<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-22664
PATTERSON ENERGY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2504748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P. O. Drawer 1416, 4510 Lamesa Highway, Snyder, Texas 79550
(Address of principal executive offices) (Zip Code)
(915) 573-1104
(Registrant's telephone number, including area code)
No change
(Former name, former address and former fiscal year, if changed from last
report.)
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
As of November 1, 1996 the issuer had 4,810,689 shares of Common Stock, par
value $0.01 per share, outstanding.
<PAGE> 2
PATTERSON ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Unaudited consolidated balance sheets 3
Unaudited consolidated statements of operations 5
Unaudited consolidated statements of
stockholders' equity 6
Unaudited consolidated statements of cash flows 7
Notes to unaudited consolidated financial
statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings 17
Item 4. Submission of matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE FOLLOWING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDE ALL
ADJUSTMENTS WHICH, IN THE OPINION OF MANAGEMENT, ARE NECESSARY IN
ORDER TO MAKE SUCH FINANCIAL STATEMENTS NOT MISLEADING.
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 9,344,494 $ 9,450,477
Marketable securities......................................... 524,323 524,323
Accounts receivable:
Trade:
Billed.................................................... 10,570,891 10,809,438
Unbilled.................................................. 2,048,782 2,170,650
Oil and gas sales........................................... 712,497 820,202
Costs of uncompleted contracts in excess of related billings.. -- 330,557
Equipment inventory........................................... 413,677 490,342
Deferred income taxes......................................... 1,058,947 614,567
Undeveloped oil and gas properties held for resale............ 2,122,112 2,549,906
Other current assets.......................................... 351,579 416,379
----------- -----------
Total current assets........................................ 27,147,302 28,176,841
----------- -----------
Property and equipment, at cost, net............................ 34,385,345 36,660,298
Deferred income taxes........................................... 347,892 2,531,395
Deposits on workers' compensation insurance policy.............. 343,760 343,760
Other assets.................................................... 766,546 785,290
----------- -----------
Total assets................................................ $62,990,845 $68,497,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
(continued)
3
<PAGE> 4
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Current liabilities:
Current maturities of notes payable.......................... $ 909,634 $ 4,039,952
Accounts payable:
Trade...................................................... 7,115,697 8,174,718
Revenue distribution....................................... 1,686,626 2,226,419
Other...................................................... 297,184 16,582
Accrued expenses............................................. 2,042,254 2,465,439
----------- -----------
Total current liabilities................................ 12,051,395 16,923,110
----------- -----------
Deferred liabilities........................................... 376,746 722,786
Notes payable, less current maturities......................... 12,906,473 11,614,622
----------- -----------
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, issued 4,747,083
shares at December 31, 1995 and
4,810,689 shares at September 30, 1996................. 47,471 48,107
Additional paid-in capital................................. 19,047,037 19,255,879
Retained earnings.......................................... 18,561,723 19,933,080
----------- -----------
Total stockholders' equity............................ 37,656,231 39,237,066
----------- -----------
Total liabilities and stockholders' equity....... $62,990,845 $68,497,584
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4
<PAGE> 5
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1995 1996 1995 1996
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
Drilling.................................. $ 15,258,974 $ 17,516,689 $ 42,655,844 $ 47,724,707
Oil and gas sales......................... 1,279,911 2,296,285 3,831,366 5,939,900
Well operation fees....................... 354,065 339,537 940,135 1,110,813
Other..................................... 11,564 110,465 133,919 280,234
------------- ------------- -------------- -------------
16,904,514 20,262,976 47,561,264 55,055,654
------------- ------------- -------------- -------------
Operating costs and expenses:
Direct drilling costs..................... 12,363,202 14,076,755 34,431,381 38,817,618
Writedown due to impairment of long-
lived assets.......................... -- -- -- 159,403
Exploration costs......................... 95,919 110,865 227,258 343,581
Dry holes and abandonments................ 170,243 257,670 373,270 611,732
Lease operating and production............ 335,309 472,190 1,070,674 1,468,390
Depreciation, depletion and amortization.. 1,789,213 2,966,143 5,285,551 7,753,384
General and administrative expense........ 1,294,973 1,298,291 3,607,326 3,943,887
------------- ------------- -------------- -------------
16,048,859 19,181,914 44,995,460 53,097,995
------------- ------------- -------------- -------------
Operating income............................ 855,655 1,081,062 2,565,804 1,957,659
------------- ------------- -------------- -------------
Other income (expense):
Net gain on sale of assets................ 216,202 133,322 335,961 532,684
Interest income........................... 142,079 128,309 422,475 376,734
Interest expense.......................... (301,483) (340,225) (761,638) (985,373)
Non-recurring acquisition costs........... -- (1,763,331) -- (2,268,331)
Other..................................... 9,705 22,899 (6,110) 97,185
------------- ------------- -------------- -------------
66,503 (1,819,026) (9,312) (2,247,101)
------------- ------------- -------------- -------------
Income (loss) before income taxes........... 922,158 (737,964) 2,556,492 (289,442)
------------- ------------- -------------- -------------
Income tax expense (benefit):
Current................................... 143,501 19,640 264,275 112,030
Deferred.................................. (113,809) (145,754) (208,052) (2,531,395)
------------- ------------- -------------- -------------
Income tax expense (benefit)........... 29,692 (126,114) 56,223 (2,419,365)
------------- ------------- -------------- -------------
Net income (loss)........................... $ 892,466 $ (611,850) $ 2,500,269 $ 2,129,923
============= ============= ============== =============
Net income (loss) per common share:
Primary................................ $ .20 $ (.12) $ .59 $ .43
============= ============= ============== =============
Assuming full dilution................. $ .20 $ (.12) $ .55 $ .43
============= ============= ============== =============
Weighted average number of
common shares outstanding:
Primary................................ 4,500,292 5,016,739 4,261,488 4,949,593
============= ============= ============== =============
Assuming full dilution................. 4,532,678 5,016,739 4,532,678 4,979,510
============= ============= ============== =============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5
<PAGE> 6
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
-------------------------- Additional
Number paid-in Retained
of shares Amount capital earnings Total
-------------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995..... 4,747,083 $ 47,471 $ 19,047,037 $ 18,561,723 $ 37,656,231
Exercise of stock options..... 25,382 254 209,224 -- 209,478
Conversion of 75,316
underwriters' redeemable
warrants................... 38,224 382 (382) -- --
Net income..................... -- -- -- 2,129,923 2,129,923
Change in Tucker Drilling
Company, Inc. fiscal year.. -- -- -- (758,566) (758,566)
--------- ---------- -------------- -------------- --------------
Balance, September 30, 1996.... 4,810,689 $ 48,107 $ 19,255,879 $ 19,933,080 $ 39,237,066
========= ========== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
<PAGE> 7
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
1995 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 2,500,269 $ 2,129,923
Adjustments to reconcile net income to net cash from
operating activities:
Loss on abandonments.................................... 35,304 118,550
Depreciation, depletion and amortization................ 5,285,551 7,753,384
Writedown due to impairment of long-lived assets........ -- 159,403
Net gain on sale of assets.............................. (335,961) (532,684)
Deferred income tax benefit............................. (208,052) (2,531,395)
Change in current assets and liabilities:
Decrease in trade accounts receivable............... 2,242,334 568,614
Increase in oil and gas sales receivable............ (129,415) (333,175)
(Increase) decrease in costs in excess............... 313,110 (330,557)
Increase in oil and gas properties held for resale.. (617,586) (427,794)
(Increase) decrease in other current assets.......... 26,051 (448,655)
Increase (decrease) in trade accounts payable....... (916,631) 778,871
Increase in revenue distribution payable............ 200,138 622,610
Increase in deferred compensation payable........... 40,500 357,636
Increase (decrease) in other current payables....... 324,451 (194,985)
Net change in deposit on workers' compensation
insurance policy................................. 150,000 --
----------- -----------
Net cash provided by operating activities............... 8,910,063 7,689,746
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................ (15,236,661) (10,553,569)
Sale of property and equipment............................. 412,471 1,136,515
Net maturities of investment securities.................... 99,574 1,946,562
Changes in other assets.................................... (78,764) (56,713)
----------- -----------
Net cash used in investing activities................. (14,803,380) (7,527,205)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable................................ 8,000,000 3,170,000
Payments on notes payable.................................. (1,922,779) (1,331,533)
Issuance of common stock and redeemable warrants........... 3,009,911 --
Proceeds from exercise of stock options.................... 116,500 240,102
----------- -----------
Net cash provided by financing activities............. 9,203,632 2,078,569
----------- -----------
Net increase in cash and cash equivalents............. 3,310,315 2,241,110
Cash and cash equivalents at beginning of period............... 6,845,059 7,209,367 (1)
----------- -----------
Cash and cash equivalents at end of period..................... $10,155,374 $ 9,450,477
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................. $ 695,285 $ 984,059
Income taxes............................................. 222,487 155,144
- ----------
(1) Amount does not agree to cash and cash equivalents as presented as a result of conforming reporting periods.
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
(continued)
7
<PAGE> 8
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Non cash investing and financing activities:
During the nine months ended September 30, 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 the 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.
During July 1996, 75,316 redeemable warrants relative to the
Underwriters' Warrant Agreement dated November 2, 1993, as amended on November
15, 1994 and June 18, 1996, were converted in which 38,224 shares of Patterson
Energy, Inc. common stock were issued and 37,092 shares of such common stock
were forfeited to Patterson in lieu of a cash payment.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
8
<PAGE> 9
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 hereafter as the "Company"). All significant intercompany accounts
and transactions have been eliminated.
On April 19, 1996, Patterson filed a Certificate of Incorporation with
the Secretary of State of the State of Delaware organizing Patterson Drilling
Company ("Patterson Drilling") as a wholly-owned subsidiary of Patterson.
Patterson Drilling was formed solely for the purpose of acquiring Tucker
Drilling Company, Inc. ("Tucker") through a merger of Patterson Drilling with
and into Tucker (the "Merger"). The Merger, consummated on July 30, 1996, 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 financial accounting purposes. Accordingly, historical
financial information has been restated to provide for the retroactive effect
of the Merger. On October 2, 1996, the restated supplemental consolidated
financial statements as of December 31, 1994 and 1995 and for each of the three
years ended December 31, 1995, were filed with the Securities and Exchange
Commission on Form 8-KA, Amendment No. 2. These supplemental consolidated
financial statements become the historical consolidated financial statements of
Patterson.
The consolidated financial statements have been prepared by management
of Patterson, 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 Patterson believes that the disclosures
are adequate to make the information presented not misleading. In the opinion
of management, all adjustments (consisting of only normal recurring accruals)
considered necessary for presentation of the information have been included.
The results of operations for the nine months ended September 30, 1996
are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the 1995 consolidated
financial statements in order for them to conform with the 1996 presentation.
2. On April 22, 1996, as amended on May 16, 1996, Patterson and Tucker
executed the Agreement and Plan of Merger among and between Patterson Energy,
Inc., Patterson Drilling Company and Tucker Drilling Company, Inc. (the "Merger
Agreement") whereby Tucker would merge with and into Patterson Drilling.
Tucker survived the merger as a wholly-owned subsidiary of Patterson assuming
the name of Patterson Drilling Company. On July 30, 1996, the Merger was
consummated by a required approval of stockholders of both Patterson and
Tucker.
Pursuant to the terms of the Merger Agreement, each share of Tucker
common stock outstanding on July 30, 1996 was converted into a 0.74 of a share
of Patterson common stock ("Exchange Ratio"), 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 was reserved for issuance under the
outstanding Tucker stock options, (which, upon consummation of the Merger,
became options to purchase Patterson common stock).
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
(continued)
9
<PAGE> 10
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
number of authorized shares of Patterson common stock from 5,000,000 shares to
9,000,000 shares and the issuance of such shares of Patterson common stock in
connection with the Merger.
3. Effective March 31, 1996, Patterson 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. Patterson
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. Patterson has
recognized net deferred income tax benefit of approximately $2,531,000 for the
nine months ended September 30, 1996.
4. Patterson adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of" during
the fiscal quarter ended March 31, 1996. The Statement establishes 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 Patterson's assets through the period ended September 30,
1996.
5. Patterson 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. Patterson has elected to continue using the intrinsic
value based method as allowed by the Statement.
On June 6, 1996, pursuant to the terms of Patterson's Non-Employee
Directors' Stock Option Plan, options to purchase a total of 2,000 shares were
granted. An additional 5,000 options were granted pursuant to the terms of the
aforementioned plan in conjunction with the appointment of a new member to
Patterson's board of directors. Patterson did not incur any compensation
related expenses as a result of these transactions as the options were granted
with an exercised price equivalent to the fair market value of the underlying
stock on the date granted. For the nine months ended September 30, 1995, stock
options to purchase 180,000 shares of Patterson 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.
6. 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, Patterson authorized the issuance of 38,224 shares of Patterson's common
stock upon conversion of 75,316 warrants. In lieu of a cash payment to
Patterson, the warrant holders chose to forfeit 37,092 shares of common stock
to Patterson, in order to receive 38,224 shares of Patterson's common stock
(i.e., the cashless method). The number of shares forfeited and received was
determined using the stated exercise price of the warrants of $8.68, the fair
market value of Patterson's common stock on the date exercised of $17.63 and
the difference thereof. Effective October 11, 1996, the aforementioned shares
as well as 125,000 other shares issuable upon exercise of options previously
granted, were registered with the Securities Exchange Commission on a Form S-3
Registration Statement.
7. 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
(continued)
10
<PAGE> 11
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
of the Loan. The Loan is unconditionally guaranteed by Patterson Energy, Inc.
under the terms of a Guaranty dated September 27, 1996.
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 to 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 outstanding under the Loan
Agreement monthly in arrears in installments of $50,000 plus accrued interest
through January 31, 1997, and 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 one percent.
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 the Registrant'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 matters, 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.
During October 1996, certain of the proceeds were used to repay the
indebtedness of Patterson Energy to: (a) CIT under the Loan Agreement dated
March 14, 1995, a total of $7,730,000, and (b) U.S. Bancorp Leasing and
Financial under the loan agreement dated July 14, 1994, a total of $3,844,000.
8. On October 24, 1996, Patterson acquired 100% of the stock of a
privately-owned, non-affiliated contract drilling company for a net 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.
9. 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 plaintiff. The Company was engaged in
drilling a
(continued)
11
<PAGE> 12
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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. Additionally, the operator filed a claim against the
Company under the Company's drilling contract with the operator for
indemnification. During October 1996, all claims against the Company have been
settled within the limits of existing liability coverage and the Company has
been fully released from further related liability.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had working capital of
approximately $11,254,000 including cash and cash equivalents of approximately
$9,450,000. For the nine months ended September 30, 1996, the Company
generated net cash from operations of approximately $7,690,000, borrowed
additional funds in the amount of $3,170,000 and received approximately
$1,121,000 from the sale of various fixed assets. These funds were used
primarily to fund the Company's capital expenditure program including the
acquisition of drilling and related equipment of approximately $5,976,000, and
leasehold acquisition, exploration and development of approximately $4,262,000.
The funds were further utilized to reduce certain notes payable by
approximately $1,332,000 and to increase cash by approximately $2,241,000. In
addition a further strain on the Company's cash, which is not apparent in the
statement of cash flows, is approximately $2,268,000 of non-recurring
acquisition costs incurred by the Company during the nine months ended
September 30, 1996 relative the Company's acquisition of Tucker Drilling
Company, Inc.
The Company had a $10,000,000 line of credit with The CIT
Group/Equipment Financing, Inc. ("CIT") and a $4,000,000 line of credit with
Norwest Bank Texas, Wichita Falls, N.A. ("Norwest"). As of September 30, 1996,
the Company had drawn down $7,700,000 and approximately $3,600,000 on the lines
of credit with CIT and Norwest, respectively. During September 1996, the
Company entered into a financing agreement with CIT providing a credit facility
of $22 million. During October 1996, approximately $11,574,000 of such
facility was used to repay existing indebtedness to CIT and U.S. Bancorp
Leasing and Financial. The remaining unfunded portion of the above described
credit facility was drawn by the Company during October 1996 to substantially
finance the Company's acquisition of a non-affiliated contract drilling
company. As of October 31, 1996, approximately $21,949,000 was outstanding
related to this agreement with CIT.
The Company's management believes that it will continue to use cash
flow from operations and borrowings (if available) which, together with the
current working capital, should be sufficient to fund operations and service the
Company's debt for at least the next 12 months. The Company's ability to
generate sufficient cash flow for operations including repayment of debt would
be adversely affected by a decline in natural gas and crude oil prices or by
unsuccessful results in the Company's contract drilling or exploration,
development and production activities. See "Volatility of Oil and Gas Prices"
below in this item.
The Company believes it must continually upgrade and maintain its
contract drilling fleet. As such, the Company has expended approximately
$5,976,000 in capital expenditures for fiscal year 1996 for its contract
drilling segment. For the nine months ended September 30, 1996, a significant
portion of the aforementioned capital expenditures included purchases of
approximately 129,000 feet (or approximately $3,363,000, of which approximately
$1,286,000 was expended during the three months ended September 30, 1996) of
new drill pipe. Management contends that although the net operating income
generated by this segment will be significantly burdened by increased
depreciation expense associated with such capital expenditures, the Company
must continually upgrade and maintain its contract drilling fleet during this
period of significant growth and acquisition. During October 1996, the Company
acquired 100% of the stock of a private-owned, non-affiliated contract drilling
company for a net purchase price of $13 million. The acquisition included six
fully equipped, land-based drilling rigs, related drilling equipment, three
trucks, a yard and shop facility and $4.5 million of working capital. The
acquisition increased the number of fully equipped, land-based drilling rigs
owned by the Company to 46.
As of September 30, 1996 the Company had expended approximately
$4,262,000 for leasehold acquisitions, exploration and development of oil and
gas properties. A significant portion of the Company's current capital
expenditures in its oil and gas segment involve a focused effort to increase
its ownership interest in the North Nena Lucia Unit. During the period ended
September 30, 1996, the Company expended approximately $1,000,000 further
increasing its net working and net revenue interests in this unit to
approximately 40.24% and 35.43%,
13
<PAGE> 14
respectively. The Company obtained short-term bank financing of $730,000
during July, 1996 to fund its continued investment in this oil and gas
property.
RESULTS OF OPERATIONS
THE FOLLOWING RESULTS OF OPERATIONS IS BASED ON HISTORICAL CONSOLIDATED
FINANCIAL INFORMATION THAT HAS BEEN RESTATED TO REFLECT THE MERGER OF THE
COMPANY AND TUCKER DRILLING COMPANY, INC. ON JULY 30, 1996 UNDER THE POOLING OF
INTERESTS METHOD OF ACCOUNTING.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the nine months ended September 30, 1996, contract drilling
revenues were approximately $47,725,000 as compared to $42,656,000 for the same
period in 1995; an increase of 12%. Average rig utilization was 70% for the
nine months ended September 30, 1996 and 1995. Direct contract drilling costs
for the nine months ended September 30, 1996 and 1995 were approximately
$38,818,000 and $34,431,000, respectively, representing approximately 81% of
contract drilling revenues. The increase in contract drilling revenues and
direct drilling costs was due primarily to the increased number of drilling
rigs included in the Company's operating drilling fleet. The Company placed one
rig into operation during May 1995 and two additional rigs during the latter
part of the third quarter of 1995. These rigs were operational during the
nine months ended September 30, 1996. An additional rig was added during May
1996 increasing the total number of available rigs to 39. The Company is
currently assembling its 40th rig which is expected to be placed into operation
during November 1996. In addition, the Company entered into a lease operating
agreement with a non-affiliate company during the quarter ended September 30,
1996 in which the Company will market and operate two contract drilling rigs
for an established day rate. The Company will be fully reimbursed for all
related expenses except labor. These rigs were not placed into operation until
after September 30, 1996. General and administrative expense for the contract
drilling segment was approximately $2,831,000 for the nine months ended
September 30, 1996 as compared to approximately $2,659,000 for the same period
in 1995. The increase in general and administrative expense was largely
attributable to approximately $70,000 of expense incurred relative to the
repairs and maintenance of an airplane leased from an affiliate of the Chairman
of the Board and Chief Executive Officer of the Company. Additional increased
general and administrative expense was incurred by the Company during the nine
months ended September 30, 1996 relative to the increased professional and
other related expenses associated with the Company's recent growth.
Depreciation expense was approximately $4,939,000 for the nine months ended
September 30, 1996 as compared to $3,721,000 for the same period in 1995. The
increase in depreciation expense was due primarily to the Company's significant
purchases of new drill pipe during the fourth quarter of 1995 and the nine
months ended September 30, 1996. For the nine months ended September 30, 1996,
income from this segment was approximately $1,702,000 as compared to
approximately $2,101,000 for the same period in 1995.
Oil and gas revenue was approximately $5,940,000 for the nine months
ended September 30, 1996, as compared to approximately $3,831,000 for the nine
months ended September 30, 1995. The volume of crude oil and natural gas sold
increased by 24% for the nine months ended September 30, 1996 as compared to
the same period in 1995. The Company sold approximately 173,000 and 139,000
barrels of crude oil and approximately 1,244,000 and 1,003,000 million cubic
feet of natural gas for the nine months ended September 30, 1996 and 1995
respectively. The average price per barrel of crude oil 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 barrel of oil
equivalent for the nine months ended September 30, 1996 as compared to $3.50
per barrel of oil equivalent 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 of 1995. Depreciation,
depletion and amortization was approximately $2,814,000 for the nine months
ended September 30, 1996 as compared to approximately $1,565,000 for the same
nine months ended 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 gas
14
<PAGE> 15
segment was approximately $1,113,000 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 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 is 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 of 1995. At September 30, 1996, the Company
recognized a net gain on the sale of certain of its fixed assets of
approximately $533,000 as compared to approximately $336,000 recognized a year
earlier. This increase is 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
$2,268,000 of non-recurring acquisition costs associated with its merger with
Tucker.
COMPARISON OF THE FISCAL QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
For the fiscal quarter ended September 30, 1996, contract drilling
revenues were approximately $17,517,000 as compared to $15,259,000 for the same
fiscal quarter in 1995; an increase of 15%. Average rig utilization was 73%
for the fiscal quarter ended September 30, 1996 as compared to 72% for the same
fiscal quarter in 1995. Direct contract drilling costs for the fiscal quarter
ended September 30, 1996 were approximately $14,077,000 or 80% of contract
drilling revenues as compared to approximately $12,363,000 or 81% of contract
drilling revenues for the same fiscal quarter in 1995. The increase in
contract drilling revenues and direct contract drilling costs was largely
attributable to two additional drilling rigs added to the Company's drilling
fleet during the latter part of the third fiscal quarter of 1995 which were
operational during the entire third quarter of 1996. In addition, the Company
entered into a lease operating agreement with a non-affiliate company during
the quarter ended September 30, 1996 in which the Company will market and
operate two contract drilling rigs for an established day rate. The Company
will be fully reimbursed for all related expenses except labor. These rigs
were not placed into operation until after September 30, 1996. General and
administrative expense for the contract drilling segment was approximately
$884,000 for the fiscal quarter ended September 30, 1996 as compared to
approximately $952,000 for the same fiscal quarter in 1995. Depreciation
expense was approximately $1,803,000 for the fiscal quarter ended September 30,
1996 as compared to $1,392,000 for the same fiscal quarter in 1995. The
increase in depreciation expense was due primarily to the significant purchases
of new drill pipe during the three months ended September 30, 1996. For the
fiscal quarter ended September 30, 1996, income from this segment was
approximately $845,000 as compared to approximately $748,000 for the same
fiscal quarter in 1995.
Oil and gas revenue was approximately $2,296,000 for the fiscal
quarter ended September 30, 1996, as compared to approximately $1,280,000 for
the same fiscal quarter in 1995. The volume of crude oil and natural gas sold
increased by 23% and 35%, respectively, in the fiscal quarter ended September
30, 1996 as compared to the same period in 1995. The Company sold
approximately 59,000 and 48,000 barrels of crude oil and approximately 440,000
and 326,000 million cubic feet of natural gas for the three months ended
September 30, 1996 and 1995, respectively. The average price per barrel of oil
was $22.23 for the fiscal quarter ended September 30, 1996 as compared to
$17.61 for the same period in 1995, and the average price per mcf of natural
gas was $2.26 as compared to $1.36 for the third quarter ended 1995. Lease
operating and production costs were $3.58 per barrel of oil equivalent in the
fiscal quarter ended September 30, 1996, as compared to $3.29 per barrel of oil
equivalent for the same period in 1995. Exploration costs increased by 16% to
approximately $111,000 for the three months ended September 30, 1996 as
compared to the same period in 1995. Depreciation, depletion and amortization
was approximately $1,163,000 for the three months ended September 30, 1996 as
compared to approximately $397,000 for the same three months ended in 1995.
The increase was due primarily to increased crude oil and natural gas production
as discussed above. General and administrative expense for the oil and gas
segment was approximately $414,000 for the third quarter ended 1996 as compared
to $343,000 for the same period in 1995. In the fiscal quarter ended September
30, 1996, income from the oil and gas segment was approximately $392,000 as
compared to approximately $334,000 for the fiscal quarter ended September 30,
1995.
15
<PAGE> 16
For the fiscal quarter ended September 30, 1996, interest expense was
approximately $340,000 as compared to $301,000 for the same period in 1995.
The increase was due primarily to an approximate 2% increase in the Company's
outstanding principal balance of notes payable when compared to the same
relative fiscal period of 1995. At September 30, 1996, the Company recognized
a net gain on the sale of certain of its fixed assets of approximately $133,000
as compared to approximately $216,000 recognized a year earlier. For the
quarter ended September 30, 1996, the Company incurred approximately $1,763,000
of non-recurring acquisition costs associated with the Company's merger with
Tucker.
INCOME TAXES
During 1996, the Company revised its estimates relative to the
realization of the future benefits of its deferred tax assets, particularly the
net operating loss carryforwards. In light of the Company's recent historical
earnings, stable rig utilization rates and increased crude oil prices,
management has determined that it is more likely than not that the Company will
realize the benefits provided by its net operating loss carryforwards and
certain other deferred tax assets As such, the Company has recognized net
deferred income tax benefit for the nine months ended September 30, 1996 of
approximately $2,531,000.
VOLATILITY OF OIL AND GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas, both with
respect to its contract drilling and its oil and gas segments. Historically,
oil and 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 gas prices could have a material adverse
effect on the Company's financial condition and results of operations.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During October 1996, an existing suit against the Company was settled
within the limits of the Company's liability coverage. Disclosure of the
matter is made in the footnotes to the consolidated financial statements
included in Part I - Financial Information of this report and is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting of stockholders on July 30, 1996.
The following table sets forth certain information relating to each of the
matters voted upon at the meeting.
<TABLE>
<CAPTION>
Votes
--------------------------------------------------------------------
Withheld/ Broker
Matters Voted Upon For Against Abstain Non-Votes
------------------ --------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
1. Amended the Certificate of
Incorporation of the Company to
increase the authorized common
stock from 5,000,000 to 9,000,000
shares. 2,406,582 7,570 4,600 0
2. The issuance of shares of common stock
of the Company in connection with the
merger of Patterson Drilling Company
into Tucker Drilling Company, Inc.
pursuant to the terms of the Agreement
and Plan of Merger among those parties,
as amended, including the issuance of
shares of the Company's stock for
issuance upon exercise of certain
stock options of Tucker which following
the merger, will constitute options
to purchase common stock of the
Company. 2,331,431 4,870 3,000 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
(a) Exhibits.
---------
The following Exhibits are filed herewith or incorporated by reference herein:
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
(b) Reports on Form 8-K.
--------------------
(1) Report dated July 30, 1996 reporting the merger of Patterson and Tucker Drilling Company, Inc.
(2) Report, Form 8-KA dated July 30, 1996 reporting the unaudited pro forma combined financial
statements which reflect the adjustments necessary to give effect to the merger of the Company
and Tucker as of and for the six months ended June 30, 1996, (unaudited).
(3) Report, Form 8-KA, Amendment No. 2, dated July 30, 1996 providing supplemental consolidated
financial statement as of December 31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 and for each of the six months ended June 30, 1995 and 1996 (unaudited).
(4) Report dated July 30, 1996 reporting an increase by one in the number of members of the Company's Board
of Directors and to fill the vacancy left by the increase.
(5) Report dated September 27, 1996 describing the execution of the loan agreement between
Patterson Drilling Company, Patterson Energy, Inc. and the CIT Group Equipment Financing, Inc.
and certain provisions contained therein.
(6) Report dated October 24, 1996 reporting the acquisition of the Gene Sledge Drilling Corporation
by Patterson Drilling Company.
</TABLE>
18
<PAGE> 19
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
By: /s/ Cloyce A. Talbott
------------------------------------
Cloyce A. Talbott
Chairman of the Board and
Chief Executive Officer
By: /s/ James C. Brown
------------------------------------
James C. Brown
Vice President-Finance
DATED: November 14, 1996
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ------------ -------------------
<S> <C>
11.1 Statement re computation of per share earnings.
27.1 Financial data schedule as of September 30, 1996 and
for the three and nine months ended September 30, 1995
and 1996
</TABLE>
20
<PAGE> 1
EXHIBIT 11
PATTERSON ENERGY, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ------------------------------
1995 1996 1995 1996
--------------------------- ------------------------------
PRIMARY EARNINGS PER SHARE
<S> <C> <C> <C> <C>
Net income (loss) $ 2,500,269 $ 2,129,923 $ 892,446 $ (611,850)
=========== =========== =========== ===========
Shares:
Weighted average number of shares outstanding 4,261,488 4,765,738 4,397,030 4,801,951
Add-Dilutive effect of outstanding options and
redeemable warrants (as determined by the
application of the treasury stock method) - 183,855 103,262 214,788
----------- ----------- ----------- -----------
Weighted average number of shares outstanding,
as adjusted 4,261,488 4,949,593 4,500,292 5,016,739
=========== =========== =========== ===========
Net income (loss) per share: Primary $ 0.586713 $ 0.430323 $ 0.198308 $ (0.121962)
=========== =========== =========== ===========
ASSUMING FULL DILUTION
Net income (loss) $ 2,500,269 $ 2,129,923 $892,446 $ (611,850)
=========== =========== =========== ===========
Shares:
Weighted average number of shares outstanding 4,261,488 4,765,738 4,397,030 4,801,951
Add-Dilutive effect of outstanding options and
redeemable warrants (as determined by the
application of the treasury stock method) 271,190 213,772 135,648 214,788
----------- ----------- ----------- -----------
Weighted average number of shares outstanding,
as adjusted 4,532,678 4,979,510 4,532,678 5,016,739
=========== =========== =========== ===========
Net income (loss) per share: Assuming full dilution $ 0.551610 $ 0.427737 $ 0.196892 $ (0.121962)
=========== =========== =========== ===========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996, AND RELATED
STATEMENTS OF OPERATIONS AND CASH FLOWS THE RESPECTIVE THREE AND SIX MONTH
PERIODS ENDING SEPTEMBER 30, 1995 AND 1996, OF PATTERSON ENERGY, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1995 JUL-01-1996 JAN-01-1996 JUL-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1996 SEP-30-1996 SEP-30-1995
<CASH> 0 0 9,450 0
<SECURITIES> 0 0 524 0
<RECEIVABLES> 0 0 13,800 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 490 0
<CURRENT-ASSETS> 0 0 28,177 0
<PP&E> 0 0 36,661 0
<DEPRECIATION> 0 0 0 0
<TOTAL-ASSETS> 0 0 68,498 0
<CURRENT-LIABILITIES> 0 0 16,923 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 48 0
<OTHER-SE> 0 0 38,189 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 39,237 0
<SALES> 3,831 2,296 5,940 1,280
<TOTAL-REVENUES> 47,561 20,263 55,056 16,905
<CGS> 1,071 472 1,468 335
<TOTAL-COSTS> 44,995 19,182 53,098 16,049
<OTHER-EXPENSES> 9,312 1,819,026 2,247,101 (66,503)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 762 340 985 301
<INCOME-PRETAX> 2,556 (738) (289) 922
<INCOME-TAX> 56,223 (126) (2,419) 30
<INCOME-CONTINUING> 2,500 (612) 2,130 892
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,500 (612) 2,130 892
<EPS-PRIMARY> .59 (.12) .43 .20
<EPS-DILUTED> .55 (.12) .43 .20
</TABLE>
