,657 30,309,798
Issuance of common stock and
warrants........................ 97,500 975 -- -- 721,275 -- 722,250
Conversion of 853,748 redeemable
warrants........................ 426,874 4,269 -- -- 2,991,015 -- 2,995,284
Conversion of 75,315 underwriters
redeemable warrants............. 35,577 355 -- -- 280,353 -- 280,708
Exercise of stock options......... 18,500 185 -- -- 146,940 -- 147,125
Net income........................ -- -- -- -- -- 3,201,066 3,201,066
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1995........ 4,747,083 47,471 -- -- 19,047,037 18,561,723 37,656,231
Exercise of stock options
(unaudited)..................... 25,382 254 -- -- 209,224 -- 209,478
Conversion of 75,316 underwriters
redeemable warrants
(unaudited)..................... 38,224 382 -- -- (382) -- --
Net income (unaudited)............ -- -- -- -- -- 2,129,923 2,129,923
Adjustment to conform fiscal years
(see Note 2) (unaudited)........ -- -- -- -- -- (758,566) (758,566)
--------- ------- -------- --------- ----------- ----------- -----------
Balance September 30, 1996
(unaudited)..................... 4,810,689 $48,107 -- $ -- $19,255,879 $19,933,080 $39,237,066
========= ======= ======== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 53
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,616,288 $ 5,006,526 $ 3,201,066 $ 2,500,269 $ 2,129,923
Adjustments to reconcile net income to net cash
from operating activities:
Loss on abandonment of oil and gas properties... 225,478 399,694 108,867 35,304 118,550
Depreciation, depletion and amortization........ 4,654,697 4,911,929 7,522,695 5,285,551 7,753,384
Write-down due to impairment of long-lived
assets........................................ -- -- 159,403 -- 159,403
Net gain on sale of assets...................... (123,945) (611,009) (373,567) (335,961) (532,684)
Deferred income tax benefit..................... -- (406,515) (1,000,324) (208,052) (2,531,395)
Change in current assets and liabilities:
(Increase) decrease in trade accounts
receivable................................ (3,268,159) (4,666,120) 1,680,215 2,242,334 568,614
(Increase) decrease in oil and gas sales
receivable................................ 91,026 (47,110) (258,561) (129,415) (333,175)
Increase in undeveloped oil and gas
properties held for resale................ (469,710) (549,440) (736,331) (617,586) (427,794)
(Increase) decrease in other current
assets.................................... 4,142 (70,067) (25,777) 26,051 (448,655)
Increase (decrease) in trade accounts
payable................................... 1,391,010 2,825,111 (1,761,828) (916,631) 778,871
Increase in revenue distribution payable.... 45,426 181,459 699,235 200,138 622,610
Increase in deferred compensation payable... 49,026 182,701 52,096 40,500 357,636
Increase (decrease) in other current
payables.................................. (47,191) 1,107,299 53,495 637,561 (525,542)
Net change in deposits on workers' compensation
insurance policy.............................. 57,853 (22,901) 213,104 150,000 --
----------- ------------ ----------- ------------ ------------
Net cash provided by operating activities... 4,225,941 8,241,557 9,533,788 8,910,063 7,689,746
----------- ------------ ----------- ------------ ------------
Cash flows from investing activities:
Net sales (purchases) of investment
securities.................................... 23,488 (1,685,929) 2,046,136 99,574 1,946,562
Purchases of property and equipment............. (5,261,725) (11,617,225) (19,906,204) (15,236,661) (10,553,569)
Sales of property and equipment................. 181,388 1,315,491 555,878 412,471 1,136,515
Change in other assets.......................... -- -- (83,844) (78,764) (56,713)
----------- ------------ ----------- ------------ ------------
Net cash used in investing activities....... (5,056,849) (11,987,663) (17,388,034) (14,803,380) (7,527,205)
----------- ------------ ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable..................... 2,766,488 5,000,000 9,375,000 8,000,000 3,170,000
Payments on notes payable....................... (4,681,296) (573,456) (2,444,437) (1,922,779) (1,331,533)
Issuance of common stock and redeemable
warrants...................................... 4,671,275 -- 3,275,993 3,009,911 --
Proceeds from exercise of stock options......... -- 43,450 147,125 116,500 240,102
Proceeds from sale of treasury stock............ 53,107 -- -- -- --
----------- ------------ ----------- ------------ ------------
Net cash provided by financing activities... 2,809,574 4,469,994 10,353,681 9,203,632 2,078,569
----------- ------------ ----------- ------------ ------------
Net increase in cash and cash equivalents... 1,978,666 723,888 2,499,435 3,310,315 2,241,110
Cash and cash equivalents at beginning of
period.......................................... 4,142,505 6,121,171 6,845,059 6,845,059 7,209,367(1)
----------- ------------ ----------- ------------ ------------
Cash and cash equivalents at end of period........ $ 6,121,171 $ 6,845,059 $ 9,344,494 $ 10,155,374 $ 9,450,477
=========== ============ =========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................... $ 347,888 $ 344,487 $ 992,651 $ 695,285 $ 984,059
Income taxes.................................. 101,711 75,679 270,095 222,487 155,144
</TABLE>
Noncash investing and financing activities:
During the year ended December 31, 1994, the Company issued 250,000
shares of common stock to Questor Drilling Corp. for certain assets valued
at $1,875,000 (See Notes 2 and 7).
During the year ended December 31, 1994, the Company retired 253,604
shares of common stock that were held in treasury (See Note 7).
During the year ended December 31, 1995, the Company acquired three
drilling rigs and related equipment from a non-affiliated person. The
purchase price for the rigs consisted of $367,500 cash, 97,500 shares of
the Company's common stock, valued for purposes of this transaction at
$682,500, and warrants to purchase an additional 75,000 shares at an
exercise price of $9.00 per share, valued at $39,750 for this transaction
(See Note 7).
During the nine months ended September 30, 1996, 75,316 redeemable
warrants relative to the Underwriter's Warrant Agreement dated November 2,
1993, as amended on November 15, 1994 and June 18, 1996, were converted in
which 38,224 shares of the Company's common stock were issued and 37,092
shares of such common stock were forfeited to the Company in lieu of a cash
payment.
- ---------------
(1) Amount does not agree to cash and cash equivalents as presented as a
result of conforming reporting periods (See Note 2).
The accompanying notes are an integral part of these consolidated financial
statements
F-7
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies follows:
Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson Energy, Inc. ("Patterson") and its wholly
owned subsidiaries, Patterson Drilling Company, Patterson Petroleum, Inc.,
Patterson Petroleum Trading Company, Inc. and Patterson Drilling Programs, Inc.
(collectively referred to as the "Company"). All significant intercompany
accounts and transactions have been eliminated.
Interim financial statements -- The consolidated financial statements as of
September 30, 1996 and for each of the nine months ended September 30, 1995 and
1996 have been prepared by management of the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated interim financial statements should be read in
conjunction with the audited December 31, 1993, 1994 and 1995 consolidated
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for presentation have
been included. Furthermore, the results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results expected for
the full year.
Management estimates -- 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.
Drilling operations -- The Company follows the percentage-of-completion
method of accounting for day work and footage drilling arrangements. Under this
method all drilling revenues, direct costs and appropriate portions of indirect
costs, related to the contracts in progress, are recognized as contract drilling
services are performed.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs
and appropriate portions of indirect costs (including maintenance, repairs and
depreciation) related to the contracts in progress are deferred and recognized
as revenues and expenses in the period the contracts are completed.
Provisions for losses are made on incomplete contracts when significant
losses are anticipated.
Equipment inventory -- Equipment inventory consists primarily of equipment
to be used in conjunction with the Company's contract drilling activities. The
inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Undeveloped oil and gas properties held for resale -- Undeveloped oil and
gas properties held for resale represent leasehold interests in unproven oil and
gas properties which the Company expects to sell. Also included are leasehold
costs programmed for development under arrangements which will provide for
reimbursement of such costs to the Company. Such properties are carried at lower
of cost or net realizable value. The Company recognizes gains or losses upon
disposition or impairment of the properties. For the years ended December 31,
1993, 1994 and 1995, the Company recorded impairment of undeveloped properties
of approximately $287,000, $313,000 and $56,000, respectively.
F-8
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment -- (a) Property and equipment (other than oil and
gas) -- Depreciation of property and equipment (other than oil and gas
properties) is provided on the straight-line method over their estimated useful
lives as follows:
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Drilling rigs and equipment...................... 2-15
Automotive equipment............................. 2-7
Office furniture................................. 3-10
Buildings........................................ 5-20
Other............................................ 3-7
</TABLE>
(b) Oil and gas properties -- The Company follows the successful efforts
method of accounting, using the field as its accumulation center for capitalized
costs. Under the successful efforts method of accounting, costs which result
directly in the discovery of oil and gas reserves and all development costs are
capitalized. Exploration costs which do not result directly in discovering oil
and gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease and well equipment, lease acquisition costs and intangible
development costs are depreciated, depleted and amortized on the
unit-of-production method, based on petroleum engineer estimates of recoverable
proved developed oil and gas reserves of each respective field. In addition, net
capitalized costs are subject to a periodic ceiling limitation. Such costs are
limited to the undiscounted future net revenues from proved oil and gas
properties, using period end costs and prices, after considering potential
future income tax effects. There were no charges relating to ceiling limitations
during the years ended December 31, 1993, 1994 and 1995.
(c) Maintenance and repairs -- Maintenance and repairs are charged against
operations. Renewals and betterments which extend the life or improve existing
properties are capitalized.
(d) Retirements -- Upon disposition or retirement of property and equipment
(other than oil and gas properties), the cost and related accumulated
depreciation are removed from the accounts and the gain or loss thereon, if any,
is credited or charged to income.
The Company recognizes the gain or loss on the sale of either a part of a
proved oil and gas property or of an entire proved oil and gas property
constituting a part of a field upon the sale or other disposition of such. The
unamortized cost of the property or group of properties, a part of which was
sold or otherwise disposed of, is apportioned to the interest sold and the
interest retained on the basis of the fair value of those interests.
Income per common share -- Income per common share of stock is based on the
weighted average number of shares outstanding during the year. Common stock
equivalents are excluded for the years ended December 31, 1993 and 1994 because
their effect is antidilutive and are included for the year ended December 31,
1995. The average number of shares outstanding has been adjusted for all periods
to give effect to the number of shares outstanding as a result of the Tucker
merger discussed in Note 2.
In addition, the number of shares outstanding has also been adjusted for
the year ended December 31, 1993, to give effect to the issuance of treasury
stock to existing stockholders in 1993 (see Note 7). The dilutive effect of this
transaction was calculated using the treasury stock method.
Income taxes -- Income taxes are provided based on earnings reported for
financial statement purposes. The provision for income taxes differs from the
amounts currently payable because of temporary differences in the recognition of
certain income and expense items for financial reporting and tax reporting
purposes.
The Company and its subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") effective January
1, 1993, the beginning of its 1993 fiscal year, and did not retroactively apply
the provisions of SFAS 109 prior to that date. SFAS 109 requires the asset and
liability approach be used to account for income taxes. Under this method,
deferred tax liabilities
F-9
<PAGE> 56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and assets are determined based on the temporary differences between financial
statement and tax basis of assets and liabilities using enacted rates in effect
for the year in which the differences are expected to reverse. Deferred tax
assets (net of a valuation allowance) primarily result from net operating loss
carryforwards, certain accrued but unpaid insurance losses, unpaid state income
taxes, alternative minimum tax credit carryforwards and investment tax credit
carryforwards.
The cumulative effect as of January 1, 1993, of adopting this new
accounting standard was not material to the financial position of the Company.
Also, there was no material impact on the consolidated statement of income for
the year ended December 31, 1993.
Investment tax credits are recorded under the flow through method as a
reduction of the provision for income taxes.
The Company files a consolidated Federal income tax return.
Statement of cash flows -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash on deposit and unrestricted
certificates of deposit with original maturities of less than 90 days.
Reclassifications -- Certain reclassifications have been made to the 1993
and 1994 consolidated financial statements in order for them to conform with the
1995 presentation. The reclassifications had no effect on net income or
stockholders' equity for those years.
2. MERGER AND ACQUISITIONS
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company and Tucker executed the Agreement and Plan of Merger among
Patterson Energy, Inc. ("Patterson"), Patterson Drilling Company ("Patterson
Drilling") and Tucker Drilling Company, Inc. ("Tucker") (the "Merger Agreement")
providing for the merger of Patterson Drilling with and into Tucker. The merger
was consummated on July 30, 1996 after a required approval of the stockholders
of both Patterson and Tucker, with Tucker as the surviving corporation, wholly
owned by Patterson and operating under the name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock upon the terms of the governing stock option
plans and as adjusted by the Exchange Ratio. A total of 1,577,514 shares of
Patterson common stock was issued pursuant to the merger and an additional
74,592 shares of Patterson common stock were reserved for issuance under the
outstanding Tucker stock options.
The merger was treated as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended and was accounted for as
a pooling of interests for accounting purposes.
The consolidated financial statements give retroactive effect to the merger
which encompasses, among other things, combining Patterson's previous historical
financial statements as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 with the previous historical
financial statements of Tucker as of March 31, 1995 and 1996 and for each of the
three years in the period ended March 31, 1996. Certain adjustments were made in
those years to conform the previous accounting policies of Tucker with those of
Patterson. As of January 1, 1996, the financial statements are presented using
the same fiscal periods. Consequently, the operations of Tucker for the three
months ended March 31, 1996 are reflected in the consolidated financial
statements of Patterson for the year ended December 31, 1995 and the nine months
ended September 30, 1996. A corresponding stockholders' equity adjustment has
been recorded as a result of including Tucker's operations for the three months
ended March 31, 1996 with Patterson's operations for the year ended December 31,
1995 and the nine months ended September 30, 1996. Selected
F-10
<PAGE> 57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unaudited information related to the operations of Tucker for the three months
ended March 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues............................................ $3,972
Operating loss...................................... (218)
Net income.......................................... 759
</TABLE>
Questor Drilling Corp. -- On July 15, 1994, Patterson acquired certain
assets of Questor Drilling Corp. ("Questor"), a Delaware corporation wholly
owned by Phibro Energy USA, Inc. ("Phibro"), pursuant to the terms of an Asset
Purchase Agreement between Patterson and Questor, dated July 8, 1994. The assets
acquired consisted of: (a) nine drilling rigs and related equipment, consisting
primarily of 16 rig hauling trucks, and (b) a yard facility consisting of
approximately 11 acres of real estate and improvements located thereon. The
purchase price for the assets consisted of a cash payment of $4,500,000 and
250,000 shares of Patterson's common stock. The total value of the transaction
was $6,375,000. The purchase price was determined through arm's-length
negotiation between Questor and Patterson. Neither Questor nor Phibro is an
affiliate of Patterson. The operating results have been included in the
consolidated operating results of Patterson since the date of acquisition.
3. CASH
Included in cash as of December 31, 1994 and 1995 was approximately
$967,000 and $1,687,000, respectively, of monthly oil and gas sales to be
distributed to revenue owners subsequent to year-end.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Drilling rigs and equipment...................................... $ 43,746,485 $ 57,598,179
Producing oil and gas properties, successful efforts method of
accounting..................................................... 11,215,663 15,387,584
Undeveloped oil and gas properties, successful efforts method of
accounting..................................................... 338,032 251,500
Other equipment.................................................. 9,904,372 11,460,737
Buildings........................................................ 2,747,992 2,743,138
Land............................................................. 361,248 361,248
------------ ------------
68,313,792 87,802,386
Less accumulated depreciation, depletion and amortization........ (46,775,762) (53,417,041)
------------ ------------
$ 21,538,030 $ 34,385,345
============ ============
</TABLE>
F-11
<PAGE> 58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Loan agreement with The CIT Group/Equipment Financing, Inc. entered
into March, 1995, with a revolving credit facility of $7,000,000;
monthly payments of interest only at the one month London Interbank
Offered Rate (5.72% at December 31, 1995) plus 3%; revolving credit
facility converts to 54 month term loan requiring principal and
interest in monthly installments commencing on October 14, 1996;
collateralized by 18 drilling rigs; matures March, 2001............. $ -- $ 7,000,000
Note payable entered into July, 1994 in the original amount of
$5,000,000 to U. S. Bancorp Leasing and Financial; 84 monthly
installments (currently $83,356) including interest at the one month
London Interbank Offered Rate (5.72% at December 31, 1995) plus
3.75%, payments subject to increase or decrease by the lender (as a
result of changes in interest rate); collateralized by nine drilling
rigs; matures July, 2001............................................ 4,776,544 4,207,704
Line of credit with Norwest Bank Texas, Wichita Falls, N.A.
(formerly Parker Square Bank, N.A.) entered into September, 1994,
with a facility of $1,000,000. The line of credit note was renewed
and increased to $2,385,833 in June, 1995. The line was amended and
restated and increased to $3,500,000 in December, 1995; monthly
payments of interest only at the Wall Street Journal prime rate
(8.5% at December 31, 1995) plus .25%; collateralized by certain of
the Company's oil and gas properties; matures December 1, 1997...... -- 1,999,403
Line of credit with Financial Services Partnership of Snyder Texas,
an entity affiliated with the Company's Chairman of the Board/Chief
Executive Officer and the Company's President/Chief Operating
Officer, with a facility of $710,000 originally due May, 1994. The
line of credit was renewed in December, 1993, bearing interest at
8%, payable monthly, and is collateralized by accounts receivable
and other intangibles. In December, 1994, the maturity date of the
line of credit was extended to December, 1996. In December, 1995,
the maturity date of the line of credit was extended to December,
1997................................................................ 709,000 609,000
Note payable entered into during December, 1993 in the original
amount of $1,750,000 to Snyder National Bank; monthly principal
payments of $29,167 plus interest at Chase Manhattan Bank's prime
rate (8.5% at December 31, 1994); collateralized by the Company's
drilling rigs and real estate; scheduled maturity December, 1998.
The note was paid prior to its maturity in 1995..................... 1,400,000 --
---------- -----------
6,885,544 13,816,107
Less current maturities............................................. (918,834) (909,634)
---------- -----------
$5,966,710 $12,906,473
========== ===========
</TABLE>
F-12
<PAGE> 59
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The CIT Group/Equipment Financing, Inc. ("CIT") Loan Agreement and the
Norwest Bank Texas, Wichita Falls, N.A. ("Norwest") line of credit contain a
number of representations, warranties and covenants, the breach of which, at the
election of CIT or Norwest, would accelerate the maturity date of the loans. The
covenants include:
- Maintenance on a quarterly basis of a consolidated cash flow coverage
ratio of at least 1.5:1 (sum of net income, plus depreciation, depletion
and amortization, less dividends paid and extraordinary items in the
prior four quarters; divided by the sum of the current portion of
long-term debt and capitalized lease obligations coming due in the
following four quarters).
- Maintenance on a consolidated basis of tangible net worth of at least
$12,000,000 (CIT) and $18,000,000 (Norwest).
- Maintenance on a consolidated basis of a ratio of total liabilities to
tangible net worth of not greater than 1.75:1.
- Without written consent of CIT and/or Norwest, the Company cannot conduct
any business not being conducted by the Company on March 14, 1995, nor
liquidate, dissolve or merge into any other entity.
- The Company shall not pay, or authorize the payment of, any dividends on
any stock, debenture or other security without the prior written consent
of Norwest.
The U.S. Bancorp Leasing and Financial note payable contains a provision
that the Company may prepay the note in whole, but not in part, by remitting to
the lender an amount equal to the principal balance at the time of such
prepayment and an administrative fee equal to a specified percentage of such
balance as follows:
<TABLE>
<CAPTION>
MONTH OF PREPAYMENT AMOUNT OF FEE
- ------------------- -------------
<S> <C>
1-12........................................... 4%
13-24.......................................... 3%
25-36.......................................... 2%
37-48.......................................... 1%
</TABLE>
The Financial Services Partnership note payable contains a covenant that
requires the Company to maintain a minimum ratio of "accounts receivable trade"
to "loan balance outstanding" of 1.5:1.
Other restrictive covenants under the terms of all debt agreements require
that the underlying collateral not be subjected to impairment, sold, conveyed,
transferred, encumbered, mortgaged, pledged, assigned or hypothecated in any
manner without express written consent of the lenders.
At December 31, 1995, the Company was in compliance with all loan
covenants.
Unused credit available under revolving notes payable and line of credit
agreements totaled $1,600,000 at December 31, 1995. A commercial bank has issued
a letter of credit to the Company's workers' compensation insurance carrier on
behalf of the Company in the amount of $150,000. Additionally, the Company
maintains a letter of credit in the amount of $475,000 with a bank for the
benefit of an insurance company as collateral for retrospective premiums and
retained losses which could become payable under the terms of the Company's
insurance contract which existed prior to consummation of the merger with
Tucker. The Company pays a fee in the amount of one percent per annum on the
unused balance. The letter of credit expires on November 30, 1996 with provision
for an indefinite number of annual extensions of the expiration date. No amounts
have been drawn under the letter of credit.
The Company has pledged as collateral a U.S. Treasury bill, maturing on
November 14, 1996 with a book value of approximately $524,000 as of March 31,
1996, against the letter of credit.
F-13
<PAGE> 60
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Five year maturities of notes payable -- Scheduled maturities of notes
payable subsequent to December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996............................................ $ 909,634
1997............................................ 4,446,407
1998............................................ 1,895,985
1999............................................ 1,958,973
2000............................................ 2,027,402
Thereafter...................................... 2,577,706
-----------
Total................................. $13,816,107
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Commitments -- On July 15, 1994, the Company issued 250,000 shares of
common stock as part of the purchase price of certain assets. The terms of the
transaction included a registration rights agreement that, among other matters,
provided in the event the holder of the shares ("Holder") still held the shares
on April 1, 1996, but prior to April 1, 1997, at the request of the Holder,
during such period, the Company would use its best efforts to arrange for the
purchase of the shares at the best available price; provided, however, that if
the price were less than $7.50 per share (before deduction of any brokerage
commission), the Company would pay to the Holder the difference between $7.50
per share and the consideration received by the Holder (See Note 7).
During September 1995, the Holder sold the 250,000 shares to Metropolitan
Life Insurance Company Separate Account EN ("MetLife"). At the time of the sale
to MetLife, MetLife and the Company amended and restated the registration rights
agreement ("Amended and Restated Agreement") in its entirety. The Amended and
Restated Agreement provides that the Company, upon written notice from MetLife,
or any transferee of the 250,000 shares, on or after February 1, 1996, shall
file, at the Company's expense, a "shelf" registration statement with the
commission and keep the registration statement effective until the earlier to
occur of (i) such time as all of the registered shares have been sold, (ii) two
years from the effective date of the registration statement, or (iii) the date
on which such shares become available for resale under Rule 144(k) of the
Securities Act of 1933. The provision relating to the $7.50 price guarantee was
eliminated.
Supplemental executive retirement plan -- Effective April 1, 1991 the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan (the
"Plan") was established for certain officers and key employees. Pursuant to
agreements, as amended on April 22, 1996 and May 16, 1996 with related
participants of the Plan, the Company is obligated to pay each participant, or
the designated beneficiary, a lump sum at such participant's death, disability
or retirement. The amount to be paid to each participant is equal to the
participant's vested benefit at such date, limited however to related benefits
received from underlying insurance policies as described below. These
obligations are unsecured general liabilities of the Company. As of December 31,
1995 there were seven participants in the Plan and benefits accrue to the
participants in equal annual amounts over ten years of service beginning April
1, 1991. Fully vested benefits are in the aggregate approximately $1,498,000.
The estimated present value of the future benefit obligations as of April 1,
1991 will be accrued over the same ten year period as the benefits vest. As of
December 31, 1995 approximately $237,000 has been accrued as a liability and
approximately $44,000 has been expensed. As of December 31, 1994, approximately
$193,000 had been accrued and approximately $50,900 was expensed under the Plan.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants, and an annuity from which future
premiums on the life insurance policies will be paid. These assets are included
as other assets at a book value of approximately $568,000 and $528,000 at
December 31, 1994, respectively.
F-14
<PAGE> 61
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The insurance company which is the issuer of the life insurance and annuity
contracts owned by the Company is currently under the supervision of the
Michigan Commissioner of Insurance pursuant to an Order of Rehabilitation.
Although the insurance company has continued to pay death benefits and scheduled
annuity benefits, cash surrender values reflected above may be subject to change
and access to such cash surrender values may be limited pending the negotiation
of assumption reinsurance agreements.
Contingencies -- (a) The Company's drilling and oil and gas exploration and
production operations are subject to inherent risks, including blowouts,
cratering, fire and explosions which could result in personal injury or death,
suspended drilling operations, damage to or destruction of equipment, damage to
producing formations and pollution or other environmental hazards. As a
protection against these hazards, the Company maintains general liability
insurance coverage of $1,000,000 per occurrence with a $3,000,000 aggregate and
excess liability and umbrella coverages of up to $15,000,000 per occurrence with
a $15,000,000 aggregate. The Company believes it is adequately insured for
public liability and property damage to others with respect to its operations.
However, such insurance may not be sufficient to protect the Company against
liability for all consequences of well disasters, extensive fire damage or
damage to the environment. The Company also carries insurance to cover physical
damage to or loss of its rigs; however, it does not carry insurance against loss
of earnings resulting from such damage or loss.
The Company's lenders which have a security interest in the drilling rigs
are named as loss payees on the physical damage insurance on such rigs. The
Company has never been fined or incurred liability for pollution or other
environmental damage in connection with its operations.
(b) In April, 1993, a wrongful death and survivorship suit was filed
against the Company and the operator of a well in the 59th Judicial District
Court of Grayson County, Texas (Case No. 93-0721). The suit arose out of a
drilling rig accident in Gonzales County, Texas on February 7, 1993. An employee
of the Company died in the accident. The survivorship action was brought against
the operator by the decedent's estate, and the wrongful death action was brought
against the Company and the operator by family members. In addition, another
employee of the Company was injured in the accident and has joined the suit
against the operator as a plaintiff. The Company was engaged in drilling a
horizontal well under a contract with the operator of the well when the accident
occurred. The suit asserts, among other things, a claim for gross negligence
against the Company and a claim for negligence and gross negligence against the
operator. The Company's defense has been assumed by the insurance carrier under
the Company's workers' compensation policy.
The Company has been informed by the insurance carrier that the accident
constitutes a single occurrence under the policy, subject to a $100,000
deductible. The operator has made a claim against the Company under the
Company's drilling contract with the operator for indemnification. The claims
against the Company and the operator have been settled, but the terms of the
settlement must be approved by the Court. The settlement amounts are less than
the coverage available under the Company's workers' compensation policy and
general liability policy. The Company's general liability insurance carrier has
determined that the operator's claim for indemnification against the Company is
covered by the Company's general liability policy (subject to a $25,000
deductible), but is assessing whether the amount of the settlement agreed to by
the operator and the defense costs claimed by the operator are reasonable.
(c) In March, 1994, a suit was filed against the Company, Patterson
Petroleum, Inc., an employee of the Company and the operator of a well, in the
71st Judicial District Court of Harrison County, Texas (Case No. 94-0255). The
suit arose out of a drilling rig accident in Burleson County, Texas in January,
1994. An individual died in the accident. The action was brought on behalf of
the decedent's minor child. Another child intervened in the suit. The Company
was engaged in drilling a horizontal well under a contract with the operator of
the well when the accident occurred. The suit asserted a claim for negligence
against the company and the other defendants. The Company's and Patterson
Petroleum's defense was assumed by the insurance carrier under the Company's
general liability policy, which is subject to a $25,000 deductible. This case
has been settled within the limits of liability coverage.
F-15
<PAGE> 62
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) In addition, the Company is also involved in various routine litigation
incident to its business. In the Company's opinion, none of these proceedings
will have a material adverse effect on the Company.
7. STOCKHOLDERS' EQUITY
In January, 1993, the Company sold 97,554 shares of treasury stock to the
existing stockholders of the Company (including officers and directors) on a
proportionate share ownership basis. The shares were sold for $0.54 per share
and the proceeds were used to retire a note payable to SSI Oil & Gas, Inc., a
company then indirectly owned by the Chairman of the Board/Chief Executive
Officer, and currently owned 50% by an affiliate of the Company's Chairman of
the Board/Chief Executive Officer and 50% by the President/Chief Operating
Officer.
On October 19, 1993, the Company reincorporated in the State of Delaware in
a transaction pursuant to which the Company merged with and into a new Delaware
company that was formed as a wholly owned subsidiary of the Company. The new
Delaware company had the authority to issue 5,000,000 shares of common stock,
par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value
$0.01 per share. The Plan and Agreement of Merger provided for the exchange of 1
share of common stock of the new Delaware company for 1.51214 shares of common
stock of the Company. The new Delaware company is the surviving corporation, and
immediately after the merger had 1,803,604 shares of common stock issued and
1,550,000 outstanding and no shares of preferred stock issued or outstanding.
The merger has been retroactively applied to the share information presented in
the financial statements.
In November, 1993, the Company completed an initial public offering of
745,000 shares of common stock and 745,000 redeemable warrants at a price of
$6.75 per share of common stock and $0.25 per redeemable warrant. Also, on
December 21, 1993, the underwriters of the Company's public offering exercised a
portion of their overallotment option to purchase 90,000 additional shares of
common stock and 111,750 additional redeemable warrants. Net proceeds from the
offering totaled approximately $4,700,000.
In July, 1995, the Company elected to redeem all of its outstanding
redeemable warrants (856,750) at the redemption price of $0.05 per warrant. The
redemption date was September 11, 1995 (the "Redemption Date"). Any right to
exercise a redeemable warrant terminated on September 8, 1995, the business day
immediately preceding the Redemption Date. As of September 26, 1995, the Company
issued 426,874 shares of common stock upon the exercise of 853,748 redeemable
warrants at $7.50 per share. Of the remaining 3,002 redeemable warrants, 2,002
were redeemed and the remaining warrants expired. The Company received
approximately $2,995,000 from the exercise of the redeemable warrants. The funds
were included in the Company's working capital and have been used for general
corporate purposes.
In November, 1995, the Company issued a total of 35,577 shares of common
stock to the underwriters of the Company's initial public offering pursuant to
their exercise of 75,315 redeemable warrants. The redeemable warrants were
issued to the underwriters pursuant to the partial exercise of underwriter
warrants issued as partial compensation for their underwriting services in
connection with the initial public offering. Total proceeds received by the
Company for the exercise of the underwriters warrants and the redeemable
warrants was approximately $281,000.
In July, 1994, the Company acquired certain assets of Questor pursuant to
the terms of an Asset Purchase Agreement between the Company and Questor, dated
July 8, 1994. The purchase price for the assets consisted of a cash payment of
$4,500,000 and 250,000 shares of the Company's common stock, par value $0.01 per
share. The total value of the transaction was $6,375,000.
In September, 1994, the Board of Directors of the Company approved a
resolution that all shares of Common stock, par value $.01 per share, of the
Company then issued but not outstanding (the "Treasury Stock") be retired. The
Board of Directors further approved a resolution that the Treasury Stock resume
the status of authorized and unissued shares of common stock.
F-16
<PAGE> 63
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May, 1995, the Company acquired three drilling rigs and related
equipment from a non-affiliated person. The purchase price for the rigs
consisted of $367,500 cash, 97,500 shares of the Company's common stock and
warrants to purchase an additional 75,000 shares at an exercise price of $9.00
per share. The total value of the transaction was $1,089,750. The Company has
granted certain registration rights to the seller with respect to the 97,500
shares and the 75,000 shares purchasable upon exercise of the warrants
(collectively the "registrable securities") consisting of (a) a one-time right
after December 1, 1995, but prior to December 1, 1998, to cause the Company to
file, at the Company's expense, a registration statement with the Securities and
Exchange Commission (the "Commission" ) covering the registrable securities,
provided that the number of shares that may be sold in any given calendar month
in connection with such registration statement may not exceed the greater of (i)
37,500 shares or (ii) the greater of 0.196 times the average monthly trading
volume of the Company's common stock on the Nasdaq National Market over the
preceding 12 calendar months, and (b) the right to join the registrable
securities in any registration statements filed by the Company with the
Commission.
At December 31, 1995, the Company has 4,747,083 shares of common stock
issued and outstanding and no shares of preferred stock issued or outstanding.
8. STOCK OPTIONS AND WARRANTS
Employee Stock Incentive Plan -- In August, 1993, the Company adopted the
Patterson Energy, Inc. 1993 Stock Incentive Plan (the "Stock Incentive Plan").
The purpose of the Stock Incentive Plan is to provide continuing incentives to
the Company's key employees, which may include, but shall not necessarily be
limited to, members of the Board of Directors (excluding members of the
Compensation Committee) and officers of the Company. The Stock Incentive Plan
provides for an authorization of 175,000 shares of common stock for issuance
thereunder. Under the Stock Incentive Plan, the Company may grant to key
employees awards of stock options and restricted stock or any combination
thereof. The Company may grant both incentive stock options ("incentive stock
options") intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended, and options which are not qualified as incentive stock
options. The options become immediately exercisable in the event of a change in
control (as defined in the Stock Incentive Plan) of the Company. Under the Stock
Incentive Plan the exercise price of incentive stock options must be at least
equal to the fair market value of the stock on date of grant and the exercise
price of non-incentive stock options may not be less than 80% of the fair market
value on date of grant.
Stock options covering a total of 166,000 shares of common stock have been
granted to date under the Stock Incentive Plan to five executive officers and 15
other employees of the Company, including Mr. Patterson (options covering 70,000
shares or approximately 42% of the total options granted). The outstanding
options were variously granted on March 31 and October 27, 1995. Each of the
options has a 10-year term. The options granted on March 31, 1995 are
exercisable at a price of $7.25 per share; while the options granted on October
27, 1995 are exercisable at a per share price of $12.50. These exercise prices
were equal to the fair market value of the stock on the respective grant dates.
The options vest in equal annual increments of 20% beginning on the date of
grant and continuing on each succeeding anniversary date. No options have been
exercised at December 31, 1995.
In March, 1983, the Board of Directors of Tucker approved and implemented
an Incentive Stock Option Plan (including stock appreciation rights) which was
amended in 1988 to allow for granting of nonqualified stock options, and in 1991
was further amended to eliminate stock appreciation rights. The purpose of the
Plan was to attract and retain key employees and directors and to provide such
persons with a proprietary interest in Tucker through the granting and exercise
of stock options. The maximum number of shares of common stock available for
issuance under the plan was 126,910 shares. The proceeds from the sale of common
stock pursuant to the plan were to be added to the general funds of Tucker and
used for general corporate purposes.
F-17
<PAGE> 64
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June, 1994 the Board of Directors of Tucker adopted the Tucker Drilling
Company, Inc. 1994 Non Qualified Stock Option Plan. Officers and directors were
not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan was 20,720 shares.
Each of the plans provide that options may be granted to purchase shares at
prices not less than the fair market value at date of grant. The exercise period
is governed by option agreements, but in no event may the exercise period extend
beyond ten years from the date of grant. As discussed at Note 2, existing stock
options and other employee incentive plans of Tucker effectively became plans to
purchase or receive common stock of Patterson on consummation of the Merger.
Accordingly, stock rights inherent in such plans are affected by the Exchange
Ratio.
Non-Employee Directors' Stock Option Plan -- In June, 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan (the "Outside Directors'
Plan"). The purpose of the Outside Directors' Plan is to encourage and provide
incentive for high level performance by non-employee directors of the Company.
An aggregate of 30,000 shares of Common Stock are reserved for issuance
under the Outside Directors' Plan to directors who are not employees of the
Company. The exercise price of options will be the fair market value of stock on
the date of grant. Outside directors are automatically granted options to
purchase 5,000 shares initially and an additional 1,000 shares for each
subsequent year that they serve up to a maximum of 10,000 shares per director.
Each option is exercisable one year after the date of grant and expires five
years from the date of grant. The options become immediately exercisable in the
event of a change of control (as defined in the Outside Directors' Plan) of the
Company. On June 6, 1995, each of the outside directors of Patterson was
automatically granted an option covering 5,000 shares with an exercise price of
$9.00 per share. No other options have been granted to date under the Outside
Directors' Plan, and none have been exercised as of December 31, 1995.
Public relations services stock options -- During November, 1994, February,
1995, and July, 1995, the Company issued options covering a total of 125,000
shares of common stock to two consultants as partial compensation for public
relations services rendered to the Company. The respective options were fully
exercisable upon grant date. In November, 1994, 32,500 options were granted at
$7.50 per share and 12,500 options were granted at $8.50 per share. In February,
1995, 20,000 options were granted at $8.775 per share and in July, 1995, 60,000
options were granted at $9.625 per share. The options expire five years from
date of grant. No options have been exercised at December 31, 1995.
Underwriters' warrants -- In November, 1993, the underwriters of the
Company's initial public offering were issued warrants as partial consideration
for their underwriting services for the initial public offering. The warrants
give the underwriters the right to purchase 75,315 shares of the Company's
common stock at a price of $8.68 per share and 75,315 redeemable warrants at
$.375 per warrant. In November, 1995, 75,315 Redeemable Warrants were issued to
the underwriters due to a partial exercise of the warrants. These Redeemable
Warrants were immediately exercised by the underwriters at a price of $7.50 per
share resulting in the issuance of 35,577 shares of the Company's common stock.
The right to purchase 75,315 shares of the Company's common stock under the
underwriters' warrants will expire in November, 1998.
Stock purchase warrants -- In May, 1995, the Company issued 75,000 warrants
exercisable at $9.00 per share as partial consideration for the purchase of
three drilling rigs and related equipment (See Note 7). The warrants were
exercisable upon issuance and expire on December 31, 1997. No warrants have been
exercised at December 31, 1995.
F-18
<PAGE> 65
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table contains information concerning stock options and
warrants:
<TABLE>
<CAPTION>
SHARES AVERAGE EXERCISE PRICE
------- ----------------------
<S> <C> <C>
<CAPTION>
GRANTED
- -----------------------
<S> <C> <C>
1993................................................ 112,973 $ 8.29
1994................................................ 53,880 7.86
1995................................................ 331,000 9.67
<CAPTION>
EXERCISED
- -----------------------
<S> <C> <C>
1993................................................ -- $ --
1994................................................ 5,476 7.93
1995................................................ 56,158 7.62
<CAPTION>
SURRENDERED
- -----------------------
<S> <C> <C>
1993................................................ -- $ --
1994................................................ 444 8.28
1995................................................ 1,776 8.28
<CAPTION>
OUTSTANDING AT YEAR END
- -----------------------
<S> <C> <C>
1993................................................ 230,263 $ 8.16
1994................................................ 278,223 8.10
1995................................................ 551,289 9.08
<CAPTION>
EXERCISABLE AT YEAR END
- -----------------------
<S> <C> <C>
1993................................................ 208,951 $ 8.14
1994................................................ 259,131 8.09
1995................................................ 401,385 8.76
</TABLE>
9. LEASES
Rent expense for office space and certain tools and equipment under monthly
rental agreements and operation leases in 1993, 1994 and 1995 was $518,525,
$792,885, and $1,042,000, respectively.
For the years ended December 31, 1993 and 1994, the Company paid $13,800 in
lease payments for each year. During April, 1995, the Company acquired a 57.85%
undivided interest in each of two drilling rigs in which the Company owned the
remaining 42.15% interest. The interests were acquired from Navajo Rigs, Inc.
("Navajo"), an affiliated entity, for a purchase price of $433,875 in cash
pursuant to a merger of Navajo into Patterson. The acquired interests were
leased by the Company on a month-to-month basis prior to the acquisition.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- --------- -----------
<S> <C> <C> <C>
Federal:
Current....................................... $ 41,213 $ 105,019 $ 138,825
Deferred income tax benefit................... -- (406,515) (1,000,324)
-------- --------- -----------
41,213 (301,496) (861,499)
State:
Current....................................... 82,096 108,330 74,735
-------- --------- -----------
Total income tax expense (benefit)............ $123,309 $(193,166) $ (786,764)
======== ========= ==========
</TABLE>
F-19
<PAGE> 66
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0% 34.0%
Net operating loss carryforward............................. (34.0) (34.0) (34.0)
Reduction of valuation allowance............................ -- (8.5) (41.4)
State franchise taxes....................................... 4.7 2.3 3.1
Alternative minimum taxes................................... 2.4 2.2 5.8
----- ----- -----
Effective tax rate.......................................... 7.1% (4.0)% (32.5)%
===== ===== =====
</TABLE>
There are $53,516 and $51,810 of accrued Federal income taxes in accrued
expenses at December 31, 1994 and 1995, respectively. There is $54,101 of
prepaid Federal income taxes in other current assets at December 31, 1995. There
are $139,835 and $135,642 of accrued state income taxes in accrued expenses at
December 31, 1994 and 1995, respectively.
As of January 1, 1993, the deferred tax asset valuation allowance of
approximately $6,405,000 was due primarily to net operating loss ("NOL")
carryforwards which were not expected to be utilized before their respective
expiration dates or which benefits the Company was unable to predict whether
they would more likely than not be realized. During 1994 and 1995, the Company
changed its estimate with respect to the future benefits of the NOL
carryforwards and, accordingly, reduced the related valuation allowance. To the
extent the valuation allowance was reduced, the related tax benefit was credited
to income.
The tax effect of significant temporary differences representing deferred
tax assets and changes therein were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, NET JANUARY 1, NET JANUARY 1, NET DECEMBER 31,
1993 CHANGE 1994 CHANGE 1995 CHANGE 1995
---------- ------ ---------- ------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards... $ 6,335 $(774) $ 5,561 $(2,001) $ 3,560 $(891) $ 2,669
Investment tax credit
carryforwards.................... 469 -- 469 -- 469 -- 469
AMT credit carryforwards............. 62 41 103 103 206 76 282
Depletion carryforwards.............. 492 64 556 (143) 413 199 612
Property and equipment............... -- 38 38 21 59 (59) --
Other................................ 157 (9) 148 137 285 (13) 272
------- ----- ------- ------- ------- ------ -------
7,515 (640) 6,875 (1,883) 4,992 (688) 4,304
Valuation allowance................ (6,405) 396 (6,009) 2,223 (3,786) 1,691 (2,095)
------- ----- ------- ------- ------- ------ -------
Deferred tax assets.............. 1,110 (244) 866 340 1,206 1,003 2,209
Deferred tax liabilities:
Property and equipment basis
difference....................... (1,110) 244 (866) 67 (799) (3) (802)
------- ----- ------- ------- ------- ------ -------
Net deferred tax asset........... $ -- $ -- $ -- $ 407 $ 407 $1,000 $ 1,407
======= ===== ======= ======= ======= ====== ========
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $7,990,000 and alternative minimum tax ("AMT") NOL carryforwards
of approximately $5,788,000 at December 31, 1995. In addition, the Company had
AMT credit carryforwards of $204,000 and statutory depletion carryforwards of
approximately $1,801,000 at December 31, 1995, which may be carried forward
indefinitely as a credit against the regular tax liability. If unused, the
aforementioned tax NOL carryforwards will expire in various amounts in years
1998 to 2008. During the years ended December 31, 1993, 1994 and 1995, the
Company utilized approximately $2,277,000, $5,891,000, and $2,481,000
respectively, of NOL carryforwards. The Company had investment tax credit
carryforwards of approximately $469,000 at December 31, 1995, which, if unused,
will expire at various dates through 2001.
F-20
<PAGE> 67
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company's NOL carryforwards became subject to an annual
limitation due to a change of over 50% in the stock ownership of the Company as
defined in Internal Revenue Service Code Section 382(g). Such limitations will
be imposed upon the net earnings of the Company excluding any contribution from
the operations acquired in the Merger ("Patterson Income") and separately
imposed upon the net earnings generated from the operations of the Tucker assets
acquired in the Merger ("Tucker Income"). The NOL carryforwards that can now be
utilized to offset Patterson income in any year will be equal to approximately
$1,808,000, which is determined by the value of Patterson's equity on August 2,
1995, the day prior to ownership change, times 5.88%, the federal long-term
exempt rate on that date as published by the U.S. Treasury Department.
Similarly, the NOL carryforwards that can now be utilized to offset Tucker
income will be limited to approximately $1,540,000 which is determined by the
value of Tucker's equity on July 29, 1996, the day prior to consummation of the
Merger, times 5.78%, the federal long-term exempt rate on that date.
11. EMPLOYEE BENEFITS
Profit Sharing Plan -- Effective January 1, 1992, the Company established a
401(k) profit sharing plan for all eligible employees. Company contributions are
discretionary. For the year ended December 31, 1993, no contributions were made
by the Company. In February, 1995, the Company made a contribution of
approximately $70,000, which was accrued in the year ended December 31, 1994. In
February, 1996, the Company approved a contribution of approximately $100,000,
which was accrued in the year ended December 31, 1995.
F-21
<PAGE> 68
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS SEGMENTS
The Company is engaged in contract drilling of oil and gas wells and oil
and gas exploration, development and production. Total revenues by business
segment include sales to affiliated customers. Information concerning the
Company's business segments for the years ended December 31, 1993, 1994 and 1995
is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Contract drilling......................... $37,746,477 $54,822,766 $57,599,180
Oil and gas............................... 5,146,301 4,706,782 6,844,769
----------- ----------- -----------
Total revenues.............................. $42,892,778 $59,529,548 $64,443,949
=========== =========== ===========
Income (loss) from operations:
Contract drilling......................... $ 2,625,008 $ 6,012,356 $ 3,675,782
Oil and gas............................... 45,294 (489,263) (50,554)
Other net................................. (126,205) (121,611) (126,542)
----------- ----------- -----------
2,544,097 5,401,482 3,498,686
----------- ----------- -----------
General corporate income (expense)(a)..... (536,088) (415,387) (165,635)
Interest income........................... 62,327 193,417 145,774
Interest expense.......................... (330,739) (366,152) (1,064,523)
----------- ----------- -----------
Income before income taxes................ $ 1,739,597 $ 4,813,360 $ 2,414,302
=========== =========== ===========
Identifiable assets:
Contract drilling......................... $22,418,335 $31,886,409 $43,286,628
Oil and gas............................... 7,852,384 10,163,670 10,348,443
Other..................................... 3,648,880 7,458,724 9,355,774
----------- ----------- -----------
Total assets................................ $33,919,599 $49,508,803 $62,990,845
=========== =========== ===========
Depreciation, depletion and amortization:
Contract drilling......................... $ 2,766,539 $ 3,524,635 $ 4,979,775
Oil and gas............................... 1,761,953 1,265,683 2,416,378
Other..................................... 126,205 121,611 126,542
----------- ----------- -----------
Total depreciation, depletion and
amortization.............................. $ 4,654,697 $ 4,911,929 $ 7,522,695
=========== =========== ===========
Capital expenditures:
Contract drilling......................... $ 3,354,629 $10,297,980 $15,634,539
Oil and gas............................... 1,883,727 2,968,625 5,106,895
Other..................................... 19,671 21,718 42,340
----------- ----------- -----------
Total expenditures.......................... $ 5,258,027 $13,288,323 $20,783,774
=========== =========== ===========
</TABLE>
- ---------------
(a) General corporate income (expense) consists primarily of interest income and
unallocated general and administrative expenses.
No customer accounted for more than 10% of the Company's consolidated
revenues for the years ended December 31, 1993, 1994 and 1995.
F-22
<PAGE> 69
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OIL AND GAS EXPENDITURES
Gross oil and gas expenditures by the Company in the United States for the
years ended December 31, 1993, 1994 and 1995 are summarized below:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs........................ $ 188,107 $ 860,759 $1,186,859
Exploration costs................................. 1,462,648 2,332,926 3,736,937
Development costs................................. 737,939 967,933 1,385,130
---------- ---------- ----------
$2,388,694 $4,161,618 $6,308,926
========== ========== ==========
</TABLE>
The aggregate amount of capitalized costs of oil and gas properties as of
December 31, 1993, 1994 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proved properties.............................. $11,595,196 $11,215,663 $15,387,584
Accumulated depreciation, depletion and
amortization................................. (8,589,933) (7,445,261) (9,009,244)
----------- ----------- -----------
Net proved properties................ $ 3,005,263 $ 3,770,402 $ 6,378,340
=========== =========== ===========
</TABLE>
14. SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION AND RELATED DATA
(UNAUDITED)
OIL AND GAS RESERVE QUANTITIES
The following table sets forth information with respect to quantities of
net proved developed oil and gas reserves, and changes in those reserves for the
years ended December 31, 1993, 1994 and 1995. The quantities were estimated by
an independent petroleum engineer for the years ended December 31, 1993, 1994
and 1995. The Company's proved developed oil and gas reserves are located
entirely within the United States.
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ----------
<S> <C> <C>
Estimated quantity, January 1, 1993.......................... 280,876 1,962,204
Revision in previous estimates............................... 34,657 161,732
Extensions, discoveries and other additions.................. 177,273 1,119,152
Sales of reserves-in-place................................... (459) (10,088)
Production................................................... (145,574) (710,386)
-------- ---------
Estimated quantity, January 1, 1994.......................... 346,773 2,522,614
Revision in previous estimates............................... 125,485 468,746
Extensions, discoveries and other additions.................. 299,623 1,872,512
Purchases.................................................... 27,400 181,495
Sales of reserves-in-place................................... (75,193) (416,328)
Production................................................... (124,019) (859,791)
-------- ---------
Estimated quantity, January 1, 1995.......................... 600,069 3,769,248
Revision in previous estimates............................... (59,429) 549,322
Extensions, discoveries and other additions.................. 405,364 2,272,738
Purchases.................................................... 2,280 40,386
Sales of reserves-in-place................................... -- --
Production................................................... (191,342) (1,361,770)
-------- ---------
Estimated quantity, January 1, 1996.......................... 756,942 5,269,924
======== =========
</TABLE>
F-23
<PAGE> 70
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Oil and gas revenues.............................. $3,913,746 $3,593,786 $5,399,536
Gain on sale of oil and gas properties............ -- 151,287 38,394
Gain on sale of undeveloped properties............ -- 48,506 66,755
---------- ---------- ----------
3,913,746 3,793,579 5,504,685
Costs and expenses (benefit):
Production costs................................ 1,207,003 1,150,590 1,715,155
Exploration expenses............................ 363,943 1,493,676 1,137,557
Depreciation, depletion and amortization........ 2,086,258 1,192,328 2,289,070
Write-down due to impairment of long-lived
assets....................................... -- -- 159,403
Income tax (benefit)............................ 140,123 (20,745) 69,190
---------- ---------- ----------
3,797,327 3,815,849 5,370,375
---------- ---------- ----------
Results of operations for oil
and gas producing activities .................. $ 116,419 $ (22,270) $ 134,310
========== ========== ==========
</TABLE>
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND GAS
RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Future gross revenues................................. $ 9,236 $15,336 $22,436
Future development and production costs............... 3,508 6,772 8,623
Future income tax expense(a).......................... 566 1,055 2,158
------- ------- -------
Future net cash flows................................. 5,162 7,509 11,655
Discount at 10% per annum............................. (1,153) (1,943) (2,987)
------- ------- -------
Standardized measure of discounted future net cash
flows............................................... $ 4,009 $ 5,566 $ 8,668
======= ======= =======
</TABLE>
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net
operating loss attributable to oil and gas operations and investment tax
credit carryforwards as of year-end; statutory depletion and tax credits
applicable to future oil and gas-producing activities are also considered
in the income tax computation.
F-24
<PAGE> 71
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT 10% PER ANNUM
The principal changes in the aggregate standardized measure of discounted
future net cash flows attributable to the Company's proved developed oil and gas
reserves are shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Standardized measure at beginning of year............. $ 3,539 $ 4,009 $ 5,566
Sales and transfers of oil and gas produced, net of
production costs.................................... (2,707) (2,337) (3,891)
Net changes in sales price and future production and
development costs................................... (390) (1,516) 807
Extensions, discoveries and improved recovery, less
related costs....................................... 2,771 4,070 6,278
Sales of minerals-in-place............................ -- (727) --
Revision of previous quantity estimates............... 863 2,226 667
Accretion of discount................................. 354 401 574
Changes in production rates and other................. (154) (71) (230)
Net change in income taxes............................ (267) (489) (1,103)
------- ------- -------
Standardized measure at end of year................... $ 4,009 $ 5,566 $ 8,668
======= ======= =======
</TABLE>
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of demand deposits, temporary
cash investments and trade receivables.
The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
1994 and 1995, the Company's demand deposits and temporary cash investments
consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under
$100,000 and cash on hand............................... $ 571,446 $ 563,743
Deposit in FDIC and SIPC-insured institutions over
$100,000 and cash on hand............................... 4,258,509 4,984,675
Investment in U.S. Treasury securities.................... 985,875 --
Mutual fund collateralized by U.S. Treasury obligations
and repurchase agreements which are collateralized by
U.S. Treasury securities................................ 2,336,268 6,664,034
----------- -----------
8,152,098 12,212,452
Less outstanding checks and other reconciling items....... (1,307,039) (2,867,958)
----------- -----------
Cash and cash equivalents................................. 6,845,059 9,344,494
Investment in U.S. Treasury securities (at cost as of
March 31)............................................... 2,570,459 524,323
----------- -----------
$ 9,415,518 $ 9,868,817
========== ==========
</TABLE>
Concentrations of credit risk with respect to trade receivables are
primarily focused on contract drilling receivables. The concentration is
mitigated by the diversification of customers for which the Company provides
drilling services. No significant losses from individual contracts were
experienced during the years
F-25
<PAGE> 72
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1994 and 1995. Included in general and administrative expense
for the period ended December 31, 1993, is a provision for 100% of a doubtful
receivable in the approximate amount of $355,500. Included in general and
administrative expense for the periods ended December 31, 1994 and 1995 are
provisions for doubtful receivables of $107,757 and $137,757, respectively.
The carrying values of cash and cash equivalents, marketable securities and
trade receivables approximate fair value due to the short-term maturity of these
assets.
16. RELATED PARTY TRANSACTIONS
Use of assets -- The Company leases a 1981 Beech King-Air 90 airplane owned
by an affiliate of the Company's Chairman of the Board/Chief Executive Officer.
Under the terms of the lease, the Company pays a monthly rental of $9,200 and
the costs of fuel, insurance, taxes and maintenance of the aircraft. From July,
1992, until January, 1995, the Company and another affiliate of the Chairman of
the Board/Chief Executive Officer were co-lessees of the aircraft. Under the
agreement the Company paid a monthly rental of $4,500 plus the Company's
proportionate share of fuel and shares the insurance, taxes and maintenance
equally with co-lessee. The Company paid approximately $105,461, $126,497, and
$174,455 for the lease of the airplane during 1993, 1994 and 1995, respectively.
Purchase of oilfield equipment and related parts -- In October, 1994, the
Company purchased oilfield equipment and parts from an entity currently owned
50% by an affiliate of the Company's Chairman of the Board/Chief Executive
Officer and 50% by the President/Chief Operating Officer. The amount of the
purchase was $150,000 and the Company had a related accounts payable of $125,000
to this entity at December 31, 1994.
Contract drilling services -- A company owned in part by a relative of the
Chairman of the Board/Chief Executive Officer, contracted drilling services from
the Company during 1993, 1994 and 1995. Revenues for 1993, 1994 and 1995 include
approximately $960,000, $338,000, and $597,700, respectively, for these
services.
Sales of oil -- A company owned in part by a relative of the Chairman of
the Board/Chief Executive Officer, acted as the first purchaser of oil produced
from leases operated by the Company during 1995. Sales of oil to that entity,
both royalty and working interest (including the Company) were approximately
$5,870,000.
Joint operation of oil and gas properties -- The Company operates certain
oil and gas properties in which the Chairman of the Board/Chief Executive
Officer, the President/Chief Operating Officer and other persons or entities
related to the Company purchased a joint interest ownership with the Company and
other industry partners. The Company made oil and gas production payments (net
of royalty) of $3,802,766, $2,765,303, and $3,907,116 from these properties in
1993, 1994 and 1995, respectively, to the aforementioned persons or entities.
These persons or entities reimbursed the Company for joint operating costs of
$3,605,569, $2,347,547, and $5,174,970 in 1993, 1994 and 1995, respectively.
Common ownership in Navajo Rigs -- Certain officers, directors and
stockholders of the Company were also shareholders in Navajo Rigs (See Note 7).
Note payable to related parties -- Note payable to related parties is
listed in Note 5.
Sale of treasury stock to existing stockholders -- In January, 1993, the
Company sold 97,554 shares of treasury stock to the existing stockholders of the
Company (including officers and directors) on a proportionate share ownership
basis. The shares were sold for $0.54 per share and the proceeds were used to
retire a note payable to an affiliate of the Company's Chairman of the
Board/Chief Executive Officer (See Note 7).
F-26
<PAGE> 73
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)
Effective March 31, 1996, the Company revised its estimates relative to the
realization of the future benefits of its net operating loss carryforwards and,
accordingly, fully reduced the related valuation allowance recognizing a net
deferred income tax benefit of $1,610,000. The Company continues to maintain a
valuation allowance of approximately $470,000 as it does not appear likely that
the Company will realize the benefit of certain other deferred tax assets prior
to their respective expirations.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" during the fiscal quarter ended March 31, 1996. The Statement
established accounting standards for determining the impairment of the Company's
long-lived assets. Implementation of the Statement did not result in any
adjustments to the carrying values of such assets.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" during the fiscal quarter ended March
31, 1996. The Statement defines a fair value based method of accounting (i.e.,
using an option pricing model such as Black-Scholes) for employee stock options
or similar equity instrument plans, but also allows an entity to measure
compensation costs for those plans using the intrinsic value (the amount by
which the market price of the underlying stock exceeds the underlying price of
the option) based method of accounting as prescribed by Accounting Principles
Board Opinion No. 25. The Company has elected to continue using the intrinsic
value based method as allowed by the Statement.
On June 6, 1996, pursuant to the terms of the Company's Non-Employee
Directors' Stock Option Plan, options to purchase a total of 2,000 shares were
granted. The Company did not incur any compensation related expenses as a result
of this transaction. For the nine months ended September 30, 1996, stock options
to purchase 180,000 shares of Patterson's common stock were granted in which no
compensation expense was incurred. Furthermore, significant compensation expense
would not have been incurred had a fair value based method of accounting (i.e.,
Black-Sholes) been applied to the above described activity.
On July 12, 1996, pursuant to the terms of the Underwriter's Warrant
Agreement dated November 2, 1993, as amended on November 15, 1994 and June 18,
1996, the Company authorized the issuance of 38,224 shares of Patterson's common
stock upon exercise of the 75,316 warrants. In lieu of a cash payment to
Patterson, the warrant holders chose to forfeit 37,092 shares of common stock
back to Patterson, in order to receive 38,224 shares of Patterson's common
stock. The number of shares forfeited and received by the respective warrant
holders was determined using the stated exercise price of the warrants ($8.68),
the fair market value of Patterson's common stock on the date of the exercise
($17.625) and the difference between the stated exercise price and the fair
market value on the date of exercise ($8.95). The difference of $8.95 was
multiplied by the total number of outstanding warrants (75,316) and then divided
by the fair market value ($17.625) to determine the number of shares to be
received.
On July 30, 1996, prior to consummation of the merger on that date, the
stockholders of Patterson at a special meeting thereof, approved an amendment to
Patterson's Certificate of Incorporation providing for an increase in the number
of authorized shares of Patterson's common stock from 5,000,000 shares to
9,000,000 shares and the issuance of 1,577,514 shares of Patterson's common
stock in connection with the merger.
On July 30, 1996, 120,440 stock options, which were exercisable at an
average per share price of $10.13, granted under the Stock Incentive Plan,
became exercisable due to a change in control as defined in the Stock Incentive
Plan. These stock options were granted in 1995 and were due to become
exercisable at various dates through the year 1999. The change in control was
affected by the issuance of shares to the former Tucker Stockholders upon
consummation of the merger of a subsidiary of the Company and Tucker pursuant to
the Merger Agreement discussed in Note 2. As of September 30, 1996, there were
stock options covering a total of 378,910 shares of common stock granted, of
which 371,910 options were exercisable.
F-27
<PAGE> 74
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 27, 1996, Patterson Drilling entered into a loan agreement
(the "Loan Agreement") with The CIT Group/Equipment Financing, Inc. ("CIT")
providing for a credit facility (the "Loan") of the lesser of 68% of the
collateral value or $22,000,000. The Loan is recourse and collateralized by the
40 drilling rigs, currently owned by Patterson Drilling, related drilling
equipment and any drilling rigs and/or drilling equipment acquired with the
proceeds.
The Loan is a short-term loan until August 31, 1997 (the "Short-Term Loan
Period"), at which time (the "Long-Term Loan Conversion Date") the Loan will be
converted into a 60-month term loan. No advances under the Loan may be made
after the Long-Term Loan Conversion Date. During the Short-Term Loan Period,
Patterson Drilling must repay all amounts under the Loan Agreement in monthly
installments of $50,000 plus accrued interest through January 31, 1997, and
monthly installments of $100,000 plus accrued interest thereafter until the
Long-Term Loan Conversion Date; and then, commencing on that date, Patterson
Drilling must pay principal and interest in monthly installments in the amount
necessary to amortize 75% of the balance of the Loan outstanding on the
Long-Term Conversion Date, with the final installment payable on August 31, 2002
(the "Maturity Date"), to include a balloon amount sufficient to discharge all
accrued and unpaid interest, unpaid principal and unpaid premiums, outstanding
under the Loan Agreement and related secured promissory note (the "Note").
Interest on the outstanding principal balance of the Note is payable monthly in
arrears at a rate of interest, computed on the basis of a 365-day year and
actual days elapsed, equal to the LIBOR Rate plus 2.75% or, if the LIBOR Rate
becomes impracticable, the interest rate will be the prime rate, from time to
time, of The Chase Manhattan Bank, New York, New York, plus 1%.
The Loan Agreement required the payment of a $20,000 commitment fee and
requires payment of a revolving loan fee of 0.25% per year on the unused portion
of the Loan during the Short-Term Loan Period. The Loan Agreement contains a
number of representations, warranties and covenants of Patterson Drilling and
Patterson, the breach of which, at the election of CIT would accelerate the
Maturity Date of the Loan. The covenants of Patterson include (i) maintenance on
a quarterly basis of a consolidated cash flow coverage ratio of at least 2:1.0
(sum of Patterson's net income on a consolidated basis, plus depreciation,
depletion and amortization, less dividends paid and extraordinary items of
income in the prior four quarters, divided by the sum of the current portion of
long-term debt and capitalized lease obligations coming due in the following
four quarters); (ii) maintenance on a consolidated basis of tangible net worth
of at least $36,000,000; and (iii) maintenance on a consolidated basis of a
ratio of total liabilities to tangible net worth of not greater than 1.25:1.0.
In addition, without the prior written consent of CIT, Patterson cannot, among
other things, conduct any business not being conducted by it on September 27,
1996, or liquidate, dissolve or merge into any other entity or materially change
its management.
On October 24, 1996, Patterson acquired 100% of the stock of a
privately-owned, non-affiliated contract drilling company for a purchase price
of $13 million. The acquisition included, among other things, six oil and gas
contract drilling rigs, related drilling equipment, three trucks, one yard and
shop facility and net working capital of $4.3 million. The acquisition was
funded with the remaining credit facility provided by the CIT Loan discussed in
Note 7 above and existing cash of the Company.
During November and December, 1996, in two separate transactions, the
Company acquired 15 drilling rigs and other assets. The total consideration paid
for these assets was approximately $4.2 million consisting of $2.4 million cash,
a $400,000 promissory note payable and 52,000 shares of the Company's common
stock, valued, for purposes of this transaction at approximately $1.4 million.
In December, 1996, the Company repaid amounts then outstanding under a line
of credit note payable in the amount of $609,000 with Financial Services
Partnership of Snyder, an entity related to the Company's Chairman of the
Board/Chief Executive Officer and the Company's President/Chief Operating
Officer. The line of credit was paid prior to its maturity which was December,
1997.
F-28
<PAGE> 75
GLOSSARY OF INDUSTRY TERMS
The following are definitions of certain industry terms used in this Prospectus:
Bbls....................... Refers to barrels of 42 U.S. gallons and represents
the basic unit for measuring the production of
crude oil and condensate.
BOE........................ Refers to barrels of oil equivalent. In reference
to natural gas, natural gas equivalents are
determined using the rate of six Mcf of natural gas
(including natural gas liquids) to one Bbl of crude
oil or condensate.
Daywork Contracts.......... Drilling contracts pursuant to which the contractor
is compensated based on a negotiated rate per day
that the drilling rig is utilized.
Completion................. Those processes necessary before production occurs
from a well and after the drillers have reached the
producing formation.
Developed Acreage.......... Lease acres spaced or assigned to productive wells.
Development Well........... A well drilled within the proved area of an oil or
gas reservoir to a depth known to be productive.
Dry Hole................... An exploratory or development well found to be
incapable of producing either oil or gas in paying
quantities (i.e., proceeds of production exceed
operating expenses).
Exploratory Well........... A well drilled to find and produce oil and 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.
Footage Contracts.......... Drilling contracts pursuant to which the contractor
is compensated based on a rate-per-foot-drilled
basis at completion of the well.
Formation.................. A succession of sedimentary beds that were
deposited continuously and under the same general
condition. Formations are usually named for the
town or area in which they were first recognized,
often at the place where the formation outcrops.
For example, the Austin Chalk formation outcrops at
Austin, Texas.
Gross Acre................. An acre in which a working interest is owned. The
number of gross acres is the total number of acres
in which a working interest is owned.
Gross Well................. A well in which a working interest is owned. The
number of gross wells is the total number of wells
in which a working interest is owned.
Horizontal Drilling........ High angle directional drilling with lateral
penetration of one or more productive reservoirs.
Leasehold Interest......... Full or partial interest in oil and gas mineral
rights, fee rights, or other rights authorizing the
owner of such interest to drill for, produce, and
sell oil and gas upon payment of delay rentals,
bonuses, and/or royalties. Leases are generally
acquired from federal and state governments and
private landowners.
MBOE....................... Refers to 1,000 BOE.
MMcf....................... Refers to a volume of 1,000,000 cubic feet under
prescribed conditions of pressure and temperature.
Mcf........................ Refers to a volume of 1,000 cubic feet under
prescribed conditions of pressure and temperature
and represents the basic unit for measuring volumes
of produced gas.
Net Acre................... Deemed to exist when the sum of the fractional
ownership working interests in gross acres equals
one. The number of net acres is the sum of
G-1
<PAGE> 76
the fractional ownership working interests owned in
gross acres expressed as whole numbers and
fractions thereof.
Net Well................... Deemed to exist when the sum of fractional
ownership working interests in gross wells equals
one. The number of net wells is the sum of the
fractional ownership working interests owned in
gross wells expressed as whole numbers and
fractions thereof.
Operator................... Any person, partnership, corporation, or other
entity engaged in the business of exercising direct
supervision over the drilling or production from an
oil and/or gas well, usually pursuant to the terms
of an operating agreement with the working interest
owners in the well.
Producing Properties....... Properties that contain one or more wells that
produce oil and/or gas in paying quantities.
Productive Well............ A well that is found capable of producing oil
and/or gas in paying quantities.
Proved Reserves............ Estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and
engineering data demonstrate with reasonable
certainty to be recoverable in future years from
known reservoirs under existing economic
conditions; i.e., prices and costs as of the date
the estimate is made.
Proved Developed
Reserves................... Proved oil and gas reserves which can be expected
to be recovered through existing wells with
existing equipment and operating methods.
Rig Utilization Rate or
Utilization Rate......... Rig utilization is based on a 365-day year for rigs
available for service during the periods indicated.
A rig is utilized when it is operating or being
moved, assembled or dismantled under contract.
SEC PV-10 Value............ The present value of estimated future revenues to
be generated from the production of proved reserves
calculated in accordance with Securities and
Exchange Commission guidelines, net of estimated
production and future development costs, using
prices and costs as of the date of estimation
without future escalation, without giving effect to
non-property related expenses such as general and
administrative expenses, debt service, future
income tax expense and depreciation, depletion and
amortization, and discounted using an annual
discount rate of 10%.
Turnkey Contracts.......... Drilling contracts pursuant to which the contractor
receives a pre-determined fixed payment in
consideration for, and only upon completion of,
drilling to a specified depth and performing
certain other negotiated services.
Undeveloped Acreage........ Leased acres on which wells have not been drilled
or completed to a point that would permit the
production of commercial quantities of oil and gas,
regardless of whether such acreage contains proved
reserves.
Working Interest........... The operating interest under a lease, the owner of
which has the right to explore for and produce oil
and gas covered by the lease. The full working
interest bears 100% of the costs of exploration,
development, production and operation, and is
entitled to the portion of the gross proceeds of
production which remains after proceeds allocable
to royalty and overriding royalty interests or
other lease burdens have been deducted.
3-D Seismic................ Seismic data that yields a three-dimensional
picture of the subsurface.
G-2
<PAGE> 77
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- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Disclosure Regarding Forward-Looking
Statements.......................... 11
The Company........................... 12
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business and Properties............... 23
Management............................ 34
Principal and Selling Stockholders.... 37
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 41
Underwriting.......................... 42
Legal Matters......................... 43
Experts............................... 43
Available Information................. 44
Incorporation of Certain Documents by
Reference........................... 44
Index to Consolidated Financial
Statements.......................... F-1
Glossary of Industry Terms............ G-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,727,000 Shares
[LOGO]
PATTERSON ENERGY, INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the Prospectus included as part of this Registration
Statement.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of Common Stock registered hereby,
all of which expenses, except for the Commission registration fee and the NASD
filing fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------------------------------------------------------------------------------- -------
<S> <C>
Registration fee................................................................... $15,572
NASD filing fee.................................................................... 5,639
Nasdaq National Market additional listing fee...................................... *
Accounting fees and expenses....................................................... *
Legal fees and expenses............................................................ *
Printing expenses.................................................................. *
Blue Sky fees and expenses......................................................... *
Transfer agent fees and expenses................................................... *
Miscellaneous...................................................................... *
------
Total.................................................................... $
======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The DGCL provides for indemnification by a corporation of costs incurred by
directors, employees and agents in connection with an action, suit or proceeding
brought by reason of their position as a director, employee or agent. The person
being indemnified must have acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation. The
DGCL provides that a corporation may advance payment of expenses. The DGCL
further provides that the indemnification and advancement of expenses provisions
of the DGCL will not be deemed exclusive of any other rights to which these
indemnifications or advancements of expenses may be entitled under bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action under official capacity and as to action in another capacity when
holding such office.
In addition to the general indemnification section, Delaware law provides
further protection for directors under Section 102(b)(7) of the DGCL. This
section was enacted in June 1986 and allows a Delaware corporation to include in
its certificate of incorporation a provision that eliminates and limits certain
personal liability of a director for monetary damages for certain breaches of
the director's fiduciary duty of care, provided that any such provision does not
(in the words of the statute) do any of the following:
"eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of this Title
[dealing with willful or negligent violation of the statutory provision
concerning dividends and stock purchases and redemptions], or (iv) for any
transaction from which the director derived an improper personal benefit.
No such provision shall eliminate or limit the liability of a director for
any act or omission occurring prior to the date when such provision becomes
effective . . . . "
II-1
<PAGE> 79
The Board of Directors is empowered to make other indemnification as
authorized under any bylaw, agreement, the Certificate of Incorporation, Bylaws
or corporate resolution so long as the indemnification is consistent with the
DGCL.
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted by the DGCL, a director of the Company will not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director. The Company's Bylaws provide that to the extent that a
director or officer of the Company is successful on the merits in the defense of
a suit or proceeding brought against him by reason of the fact that he is a
director or officer of the Company, he shall be indemnified against expenses
(including attorneys' fees) reasonably incurred in connection with such action.
In other circumstances, a director or officer of the Company may be indemnified
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in and not opposed to the best interests of the
Company, and, with respect to a criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful; however, in an action or suit by or
in the right of the Company to procure a judgment in its favor, such person will
not be indemnified if he has been adjudged to be liable to the Company unless
and only to the extent that, the Delaware Court of Chancery or the court in
which such action or suit was brought determines upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court deems proper. A determination
that indemnification of a director or officer is proper will be made by a
disinterested majority of the Company's Board of Directors, by independent legal
counsel or by the stockholders of the Company. The Company's Bylaws also provide
that the Company may advance the payment of expenses and that the
indemnification and advancement of expenses provisions of the Bylaws are
nonexclusive. The Company maintains director and officer liability insurance
covering director and officer indemnification.
The Underwriters have agreed pursuant to the Underwriting Agreement filed
as Exhibit 1.1 to indemnify directors, officers and controlling persons of the
Company against certain liabilities, including liabilities under the Securities
Act.
ITEM 16. EXHIBITS.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT ITEM 601 CROSS
NUMBER REFERENCE DOCUMENT AS FORM S-3 EXHIBIT
------ -------------- ------------------------------------------------------------
<C> <C> <S>
1.1 1 Form of Underwriting Agreement(1)
2.1 2 Agreement and Plan of Merger, dated as of April 22, 1996,
among Patterson Drilling Company and Tucker Drilling
Company, Inc. and amendment thereto, dated May 16, 1996(2)
2.2 2 Stock Purchase Agreement, dated as of October 23, 1996, by
and among Patterson Drilling Company and H. Gene Sledge,
Joyce A. Sledge, David W. Sledge and Michael G. Sledge(3)
4.1 4 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock
5.1 5 Opinion of Baker & Hostetler re: legality of the shares to
be offered(1)
15.1 15 Letter of Coopers & Lybrand L.L.P. re: unaudited interim
financial information(1)
23.1 23 Consent of Coopers & Lybrand L.L.P.
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT ITEM 601 CROSS
NUMBER REFERENCE DOCUMENT AS FORM S-3 EXHIBIT
------ -------------- ------------------------------------------------------------
<C> <C> <S>
23.2 23 Consent of Arthur Andersen LLP
23.3 23 Consent of M. Brian Wallace, independent petroleum engineer
23.4 23 Consent of Baker & Hostetler (included in Exhibit 5.1)(1)
24.1 24 Powers of Attorney (included on the signature page hereto)
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996.
(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996.
ITEM 17. UNDERTAKINGS.
1. The Company hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
(b) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) For purposes of determining any liability under the Securities Act
of 1933, each filing of the Company's Annual Report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed to
be a new Registration Statement relating to the securities offered herein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering hereof.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Snyder, State of Texas on the 18th day of December,
1996.
PATTERSON ENERGY, INC.
By: /s/ A. GLENN PATTERSON
--------------------------------
A. Glenn Patterson
President and Chief Operating
Officer
Each of the undersigned officers and directors of Patterson Energy, Inc.
hereby appoints Cloyce A. Talbott and A. Glenn Patterson, as attorneys and
agents for the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned, to sign and file with the Securities
and Exchange Commission under the Securities Act of 1933 any and all amendments
(including post-effective amendments) and exhibits to this Registration
Statement, any additional registration statements pursuant to Rule 462 of the
Securities Act of 1933 and any and all applications, instruments or documents to
be filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby, with full power and authority to
do and perform any and all acts and things whatsoever requisite and necessary or
desirable.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of December 18, 1996, by the following
persons in the capacities indicated:
<TABLE>
<C> <S>
/s/ CLOYCE A. TALBOTT Chairman of the Board, Director and Chief
- --------------------------------------------- Executive Officer
Cloyce A. Talbott Principal Executive Officer
/s/ A. GLENN PATTERSON President, Chief Operating Officer and
- --------------------------------------------- Director
A. Glenn Patterson
/s/ ROBERT C. GIST Director
- ---------------------------------------------
Robert C. Gist
/s/ KENNETH E. DAVIS Director
- ---------------------------------------------
Kenneth E. Davis
/s/ VINCENT A. ROSSI, JR. Director
- ---------------------------------------------
Vincent A. Rossi, Jr.
/s/ JAMES C. BROWN Vice President -- Finance, Secretary,
- --------------------------------------------- Treasurer and Chief Financial Officer
James C. Brown Principal Accounting Officer
</TABLE>
II-4
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT ITEM 601 CROSS
NUMBER REFERENCE DOCUMENT AS FORM S-3 EXHIBIT
- ------ -------------- --------------------------------------------------------------------
<C> <C> <S>
1.1 1 Form of Underwriting Agreement(1)
2.1 2 Agreement and Plan of Merger, dated as of April 22, 1996, among
Patterson Drilling Company and Tucker Drilling Company, Inc. and
amendment thereto, dated May 16, 1996(2)
2.2 2 Stock Purchase Agreement, dated as of October 23, 1996, by and among
Patterson Drilling Company and H. Gene Sledge, Joyce A. Sledge,
David W. Sledge and Michael G. Sledge(3)
4.1 4 Excerpt from Restated Certificate of Incorporation of Patterson
Energy, Inc. regarding authorized Common Stock and Preferred Stock
5.1 5 Opinion of Baker & Hostetler re: legality of the shares to be
offered(1)
15.1 15 Letter of Coopers & Lybrand L.L.P. re: unaudited interim financial
information(1)
23.1 23 Consent of Coopers & Lybrand L.L.P.
23.2 23 Consent of Arthur Andersen LLP
23.3 23 Consent of M. Brian Wallace, independent petroleum engineer
23.4 23 Consent of Baker & Hostetler (included in Exhibit 5.1)(1)
24.1 24 Powers of Attorney (included on the signature page hereto)
</TABLE>
- ---------------
(1) To be filed by amendment.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996.
(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996.
<PAGE> 1
EXHIBIT 4.1
EXCEPT FROM RESTATED CERTIFICATE OF INCORPORATION
OF PATTERSON ENERGY, INC.
"Section 2. COMMON STOCK
2.1 Issuance, Consideration, and Terms. Any unissued shares of the Common
Stock may be issued from time to time for such consideration, having a value of
not less than the par value thereof, as may be fixed from time to time by the
Board of Directors. Any treasury shares may be disposed of for such
consideration as may be determined from time to time by the Board of Directors.
The Common Stock shall be subject to the express terms of the Preferred Stock
and any series thereof. Each share of Common Stock shall be of equal rank and
shall be identical to every other share of Common Stock. Holders of Common Stock
shall have such rights as are provided herein and by law.
2.2 Voting Rights. Except as expressly required by law or as provided in or
fixed and determined pursuant to Section 1 of this Article FOURTH, the entire
voting power and all voting rights shall be vested exclusively in the Common
Stock. Each holder of shares of Common Stock shall be entitled to one (1) vote
for each share standing in such holder's name on the books of the Corporation.
2.3 Dividends. Subject to Section 1 of this Article FOURTH, the holders of
Common Stock shall be entitled to receive, and shall share equally share for
share, when and as declared by the Board of Directors, out of the assets of the
Corporation which are by law available therefor, dividends or distributions
payable in cash, in property, or in securities of the Corporation."
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 of
(i) our report dated February 28, 1996, except as to the Tucker Drilling
Company, Inc. merger discussed in Note 2 for which the date is September 13,
1996, on our audits of the consolidated financial statements of Patterson
Energy, Inc. We also consent to the incorporation by reference of (ii) our
report dated February 28, 1996, on our audits of the consolidated financial
statements of Patterson Energy, Inc. which report is included in Patterson
Energy, Inc.'s Annual Report on Form 10-KSB for the year ended December 31,
1995, and (iii) our report dated September 13, 1996 on our audits of the
supplemental consolidated financial statements of Patterson Energy, Inc. which
report is included in Patterson Energy, Inc.'s Current Report on Form 8-K/A
(Amendment No. 2) dated July 30, 1996. We also consent to the reference to our
firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Dallas, Texas
December 18, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this Registration Statement and to the incorporation by
reference in this Registration Statement of our report dated May 16, 1996,
included in the Patterson Energy, Inc., Current Report on Form 8-KA (Amendment
No. 2) dated July 30, 1996, and to all references to our firm included in this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
December 18, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
I hereby consent to the use in the Prospectus constituting a part of the
Registration Statement on Form S-3 (the "Registration Statement"), filed by
Patterson Energy, Inc. ("Patterson") with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, of information contained in my
summary reserve report dated December 16, 1996, relating to the oil and gas
reserves and revenues, as of December 31, 1993, 1994 and 1995 and as of
September 30, 1996, of certain properties owned by Patterson and all references
to me under the headings "Prospectus Summary -- Summary Operating and Oil and
Natural Gas Data," "Business and Properties -- Oil and Natural Gas
Operations -- Oil and Natural Gas Reserves" and "Experts" in such Prospectus,
and further consent to me being named as an expert therein.
/s/ M. BRIAN WALLACE
M. BRIAN WALLACE, P.E.
Dallas, Texas
December 18, 1996
