<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Under the Securities Act of 1933
Registration No. 333-06351
PATTERSON ENERGY, INC.
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
June 20, 1996
Dear Patterson Energy, Inc. Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Patterson Energy, Inc. ("Patterson"), to be held at 3000 Thanksgiving Tower,
1601 Elm Street, Dallas, Texas at 11:00 a.m., local time, on July 30, 1996 (the
"Special Meeting").
At the Special Meeting, you will be asked to approve certain matters
related to the proposed merger (the "Merger") of Patterson Drilling Company, a
wholly-owned subsidiary of Patterson ("Sub"), with and into Tucker Drilling
Company, Inc. ("Tucker"), which will result in Tucker becoming a wholly-owned
subsidiary of Patterson. Specifically, you will be asked to approve the
following:
(1) an amendment to Patterson's Certificate of Incorporation to increase
its authorized Common Stock from 5,000,000 shares to 9,000,000 shares (the
"Charter Amendment"); and
(2) the issuance of shares of Patterson's Common Stock (the "Stock
Issuance") in connection with the Agreement and Plan of Merger, dated as of
April 22, 1996, as amended (the "Merger Agreement"), among Patterson, Sub
and Tucker, including the issuance of shares of Patterson Common Stock in
the Merger and the reservation of shares of Patterson Common Stock for
issuance upon exercise of certain stock options of Tucker which, following
the Merger, will constitute options to purchase Patterson Common Stock.
Pursuant to the terms of the Merger Agreement, each outstanding share of
Common Stock of Tucker will be converted into 0.74 of a share of Patterson
Common Stock, resulting in the stockholders of Tucker immediately prior to the
Merger owning approximately 32 percent of the Patterson Common Stock immediately
following the Merger. Cash will be paid in lieu of fractional shares of
Patterson Common Stock. The effect of your approval will be to enable Patterson
to complete the Merger.
THE BOARD OF DIRECTORS OF PATTERSON HAS DETERMINED THAT THE MERGER IS FAIR
TO AND ADVISABLE AND IN THE BEST INTERESTS OF PATTERSON AND ITS STOCKHOLDERS.
ACCORDINGLY, THE BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER, INCLUDING THE CHARTER AMENDMENT AND THE STOCK ISSUANCE, AND RECOMMENDS
THAT YOU VOTE IN FAVOR OF THE CHARTER AMENDMENT AND THE STOCK ISSUANCE AT THE
SPECIAL MEETING.
The Notice of Special Meeting and the Prospectus/Joint Proxy Statement
containing detailed information concerning the Merger and related transactions
accompany this letter. Please review this material carefully.
Because of the significance of these matters to Patterson, your
participation in the Special Meeting, in person or by proxy, is especially
important. The affirmative vote of a majority of the outstanding shares of
Patterson Common Stock is required to approve the Charter Amendment. The
approval of the Stock Issuance requires the affirmative vote of a majority of
the shares of Patterson Common Stock present, in person or by proxy, and
entitled to vote at the Special Meeting. An abstention from voting on the
Charter Amendment or the Stock Issuance will have the same effect as a vote
against the Charter Amendment or the Stock Issuance (as the case may be). In
addition, brokers who hold shares of Patterson Common Stock as nominees will not
have discretionary authority to vote such shares in the absence of instructions
from the beneficial owners thereof. Votes which are not cast for this reason
also will have the effect of a vote against the Charter Amendment. Accordingly,
we urge you to indicate your voting instructions and sign, date and mail the
enclosed proxy card promptly in the return envelope provided, whether or not you
plan to attend the Special Meeting. Your vote is important.
Sincerely,
/s/ Cloyce A. Talbott
Cloyce A. Talbott
Chairman of the Board and Chief Executive
Officer
<PAGE> 2
PATTERSON ENERGY, INC.
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
Dear Stockholder:
A Special Meeting of Stockholders of Patterson Energy, Inc. ("Patterson")
will be held at 3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas, at
11:00 a.m., local time, on July 30, 1996 to consider and vote upon the following
matters in connection with the Agreement and Plan of Merger, dated as of April
22, 1996, as amended on May 16, 1996 (the "Merger Agreement"), which is attached
as Annex I to the accompanying Prospectus/Joint Proxy Statement, providing for
the merger (the "Merger") of Patterson Drilling Company, a wholly-owned
subsidiary of Patterson, with and into Tucker Drilling Company, Inc. ("Tucker")
and the conversion of each issued and outstanding share of Common Stock of
Tucker into the right to receive 0.74 of a share of Common Stock of Patterson:
(1) the approval of an amendment to Patterson's Certificate of
Incorporation to increase its authorized Common Stock from 5,000,000 shares
to 9,000,000 shares (the "Charter Amendment");
(2) the approval of the issuance of shares of Common Stock of Patterson
(the "Stock Issuance") in connection with the Merger Agreement, including
the issuance of shares of Patterson Common Stock in the Merger and the
reservation of shares of Patterson Common Stock for issuance upon exercise
of certain stock options of Tucker which, following the Merger, will
constitute options to purchase Patterson Common Stock; and
(3) the transaction of such other business, if any, as may properly come
before the Special Meeting or any adjournments or postponements thereof.
The Board of Directors of Patterson has fixed the close of business on June
20, 1996, as the record date for the determination of Patterson stockholders
entitled to notice of and to vote at the Special Meeting. Only holders of record
of shares of Patterson Common Stock at the close of business on the record date
are entitled to notice of and to vote at the Special Meeting. Stockholders of
Patterson are not entitled to any appraisal or dissenter's rights under the
Delaware General Corporation Law in respect of the matters to be considered and
voted upon at the Special Meeting.
YOUR VOTE IS VERY IMPORTANT. PLEASE INDICATE YOUR VOTING INSTRUCTIONS, DATE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE
PREPAID RETURN ENVELOPE, REGARDLESS OF WHETHER YOU EXPECT TO ATTEND THE SPECIAL
MEETING. IF YOU SIGN AND RETURN YOUR PROXY CARD WITHOUT SPECIFYING HOW YOU WOULD
LIKE YOUR SHARES VOTED, IT WILL BE UNDERSTOOD THAT YOU WISH TO HAVE YOUR SHARES
VOTED FOR THE CHARTER AMENDMENT AND THE STOCK ISSUANCE. YOU MAY REVOKE YOUR
PROXY BY SIGNING AND RETURNING A LATER DATED PROXY WITH RESPECT TO THE SAME
SHARES, BY FILING WITH THE SECRETARY OF PATTERSON A DULY EXECUTED REVOCATION, OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON (ALTHOUGH ATTENDANCE AT
THE SPECIAL MEETING WILL NOT IN AND OF ITSELF CONSTITUTE A REVOCATION OF YOUR
PROXY).
By order of the Board of Directors,
/s/ James C. Brown
James C. Brown
Secretary
Snyder, Texas
June 20, 1996
<PAGE> 3
Filed Pursuant to Rule 424(b)(3)
Under the Securities Act of 1933
Registration No. 333-06351
TUCKER DRILLING COMPANY, INC.
P. O. BOX 1876
SAN ANGELO, TEXAS 76902
June 20, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Tucker Drilling Company, Inc., a Delaware corporation ("Tucker"), to be held at
3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas on July 30, 1996, at
10:00 a.m., local time (the "Special Meeting"). As described in the accompanying
Prospectus/Joint Proxy Statement, at the Special Meeting the stockholders of
Tucker will be asked to consider and vote upon the proposed acquisition of
Tucker by Patterson Energy, Inc., a Delaware corporation ("Patterson"), through
the merger (the "Merger") of Patterson Drilling Company, a Delaware corporation
and wholly-owned subsidiary of Patterson ("Sub"), with and into Tucker. At the
Special Meeting, the stockholders also will be asked to transact such other
business as may properly come before the Special Meeting or any adjournment
thereof.
The Merger is subject to the terms and conditions of an Agreement and Plan
of Merger, dated as of April 22, 1996, as amended (the "Merger Agreement"),
among Patterson, Sub and Tucker. In the Merger, Sub will be merged with and into
Tucker, and Tucker will continue as the surviving corporation and a wholly-owned
subsidiary of Patterson under the name "Patterson Drilling Company."
Pursuant to the Merger each issued and outstanding share of Common Stock,
par value $.01 per share, of Tucker ("Tucker Common Stock") will be converted
into the right to receive 0.74 of a share (the "Exchange Ratio") of Common
Stock, par value $.01 per share, of Patterson ("Patterson Common Stock").
Additionally, outstanding options to purchase Tucker Common Stock will be
converted into options to purchase Patterson Common Stock based upon the
Exchange Ratio. The Exchange Ratio is subject to appropriate and proportionate
adjustments in the event of any reclassification, recapitalization, stock split,
stock combination, stock dividend or share exchange with respect to Tucker
Common Stock or Patterson Common Stock prior to the effective time of the
Merger.
No fractional share of Patterson Common Stock will be issued, and in lieu
thereof, each holder of shares of Tucker Common Stock who would otherwise have
been entitled to receive a fraction of a share of Patterson Common Stock shall
receive cash (without interest) in an amount equal to the product of such
fractional part of a share of Tucker Common Stock multiplied by the Closing
Price. "Closing Price" means the average of the daily closing price of Patterson
Common Stock, rounded to four decimal places, as reported under Nasdaq National
Market Issues Reports in The Wall Street Journal for each of the first 20
consecutive Trading Days in the period commencing 25 Trading Days prior to the
date of the closing of the Merger Agreement, and "Trading Day" means a day on
which the National Association of Securities Dealers, Inc. National Market is
open for trading.
The accompanying Prospectus/Joint Proxy Statement provides a detailed
description of the Merger Agreement and the business of Tucker and Patterson and
other important information. A copy of the Merger Agreement is attached to the
Prospectus/Joint Proxy Statement as Annex I.
THE TUCKER BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE
TERMS AND CONDITIONS OF THE PROPOSED MERGER. THE TUCKER BOARD BELIEVES THAT THE
MERGER IS FAIR TO AND ADVISABLE AND IN THE BEST INTERESTS OF TUCKER AND ITS
STOCKHOLDERS. THE TUCKER BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER AND RECOMMENDS THAT STOCKHOLDERS OF TUCKER VOTE FOR
APPROVAL OF THE MERGER.
Stockholders of Tucker are not entitled to any appraisal or dissenter's
rights under the Delaware General Corporation Law in respect of the transactions
contemplated by the Merger Agreement.
The affirmative vote of a majority of the outstanding shares of Tucker
Common Stock is required to approve the Merger Agreement. An abstention from
voting on the Merger Agreement will have the same effect as a vote against the
Merger Agreement. In addition, brokers who hold shares of Tucker Common Stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Votes which are not
cast for this reason also will have the effect of a vote against the Merger
Agreement. Accordingly, we urge you to carefully review the enclosed materials,
indicate your voting instructions and sign, date and mail the enclosed proxy
card promptly in the return envelope provided, whether or not you plan to attend
the Special Meeting. YOUR VOTE ON THIS MATTER IS VERY IMPORTANT. The issuance of
shares of Patterson Common Stock pursuant to the Merger must also be approved
and adopted by the affirmative vote of a majority of the shares of Patterson
Common Stock present, in person or by proxy, and entitled to vote at a special
meeting of stockholders of Patterson.
<PAGE> 4
If the Merger is consummated, you will receive instructions regarding the
exchange of your stock certificates representing the outstanding shares of
Tucker Common Stock for stock certificates representing Patterson Common Stock
and cash, if applicable. PLEASE DO NOT SEND IN YOUR EXISTING STOCK CERTIFICATES
UNTIL YOU RECEIVE THESE INSTRUCTIONS.
Sincerely,
/s/ T. MARK TUCKER
T. MARK TUCKER
Acting Chairman of the Board and President
<PAGE> 5
TUCKER DRILLING COMPANY, INC.
P. O. BOX 1876
SAN ANGELO, TEXAS 76902
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1996
To the Stockholders of
TUCKER DRILLING COMPANY, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders of Tucker
Drilling Company, Inc., a Delaware corporation ("Tucker"), will be held at 3000
Thanksgiving Tower, 1601 Elm Street, Dallas, Texas on July 30, 1996, at 10:00
a.m., local time, for the following purposes:
(a) To consider and vote upon a proposal to approve that certain Agreement
and Plan of Merger, dated as of April 22, 1996, as amended on May 16,
1996, which is attached as Annex I to the accompanying
Prospectus/Joint Proxy Statement (the "Merger Agreement"), among
Patterson Energy, Inc., a Delaware corporation ("Patterson"),
Patterson Drilling Company, a Delaware corporation and wholly-owned
subsidiary of Patterson ("Sub"), and Tucker, pursuant to which (i) Sub
would be merged with and into Tucker, (ii) each issued and outstanding
share of Common Stock, par value $.01 per share, of Tucker will be
converted into the right to receive 0.74 of a share of Common Stock,
par value $.01 per share, of Patterson, and (iii) outstanding options
to purchase shares of Tucker Common Stock will become options to
purchase shares of Patterson Common Stock upon the terms set forth in
the governing stock option plans and the Merger Agreement; and
(b) To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Board of Directors of Tucker has fixed the close of business on June
20, 1996, as the record date for the determination of Tucker stockholders
entitled to notice of and to vote at the Special Meeting. Only stockholders of
record at the close of business on the record date are entitled to notice of,
and to vote at, the Special Meeting or any adjournment thereof. Stockholders of
Tucker are not entitled to any appraisal or dissenter's rights under the
Delaware General Corporation Law in respect of the transactions contemplated by
the Merger Agreement.
YOUR VOTE IS VERY IMPORTANT. PLEASE INDICATE YOUR VOTING INSTRUCTIONS, DATE
AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED POSTAGE
PREPAID RETURN ENVELOPE, REGARDLESS OF WHETHER YOU EXPECT TO ATTEND THE SPECIAL
MEETING. IF YOU SIGN AND RETURN YOUR PROXY CARD WITHOUT SPECIFYING HOW YOU WOULD
LIKE YOUR SHARES TO BE VOTED, IT WILL BE UNDERSTOOD THAT YOU WISH TO HAVE YOUR
SHARES VOTED FOR THE MERGER AGREEMENT. YOU MAY REVOKE YOUR PROXY BY SIGNING AND
RETURNING A LATER DATED PROXY WITH RESPECT TO THE SAME SHARES, BY FILING WITH
THE SECRETARY OF TUCKER A DULY EXECUTED REVOCATION OR BY ATTENDING THE SPECIAL
MEETING AND VOTING IN PERSON (ALTHOUGH ATTENDANCE AT THE SPECIAL MEETING WILL
NOT IN AND OF ITSELF CONSTITUTE A REVOCATION OF YOUR PROXY).
By order of the Board of Directors,
/s/ CHARLES B. MIDDLEKAUF
CHARLES B. MIDDLEKAUF
Secretary
San Angelo, Texas
June 20, 1996
<PAGE> 6
PATTERSON ENERGY, INC.
TUCKER DRILLING COMPANY, INC.
JOINT PROXY STATEMENT
---------------------------
PATTERSON ENERGY, INC.
PROSPECTUS
This Prospectus/Joint Proxy Statement ("Prospectus/Joint Proxy Statement")
is being furnished to stockholders of Patterson Energy, Inc., a Delaware
corporation ("Patterson"), and to stockholders of Tucker Drilling Company, Inc.,
a Delaware corporation ("Tucker"), in connection with the solicitation of
proxies by the Board of Directors of each corporation for use at the Special
Meeting of Stockholders of Patterson (the "Patterson Special Meeting") and the
Special Meeting of Stockholders of Tucker (the "Tucker Special Meeting" and,
together with the Patterson Special Meeting, the "Special Meetings"),
respectively, in each case including any adjournments or postponements thereof.
The Special Meetings are both scheduled to be held on July 30, 1996. This
Prospectus/Joint Proxy Statement relates to the proposed merger (the "Merger")
of Patterson Drilling Company, a Delaware corporation and a wholly-owned
subsidiary of Patterson ("Sub"), with and into Tucker pursuant to the Agreement
and Plan of Merger, dated as of April 22, 1996, as amended on May 16, 1996 (the
"Merger Agreement"), among Patterson, Sub and Tucker, with Tucker, as the
surviving corporation in the Merger, to become a wholly-owned subsidiary of
Patterson and to operate under the name "Patterson Drilling Company."
Each outstanding share of Common Stock, par value $.01 per share, of Tucker
(the "Tucker Common Stock") will be converted in the Merger into 0.74 of a share
of validly issued, fully paid and nonassessable Common Stock, par value $.01 per
share, of Patterson (the "Patterson Common Stock"). Cash will be paid in lieu of
fractional shares of Patterson Common Stock.
This Prospectus/Joint Proxy Statement constitutes a prospectus of Patterson
with respect to up to 1,652,106 shares of Patterson Common Stock issuable to
Tucker stockholders in the Merger pursuant to the Merger Agreement or upon
exercise of certain stock options of Tucker which, pursuant to the Merger
Agreement and the terms of the governing stock option plans, following the
Merger, will constitute options to purchase shares of Patterson Common Stock
upon the terms set forth in such stock option plans and the Merger Agreement.
The Patterson Common Stock is traded on the National Association of
Securities Dealers, Inc. Automated Quotation System/National Market ("Nasdaq
National Market") under the symbol "PTEN" and the Tucker Common Stock is traded
on the Nasdaq National Market under the symbol "TUCK." On June 19, 1996, the
closing sale prices of the Patterson Common Stock and the Tucker Common Stock as
reported on the Nasdaq National Market were $17.13 per share and $12.00 per
share, respectively.
SEE "RISK FACTORS" BEGINNING AT PAGE 18 FOR A DISCUSSION OF CERTAIN RISKS
TO BE CONSIDERED BY STOCKHOLDERS OF PATTERSON AND TUCKER.
This Prospectus/Joint Proxy Statement, the accompanying forms of proxy and
the other enclosed documents are first being mailed to stockholders of Patterson
and Tucker on or about June 25, 1996.
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/JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
The date of this Prospectus/Joint Proxy Statement is June 20, 1996.
<PAGE> 7
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/JOINT PROXY
STATEMENT IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PATTERSON OR TUCKER.
NEITHER THE DELIVERY OF THIS PROSPECTUS/JOINT PROXY STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PATTERSON
OR TUCKER SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR
INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE. THIS PROSPECTUS/JOINT PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY
SOLICITATION.
[PRINCIPAL AREAS OF ACTIVITY MAP -- THE MAP SHOWS THAT PATTERSON'S PRINCIPAL
AREAS OF ACTIVITY ARE IN THE PERMIAN BASIN OF WEST TEXAS AND SOUTHEASTERN NEW
MEXICO AND SOUTH AND SOUTHEAST TEXAS, PRIMARILY IN THE AUSTIN CHALK TREND AND
THAT TUCKER'S PRINCIPAL AREAS OF ACTIVITY ARE IN THE PERMIAN AND THE HARDEMAN
BASINS IN WEST AND NORTH TEXAS.]
THIS PROSPECTUS/JOINT PROXY STATEMENT INCORPORATES CERTAIN DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. PATTERSON AND
TUCKER EACH UNDERTAKE TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE), WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROSPECTUS/JOINT PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO, IN THE CASE OF DOCUMENTS RELATING TO PATTERSON OR SUB, ATTENTION:
JAMES C. BROWN, SECRETARY, PATTERSON ENERGY, INC., P.O. DRAWER 1416, SNYDER,
TEXAS 79550 (TELEPHONE (915) 573-1104), AND, IN THE CASE OF DOCUMENTS RELATING
TO TUCKER, ATTENTION: CHARLES B. MIDDLEKAUF, SECRETARY, TUCKER DRILLING COMPANY,
INC., P.O. BOX 1876, SAN ANGELO, TEXAS 76902 (TELEPHONE (915) 655-6773). IN
ORDER TO ENSURE DELIVERY OF DOCUMENTS PRIOR TO THE APPLICABLE SPECIAL MEETING,
REQUESTS SHOULD BE RECEIVED BY JULY 23, 1996.
2
<PAGE> 8
AVAILABLE INFORMATION
Patterson and Tucker are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, file reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by Patterson or Tucker can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. Copies of
such material can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
Patterson or Tucker may be inspected at the offices of the Nasdaq National
Market, 1735 K Street, N.W. Washington, D.C. 20006.
Patterson has filed with the Commission a Registration Statement on Form
S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Patterson Common Stock to be issued
pursuant to the Merger Agreement. The information contained herein with respect
to Patterson and its affiliates, including Sub, has been provided by Patterson,
and the information contained herein with respect to Tucker and its affiliates
has been provided by Tucker. This Prospectus/Joint Proxy Statement does not
contain all of the information set forth in the Registration Statement, certain
parts of which were omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete, and in each
instance reference is made to the copy of such document so filed. Each such
statement is qualified by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Commission pursuant
to the Exchange Act, are incorporated herein by reference:
1. Patterson's Annual Report on Form 10-KSB for its fiscal year ended
December 31, 1995 (the "Patterson 1995 Form 10-KSB").
2. Patterson's Proxy Statement dated April 26, 1996, for its 1996 Annual
Meeting of Stockholders (the "Patterson 1996 Proxy Statement").
3. Patterson's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 (the "Patterson First Quarter 1996 Form 10-Q").
4. Patterson's Current Report on Form 8-K dated April 22, 1996.
5. Patterson's Current Report on Form 8-K dated April 30, 1996.
6. Patterson's Current Report on Form 8-K dated May 16, 1996.
7. Tucker's Annual Report on Form 10-KSB for its fiscal year ended March
31, 1996 (the "Tucker 1996 Form 10-KSB").
8. Tucker's Current Report on Form 8-K dated April 22, 1996.
9. Tucker's Current Report on Form 8-K dated May 16, 1996.
The Patterson 1995 Form 10-KSB, the Patterson 1996 Proxy Statement and the
Patterson First Quarter 1996 Form 10-Q are attached to this Prospectus/Joint
Proxy Statement as Annexes IV, V, and VI, respectively. The Tucker 1996 Form
10-KSB is attached to this Prospectus/Joint Proxy Statement as Annex VII.
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/Joint Proxy Statement to the extent that a
statement contained herein or 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/Joint Proxy Statement.
3
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
AVAILABLE INFORMATION.................. 3 THE TUCKER SPECIAL MEETING............. 22
INCORPORATION OF CERTAIN DOCUMENTS BY Date, Time and Place................. 22
REFERENCE............................ 3 Purpose.............................. 22
SUMMARY................................ 6 Record Date; Shares Entitled to
The Parties to the Merger............ 6 Vote.............................. 22
The Special Meetings................. 6 Quorum............................... 22
The Merger and Related Matters....... 8 Vote Required........................ 22
MARKET PRICES.......................... 11 Voting of Proxies.................... 23
SELECTED CONSOLIDATED FINANCIAL DATA OF Revocability of Proxies.............. 23
PATTERSON ENERGY, INC................ 13 No Appraisal Rights.................. 23
SELECTED FINANCIAL DATA OF TUCKER Solicitation of Proxies.............. 23
DRILLING COMPANY, INC................ 14 BACKGROUND OF AND REASONS FOR THE
SELECTED PRO FORMA COMBINED FINANCIAL MERGER............................... 24
DATA................................. 15 Background of the Merger............. 24
COMPARATIVE PER COMMON SHARE DATA OF Patterson's Reasons for the Merger;
PATTERSON ENERGY, INC. AND TUCKER Recommendation of Patterson Board
DRILLING COMPANY, INC................ 17 of Directors...................... 26
RISK FACTORS........................... 18 Tucker's Reasons for the Merger;
Exchange Ratio....................... 18 Recommendation of Tucker Board of
Possible Volatility of Patterson Directors......................... 27
Common Stock Price................ 18 Opinions of Financial Advisors....... 27
Patterson Indebtedness--Consequence TERMS OF THE MERGER.................... 37
of Failure to Service............. 18 General.............................. 37
No Anticipated Cash Dividends........ 19 Merger Consideration................. 37
Reliance on Key Patterson Effective Time of the Merger......... 37
Personnel......................... 19 Conversion of Tucker Common Stock;
Concentration of Stock Ownership..... 19 Procedures for Exchange of Stock
Provisions Having Possible Certificates...................... 37
Anti-Takeover Effect.............. 19 Fractional Shares.................... 38
INTRODUCTION........................... 20 Reasonable Efforts................... 39
THE PATTERSON SPECIAL Tucker Stock Options................. 39
MEETING.............................. 20 Employee Benefits.................... 39
Date, Time and Place................. 20 Conduct of Business Pending
Purpose.............................. 20 the Merger........................ 40
Record Date; Shares Entitled to Access to Information................ 41
Vote.............................. 20 No Solicitation...................... 41
Quorum............................... 20 Representations and Warranties....... 42
Vote Required........................ 21 Fees and Expenses.................... 42
Voting of Proxies.................... 21 Conditions to the Merger............. 44
Revocability of Proxies.............. 21 Termination of the Merger
No Appraisal Rights.................. 21 Agreement......................... 45
Solicitation of Proxies.............. 21 Amendment............................ 45
Waiver............................... 46
Certain Federal Income Tax
Consequences...................... 46
Interests of Certain Persons in
the Merger........................ 47
Accounting Treatment................. 48
Resales of Patterson Common Stock
Received in the Merger............ 48
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL STOCKHOLDERS' PROPOSALS................ 70
STATEMENTS........................... 49 GLOSSARY OF INDUSTRY TERMS............. 71
BUSINESS OF PATTERSON.................. 57 ANNEXES
BUSINESS OF TUCKER..................... 58 Annex I--Agreement and Plan of
POST-MERGER PROFILE AND STRATEGY....... 60 Merger, as amended
PRINCIPAL STOCKHOLDERS OF PATTERSON AND Annex II(A)--Opinion of TM Capital
TUCKER............................... 61 Corp.
DESCRIPTION OF PATTERSON CAPITAL Annex II(B)--Opinion of Gilford
STOCK................................ 64 Securities Incorporated
COMPARISON OF RIGHTS OF HOLDERS OF Annex III--Opinion of Rauscher Pierce
TUCKER COMMON STOCK AND PATTERSON Refsnes, Inc.
COMMON STOCK......................... 67 Annex IV--Patterson's Annual Report
THE CHARTER AMENDMENT.................. 69 on Form 10-KSB for its fiscal year
INDEPENDENT ACCOUNTANTS................ 70 ended December 31, 1995
LEGAL MATTERS.......................... 70 Annex V--Patterson's Proxy Statement
EXPERTS................................ 70 dated April 26, 1996 for its 1996
Annual Meeting of Stockholders
Annex VI--Patterson's Quarterly
Report on Form 10-Q for the
quarter ended March 31, 1996
Annex VII--Tucker's Annual Report on
Form 10-KSB for its fiscal year
ended March 31, 1996
</TABLE>
5
<PAGE> 11
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROSPECTUS/JOINT PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED BY, THE MORE DETAILED INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/JOINT PROXY STATEMENT AND THE ANNEXES HERETO.
STOCKHOLDERS ARE URGED TO CAREFULLY READ THIS PROSPECTUS/JOINT PROXY STATEMENT
AND THE ANNEXES HERETO IN THEIR ENTIRETY. AS USED IN THIS PROSPECTUS/JOINT PROXY
STATEMENT, UNLESS OTHERWISE REQUIRED BY THE CONTEXT, THE TERM "PATTERSON" MEANS
PATTERSON ENERGY, INC. AND ITS CONSOLIDATED SUBSIDIARIES, THE TERM "TUCKER"
MEANS TUCKER DRILLING COMPANY, INC., AND THE TERM "SUB" MEANS PATTERSON DRILLING
COMPANY, A WHOLLY-OWNED SUBSIDIARY OF PATTERSON. SEE "GLOSSARY OF INDUSTRY
TERMS" AT THE BACK OF THIS PROSPECTUS/JOINT PROXY STATEMENT FOR DEFINITIONS OF
CERTAIN OIL AND GAS TERMS USED HEREIN.
THE PARTIES TO THE MERGER
PATTERSON
Patterson is engaged in onshore contract drilling for oil and gas and, to a
lesser extent, in the exploration, development and production of oil and gas for
its own account. Patterson's operations are conducted in the Permian Basin in
West Texas and Southeastern New Mexico and in South and Southeast Texas,
primarily in the Austin Chalk Trend. Patterson's executive offices are located
at 4510 Lamesa Highway, Snyder, Texas 79549, and its telephone number at that
address is (915) 573-1104.
SUB
Sub, a wholly-owned subsidiary of Patterson, was organized as a Delaware
corporation in April 1996 for the purpose of consummating the Merger and the
other transactions contemplated by the Merger Agreement. Sub has no assets or
business and has not carried on any activities to date other than incident to
its formation and in connection with the Merger and the other transactions
contemplated by the Merger Agreement. Sub's offices are located at 4510 Lamesa
Highway, Snyder, Texas 79549, and its telephone number at that address is (915)
573-1104.
TUCKER
Tucker is principally engaged in onshore contract oil and gas drilling
operations in Texas and also engages in oil and gas exploration, development and
production for its own account. Most of Tucker's contract drilling activities
are conducted in West and North Texas in the Permian and Hardeman Basins.
Tucker's executive offices are located at 14 East Beauregard, San Angelo, Texas
76903, and its telephone number at that address is (915) 655-6773.
THE SPECIAL MEETINGS
DATE, TIME AND PLACE
PATTERSON. The Patterson Special Meeting will be held on July 30, 1996, at
11:00 a.m., local time, at 3000 Thanksgiving Tower, 1601 Elm Street, Dallas,
Texas.
TUCKER. The Tucker Special Meeting will be held on July 30, 1996, at 10:00
a.m., local time, at 3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas.
PURPOSES OF THE SPECIAL MEETINGS
PATTERSON SPECIAL MEETING. At the Patterson Special Meeting, holders of
shares of Patterson Common Stock will consider and vote upon proposals to (i)
approve an amendment to Patterson's Certificate of Incorporation to increase the
number of authorized shares of Patterson Common Stock from 5,000,000 shares to
9,000,000 shares (the "Charter Amendment"), and (ii) approve, as required by the
Nasdaq National Market, the issuance of shares of Patterson Common Stock (the
"Stock Issuance") in connection with the
6
<PAGE> 12
Merger Agreement, a conformed copy of which appears as Annex I to this
Prospectus/Joint Proxy Statement, including the issuance of shares of Patterson
Common Stock in the Merger and the reservation of shares of Patterson Common
Stock for issuance upon exercise of stock options of Tucker which, following the
Merger, will constitute options to purchase Patterson Common Stock upon the
terms set forth in the governing stock option plans and the Merger Agreement.
Holders of shares of Patterson Common Stock entitled to vote also will consider
and vote upon any other matter that may properly come before the Patterson
Special Meeting or any adjournments or postponements thereof.
TUCKER SPECIAL MEETING. At the Tucker Special Meeting, holders of shares
of Tucker Common Stock will consider and vote upon a proposal to approve and
adopt the Merger Agreement, which provides for the Merger of Sub with and into
Tucker, with Tucker to be the surviving corporation in the Merger and a wholly-
owned subsidiary of Patterson, and the conversion of outstanding options (the
"Tucker Stock Options") to purchase shares of Tucker Common Stock into options
to purchase shares of Patterson Common Stock upon the terms set forth in the
governing stock option plans and the Merger Agreement. Holders of shares of
Tucker Common Stock entitled to vote also will consider and vote upon any other
matter that may properly come before the Tucker Special Meeting or any
adjournments or postponements thereof.
RECORD DATES; SHARES ENTITLED TO VOTE
PATTERSON. Only holders of record of shares of Patterson Common Stock at
the close of business on June 20, 1996 (the "Patterson Record Date"), are
entitled to notice of and to vote at the Patterson Special Meeting. On such
date, there were 3,194,951 shares of Patterson Common Stock outstanding and
entitled to vote. Each such share of Patterson Common Stock will be entitled to
one vote on each matter to be acted upon at the Patterson Special Meeting.
TUCKER. Only holders of record of shares of Tucker Common Stock at the
close of business on June 20, 1996 (the "Tucker Record Date"), are entitled to
notice of and to vote at the Tucker Special Meeting. On such date, there were
2,104,076 shares of Tucker Common Stock outstanding and entitled to vote. Each
such share of Tucker Common Stock will be entitled to one vote on each matter to
be acted upon at the Tucker Special Meeting.
QUORUM; VOTE REQUIRED
PATTERSON. A majority of the outstanding shares of Patterson Common Stock
entitled to vote must be present in person or by proxy at the Patterson Special
Meeting in order for a quorum to be present. The affirmative vote of the holders
of a majority of the outstanding shares of Patterson Common Stock is required to
approve the Charter Amendment. The affirmative vote of the holders of a majority
of the shares of Patterson Common Stock present, in person or by proxy, and
entitled to vote at the Patterson Special Meeting is required to approve the
Stock Issuance.
TUCKER. A majority of the shares of Tucker Common Stock entitled to vote
must be present in person or by proxy at the Tucker Special Meeting in order for
a quorum to be present. The affirmative vote of the holders of a majority of the
outstanding shares of Tucker Common Stock is required to approve and adopt the
Merger Agreement.
NO APPRAISAL RIGHTS
Under Delaware law, neither Patterson nor Tucker stockholders will be
entitled to any appraisal or dissenter's rights with respect to the matters to
be acted upon at the respective Special Meetings. See "The Patterson Special
Meeting--No Appraisal Rights" and "The Tucker Special Meeting--No Appraisal
Rights."
SECURITY OWNERSHIP OF MANAGEMENT
PATTERSON. As of the Patterson Record Date, the directors and executive
officers of Patterson beneficially owned an aggregate of 924,198 shares
(approximately 28%) of the outstanding shares of Patterson
7
<PAGE> 13
Common Stock, including 47,760 shares subject to options currently exercisable
or exercisable within 60 days. See "Principal Stockholders of Patterson and
Tucker--Patterson." Each of such directors and executive officers has advised
Patterson that he plans to vote or direct the vote of all such shares of
Patterson Common Stock entitled to vote in favor of the matters submitted to the
stockholders of Patterson at the Patterson Special Meeting.
TUCKER. As of the Tucker Record Date, the directors and executive officers
of Tucker beneficially owned an aggregate of 231,741 shares (approximately 11%)
of the outstanding Tucker Common Stock, including 81,500 shares subject to
options, all of which are fully vested and currently exercisable. See "Principal
Stockholders of Patterson and Tucker--Tucker." Each of such directors and
executive officers has indicated his present intention to vote or direct the
vote of all such shares of Tucker Common Stock entitled to vote in favor of the
matters submitted to the stockholders of Tucker at the Tucker Special Meeting.
THE MERGER AND RELATED MATTERS
EFFECT OF THE MERGER
At the Effective Time (as hereinafter defined), Sub will merge with and
into Tucker, with Tucker being the surviving corporation and a wholly-owned
subsidiary of Patterson (the "Surviving Corporation"). The Surviving Corporation
will operate under the name Patterson Drilling Company. In the Merger, each
outstanding share of Tucker Common Stock will be converted into the right to
receive 0.74 of a share of Patterson Common Stock (the "Exchange Ratio") and the
Tucker Stock Options will become options to purchase shares of Patterson Common
Stock upon the terms of the governing stock option plans and the Merger
Agreement. The full text of the Merger Agreement is attached to this
Prospectus/Joint Proxy Statement as Annex I. See "Terms of the Merger--General"
and "--Merger Consideration."
Based on the number of shares of Patterson Common Stock and Tucker Common
Stock outstanding as of the Patterson Record Date and the Tucker Record Date,
approximately 1,557,016 shares of Patterson Common Stock will be issuable in the
Merger, representing approximately 32.77% of the total Patterson Common Stock to
be outstanding after such issuance (without giving effect to 95,090 shares of
Patterson Common Stock issuable upon exercise of Tucker Stock Options to be
assumed by Patterson pursuant to the Merger Agreement). See "Terms of the
Merger--Merger Consideration."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
PATTERSON. The Board of Directors of Patterson has determined that the
Merger is fair to and advisable and in the best interests of Patterson and its
stockholders and unanimously recommends that the Patterson stockholders approve
the Charter Amendment and the Stock Issuance. See "Background of and Reasons for
the Merger--Patterson's Reasons for the Merger; Recommendation of Patterson
Board of Directors."
TUCKER. The Board of Directors of Tucker has determined that the Merger is
fair to and advisable and in the best interests of Tucker and its stockholders
and unanimously recommends that the Tucker stockholders approve and adopt the
Merger Agreement. See "Background of and Reasons for the Merger--Tucker's
Reasons for the Merger; Recommendation of Tucker Board of Directors."
OPINIONS OF FINANCIAL ADVISORS
PATTERSON. TM Capital Corp. ("TM Capital") and Gilford Securities
Incorporated ("Gilford Securities") each delivered its written opinion dated
April 22, 1996, to the Patterson Board of Directors that, as of such date, the
consideration to be paid by Patterson pursuant to the Merger Agreement and the
Exchange Ratio were fair to the stockholders of Patterson from a financial point
of view. TM Capital and Gilford Securities each subsequently delivered its
written opinion, dated the date of this Prospectus/Joint Proxy Statement, to the
Patterson Board of Directors that as of such date based upon the assumptions
made, the factors considered and the review undertaken, and subject to the
limitations and qualifications as described in each of such opinions, the
consideration to be paid by Patterson pursuant to the Merger Agreement and the
Exchange Ratio were fair to the Patterson stockholders from a financial point of
view.
8
<PAGE> 14
The full text of the respective opinions of TM Capital and Gilford
Securities, dated the date of this Prospectus/Joint Proxy Statement, are
attached hereto as Annex II(A) and (B) and are incorporated herein by reference.
Patterson stockholders are urged to read the respective opinions in their
entirety. See "Background of and Reasons for the Merger--Opinions of Financial
Advisors--Patterson."
TUCKER. Rauscher Pierce Refsnes, Inc. ("Rauscher Pierce") delivered its
written opinion dated April 22, 1996, to the Tucker Board of Directors that, as
of such date, the terms of the Merger are fair to the Tucker stockholders from a
financial point of view. Rauscher Pierce subsequently delivered its written
opinion, dated the date of this Prospectus/Joint Proxy Statement, to the Tucker
Board of Directors that as of such date, based upon the assumptions made, the
factors considered and the review undertaken, and subject to the limitations and
qualifications as described in such opinion, the terms of the Merger are fair to
the Tucker stockholders from a financial point of view.
The full text of the written opinion of Rauscher Pierce, dated the date of
this Prospectus/Joint Proxy Statement, is attached hereto as Annex III and is
incorporated herein by reference. Tucker stockholders are urged to read this
opinion in its entirety. See "Background of and Reasons for the Merger--Opinions
of Financial Advisors--Tucker."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware (the "Effective Time"),
unless the certificate of merger specifies a later Effective Time. Assuming all
conditions to the Merger contained in the Merger Agreement are satisfied or
waived prior thereto, it is anticipated that the Effective Time of the Merger
will occur as soon as practicable following the Special Meetings. See "Terms of
the Merger--Effective Time of the Merger."
CERTAIN CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of Patterson, Sub and Tucker to consummate the
Merger are subject to satisfaction or waiver at or prior to the Effective Time
of various conditions, including obtaining requisite Patterson and Tucker
stockholder approvals, accuracy of the representations and warranties of each
party and compliance with all agreements and covenants by each party, the
approval for trading on the Nasdaq National Market of the Patterson Common Stock
to be issued in the Merger (including the shares issuable under Tucker Stock
Options to be assumed by Patterson at the Effective Time), the receipt of an
opinion from Coopers & Lybrand L.L.P. to the effect that, as of the Effective
Time, the Merger qualifies for pooling of interests accounting treatment if
closed and consummated in accordance with the Merger Agreement and the receipt
of legal opinions covering the qualification of the Merger as a reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). See "Terms of the Merger--Conditions to the Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Time (i) by mutual consent of Patterson and Tucker, (ii) by either Patterson or
Tucker (a) if any court or other governmental entity shall have issued a final
and nonappealable order, decree or ruling or taken any other final and
nonappealable action permanently enjoining or otherwise prohibiting the Merger,
(b) if the Merger shall not have been consummated on or before November 30, 1996
(other than due to the failure of the party seeking to terminate the Merger
Agreement to perform its obligations under the Merger Agreement), (c) if, under
certain circumstances, the required Patterson and Tucker stockholder approvals
are not obtained, or (d) if the other party breaches (and fails to cure) a
representation, warranty, covenant or agreement contained in the Merger
Agreement, and (iii) by Patterson or Tucker in certain other situations,
including in the event of certain competing transactions with respect to Tucker
or a withdrawal or modification by the Tucker Board of Directors of its
recommendation of the Merger. See "Terms of the Merger--Termination of the
Merger Agreement." The Merger Agreement provides that, in the event of a
termination in certain situations in which there is a competing transaction with
respect to Tucker, or in the event that Tucker enters into certain business
combination transactions with another person within nine months (or, in certain
situations, within 24 months if such person beneficially owned more that 25% of
Tucker's Common Stock at the time of the Tucker Special
9
<PAGE> 15
Meeting) following termination under certain events, Patterson will receive a
termination fee of $2,000,000. In the event of a termination by Patterson
resulting from a modification or withdrawal by the Tucker Board of Directors of
its recommendation of the Merger or its declaration that the Merger is fair to
and advisable and in the best interests of Tucker and its stockholders, or a
resolution by the Tucker Board of Directors to do so, Patterson will receive a
termination fee of $250,000 and, in the event that Tucker enters into certain
business combination transactions with another person within nine months
thereafter, Tucker will pay an additional fee of $1,750,000. See "Terms of the
Merger--Fees and Expenses."
NO SOLICITATION
The Merger Agreement provides that Tucker will not initiate or solicit any
inquiries or the making of any proposal relating to any competing transaction
with respect to Tucker, or enter into discussions or negotiations with any
person in furtherance of any such competing transaction, or agree to endorse any
such competing transaction; provided, however, that Tucker may furnish
information or enter into discussions or negotiations with respect to an
unsolicited proposal to acquire Tucker pursuant to a competing transaction if,
and only to the extent that, the Board of Directors of Tucker, after
consultation with and based upon the advice of independent legal counsel,
determines in good faith that such action is necessary for the Tucker Board of
Directors to comply with its fiduciary duties to the stockholders of Tucker
under applicable law. See "Terms of the Merger--No Solicitation."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Board of Directors and the executive officers of
Tucker have certain interests in the Merger that are in addition to the
interests of Tucker stockholders generally. The Board of Directors of Tucker was
aware of these interests and considered them, among other matters, in approving
and adopting the Merger Agreement and the transactions contemplated thereby. See
"Terms of the Merger--Interests of Certain Persons in the Merger."
ACCOUNTING TREATMENT
The Merger will be treated as a "pooling of interests" for accounting and
financial reporting purposes. Consummation of the Merger is conditioned upon,
among other things, Patterson and Tucker receiving the opinion of Coopers &
Lybrand L.L.P., independent accountants to Patterson, to the effect that, as of
the Effective Time, the Merger qualifies for "pooling of interests" accounting
treatment if closed and consummated in accordance with the Merger Agreement. In
addition, Tucker and Patterson have received the opinion of Arthur Andersen LLP,
the independent public accountants of Tucker, to the effect that, as of the date
of the Merger Agreement, the requirements for pooling of interests accounting
treatment relating to the prior operations of Tucker are satisfied. See "Terms
of the Merger--Accounting Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code, in which case no gain or loss generally would be recognized by the
stockholders of Tucker on the exchange of their shares of Tucker Common Stock in
the Merger (except with respect to cash received by such stockholders in lieu of
fractional shares). It is a condition to closing of the Merger that Tucker
receives an opinion of independent legal counsel to the effect that the Merger
will be treated as a tax-free reorganization for federal income tax purposes;
such opinion will be based on certain assumptions and representations. No
rulings have been (or will be) requested from the Internal Revenue Service with
respect to any tax matters. Each Tucker stockholder should consult his own tax
advisor concerning the tax consequences of the Merger in his particular
individual circumstances. See "Terms of the Merger--Certain Federal Income Tax
Consequences."
RESTRICTIONS ON RESALE OF PATTERSON COMMON STOCK; AFFILIATE AGREEMENTS
The shares of Patterson Common Stock issued to Tucker stockholders in the
Merger will be registered under the Securities Act and will be freely tradable
on the Nasdaq National Market after the Effective Time,
10
<PAGE> 16
subject to certain limitations on transfer imposed on affiliates of Patterson
and Tucker. Before the Effective Time, certain affiliates of Patterson and
Tucker are required to execute and deliver affiliate agreements with Patterson
(the "Affiliate Agreements"), pursuant to which such persons agree not to sell,
transfer or otherwise reduce such persons' risk relative to Patterson Common
Stock or Tucker Common Stock owned by them prior to the Merger or shares of
Patterson Common Stock they receive in connection with the Merger during the
period beginning 30 days before the Effective Time and ending when financial
results covering at least 30 days of post-Merger combined operations of
Patterson and Tucker have been published. Furthermore, pursuant to the terms of
the Affiliate Agreements, such persons may not sell or otherwise dispose of
their shares of Patterson Common Stock (whether received in the Merger or
previously held) except in compliance with the applicable provisions of the
Securities Act and the rules and regulations thereunder, including Rule 145. See
"Terms of the Merger--Resales of Patterson Common Stock Received in the Merger."
RISK FACTORS
Patterson and Tucker stockholders should carefully consider the matters set
forth in "Risk Factors" beginning on page 18 of this Prospectus/Joint Proxy
Statement.
COMPARISON OF RIGHTS OF HOLDERS OF TUCKER COMMON STOCK AND PATTERSON COMMON
STOCK
See "Comparison of Rights of Holders of Tucker Common Stock and Patterson
Common Stock" for a summary of the material differences between the rights of
holders of Tucker Common Stock and the rights of holders of Patterson Common
Stock.
MARKET PRICES
The Patterson Common Stock and the Tucker Common Stock are traded on the
Nasdaq National Market (Symbols: PTEN and TUCK, respectively). The following
table sets forth for the periods indicated the reported high and low sales
prices per share of Patterson Common Stock and Tucker Common Stock. Neither
Patterson nor Tucker has paid any cash dividends on its Common Stock. The fiscal
year of Patterson is a calendar year. The fiscal year of Tucker currently ends
on March 31 of each year.
<TABLE>
<CAPTION>
SALES PRICE
-----------------
PATTERSON COMMON STOCK HIGH LOW
- ------------------------------------------------------------------------- ------ ------
<S> <C> <C>
Calendar 1994
First Quarter.......................................................... $ 7.25 $ 6.50
Second Quarter......................................................... 7.00 6.00
Third Quarter.......................................................... 7.50 6.25
Fourth Quarter......................................................... 7.88 6.75
Calendar 1995
First Quarter.......................................................... $ 7.75 $ 6.00
Second Quarter......................................................... 10.25 7.00
Third Quarter.......................................................... 13.88 9.38
Fourth Quarter......................................................... 14.63 10.50
Calendar 1996
First Quarter.......................................................... $13.16 $12.65
Second Quarter (through June 19, 1996)................................. 18.13 13.25
</TABLE>
11
<PAGE> 17
<TABLE>
<CAPTION>
SALES PRICE
-----------------
TUCKER COMMON STOCK HIGH LOW
- ------------------------------------------------------------------------- ------ ------
<S> <C> <C>
Fiscal 1995
First Quarter.......................................................... $ 5.00 $ 4.38
Second Quarter......................................................... 6.13 4.75
Third Quarter.......................................................... 6.63 5.06
Fourth Quarter......................................................... 7.25 5.00
Fiscal 1996
First Quarter.......................................................... $ 8.00 $ 6.25
Second Quarter......................................................... 8.75 7.00
Third Quarter.......................................................... 8.75 7.25
Fourth Quarter......................................................... 10.50 7.63
Fiscal 1997
First Quarter (through June 19, 1996).................................. $12.38 $ 9.63
</TABLE>
On April 22, 1996, the last trading day before the public announcement of
the execution of the Merger Agreement, the closing sale prices of the Patterson
Common Stock and the Tucker Common Stock, as reported on the Nasdaq National
Market, were $14.50 per share and $10.38 per share, respectively. Recent closing
sale prices of the Patterson Common Stock and the Tucker Common Stock as
reported on the Nasdaq National Market are set forth on the cover page of this
Prospectus/Joint Proxy Statement. Patterson and Tucker stockholders are urged to
obtain current market quotations for the Patterson Common Stock and the Tucker
Common Stock.
DIVIDEND POLICY OF PATTERSON FOLLOWING THE MERGER. Patterson does not
expect to pay any cash dividends on its Common Stock in the foreseeable future.
Patterson instead intends to retain its earnings to support the operations and
growth of its businesses. Any future cash dividends would depend on the future
earnings, capital requirements, Patterson's financial condition and other
factors deemed relevant by the Board of Directors of Patterson. In addition, the
terms of an existing bank line of credit prohibits payment of dividends by
Patterson without prior written consent of the bank.
12
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
OF PATTERSON ENERGY, INC.
The following table sets forth selected consolidated historical financial
data of Patterson and has been derived from and should be read in conjunction
with the audited consolidated financial statements of Patterson for each of the
five years ended December 31, 1995, and the unaudited interim consolidated
financial statements of Patterson for the three months ended March 31, 1995 and
1996, including the respective notes thereto, which are incorporated by
reference herein. See "Available Information" and "Incorporation of Certain
Documents by Reference." In the opinion of management of Patterson, all
adjustments, consisting of normal recurring accruals, considered necessary for
fair presentation have been included in the unaudited interim data. Unaudited
interim results are not necessarily indicative of results which may be expected
for future periods.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Operating revenues:
Drilling............................................. $20,075 $19,641 $21,396 $31,408 $41,249 $ 9,042 $10,533
Oil and gas sales.................................... 867 1,712 2,448 2,742 4,124 919 1,324
Well operation fees.................................. 868 823 815 834 1,132 252 345
Other................................................ 288 163 169 133 149 41 74
------- ------- ------- ------- ------- ------- -------
22,098 22,339 24,828 35,117 46,654 10,254 12,276
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Direct drilling costs................................ 17,369 16,770 17,251 25,167 33,492 7,455 8,746
Lease operating and production....................... 436 798 725 874 1,175 276 388
Exploration costs.................................... 509 258 280 207 369 69 116
Dry holes and abandonments........................... 62 125 190 1,093 683 155 68
Depreciation, depletion and amortization............. 1,857 1,784 2,321 2,881 5,314 1,030 1,733
General and administrative........................... 1,736 2,025 2,318 2,863 3,200 720 808
------- ------- ------- ------- ------- ------- -------
21,969 21,760 23,085 33,085 44,233 9,705 11,859
------- ------- ------- ------- ------- ------- -------
Operating income....................................... 129 579 1,743 2,032 2,421 549 417
------- ------- ------- ------- ------- ------- -------
Other income (expense):
Net gain on sale of assets........................... 405 654 84 359 313 29 26
Interest income...................................... 64 67 63 193 146 35 35
Interest expense..................................... (523) (416) (331) (366) (1,065) (188) (329)
Other................................................ 269 64 122 64 12 5 41
------- ------- ------- ------- ------- ------- -------
Other income (expense), net........................ 215 369 (62) 250 (594) (119) (227)
------- ------- ------- ------- ------- ------- -------
Income before income taxes and extraordinary items..... 344 948 1,681 2,282 1,827 430 190
Income tax expense (benefit), net...................... 195 391 123 (241) (88) 17 (1,586)
------- ------- ------- ------- ------- ------- -------
Income before extraordinary items...................... 149 557 1,558 2,523 1,915 413 1,776
Extraordinary items.................................... 131 458 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................................. $ 280 $ 1,015 $ 1,558 $ 2,523 $ 1,915 $ 413 $ 1,776
======= ======= ======= ======= ======= ======= =======
Net income per share:
Primary.............................................. $ 0.18 $ 0.65 $ 0.95 $ 1.01 $ 0.68 $ 0.16 $ 0.53
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... N/A N/A N/A N/A $ 0.65 N/A $ 0.53
======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares outstanding:
Primary.............................................. 1,552 1,545 1,648 2,501 2,836 2,635 3,334
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... N/A N/A N/A N/A 2,961 N/A 3,341
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital...................................... $ 802 $ 29 $ 5,224 $ 5,169 $ 6,289 $ 6,385 $ 5,740
Total assets......................................... 12,286 13,624 18,429 31,656 43,790 35,173 45,765
Notes payable, less current maturities............... 3,500 2,294 2,109 5,967 12,906 9,293 12,592
Retained earnings (accumulated deficit).............. (765) 250 1,808 4,331 6,246 4,744 8,022
Total stockholders' equity........................... 2,814 3,780 10,062 14,460 20,373 14,873 22,149
</TABLE>
13
<PAGE> 19
SELECTED FINANCIAL DATA
OF TUCKER DRILLING COMPANY, INC.
The following table sets forth selected historical financial data of Tucker
and has been derived from and should be read in conjunction with the audited
financial statements of Tucker for each of the five years ended March 31, 1996,
including the respective notes thereto, which are incorporated by reference
herein. See "Available Information" and "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Contract Drilling......................... $13,460 $14,606 $16,431 $23,190 $16,595
Oil and gas............................... 2,172 1,577 1,466 852 1,275
------- ------- ------- ------- -------
15,632 16,183 17,897 24,042 17,870
------- ------- ------- ------- -------
Costs and expenses:
Contract drilling......................... 11,660 12,445 13,446 17,744 13,140
Oil and gas exploration and production.... 649 564 519 295 335
Writedown due to impairment of long-lived
assets................................. -- -- -- -- 159
Dry holes and abandonments................ 471 313 206 186 109
Depreciation, depletion and
amortization........................... 2,732 2,554 2,673 1,943 2,184
General and administrative................ 1,453 1,403 1,448 1,784 1,698
------- ------- ------- ------- -------
16,965 17,279 18,292 21,952 17,625
------- ------- ------- ------- -------
Income (loss) from operations............... (1,333) (1,096) (395) 2,090 245
------- ------- ------- ------- -------
Other income (expense):
Net gain on sale of property and
equipment.............................. 248 7 54 357 64
Interest income........................... 237 106 79 216 400
Other..................................... 24 8 (4) (39) 23
------- ------- ------- ------- -------
Other income, net...................... 509 121 129 534 487
------- ------- ------- ------- -------
Income (loss) before income taxes........... (824) (975) (266) 2,624 732
Income taxes (benefits)..................... (15) -- -- 48 (748)
------- ------- ------- ------- -------
Net income (loss)........................... $ (809) $ (975) $ (266) $ 2,576 $ 1,480
======= ======= ======= ======= =======
Net income (loss) per common share.......... $ (0.39) $ (0.47) $ (0.13) $ 1.25 $ 0.71
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding............................... 2,065 2,065 2,065 2,065 2,085
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital........................... $ 4,446 $ 4,265 $ 4,876 $ 8,482 $ 8,792
Total assets.............................. 15,563 14,362 15,095 17,596 19,092
Retained earnings......................... 9,393 8,418 8,152 10,728 12,208
Total stockholders' equity................ 14,170 13,195 12,929 15,548 17,175
</TABLE>
14
<PAGE> 20
SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth selected unaudited pro forma combined
financial data of Patterson giving effect to the Merger under the pooling of
interests method of accounting and reflecting certain assumptions described in
the Notes to Unaudited Pro Forma Combined Financial Statements. The Pro Forma
Combined Statements of Income Data set forth below assume the Merger was
consummated as of January 1, 1993, and the Pro Forma Combined Balance Sheet Data
set forth below assume the Merger was consummated as of March 31, 1996. The pro
forma combined financial data is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated on the dates indicated,
nor is it necessarily indicative of future operating results or financial
position. The pro forma combined financial data has been derived from and should
be read in conjunction with the unaudited pro forma combined financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus/Joint Proxy Statement. See "Terms of the Merger--Accounting
Treatment" and "Unaudited Pro Forma Combined Financial Statements."
PATTERSON ENERGY, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME DATA
(UNAUDITED)
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- MARCH 31,
1993 1994 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Drilling.............................. $37,746,477 $54,822,766 $57,599,180 $14,095,736
Oil and gas sales..................... 3,913,746 3,593,786 5,399,536 1,689,958
Well operation fees................... 1,063,629 979,756 1,296,257 385,822
Other................................. 168,926 133,240 148,976 74,015
----------- ----------- ----------- -----------
42,892,778 59,529,548 64,443,949 16,245,531
----------- ----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs................. 30,631,392 43,080,526 46,459,500 11,423,347
Lease operating and production........ 1,206,796 1,141,391 1,509,206 481,373
Exploration costs..................... 317,085 233,547 369,133 159,403
Writedown due to impairment of
long-lived assets.................. -- -- 159,403 115,929
Dry holes and abandonments............ 395,508 1,279,133 791,221 151,697
Depreciation, depletion and
amortization....................... 4,654,697 4,911,929 7,522,695 2,293,226
General and administrative............ 4,013,766 4,793,484 5,062,940 1,376,277
----------- ----------- ----------- -----------
41,219,244 55,440,010 61,874,098 16,001,252
----------- ----------- ----------- -----------
Operating income........................ 1,673,534 4,089,538 2,569,851 244,279
----------- ----------- ----------- -----------
Other income (expense):
Net gain on sale of assets............ 138,272 611,009 373,567 49,924
Interest income....................... 141,067 408,945 545,463 120,833
Interest expense...................... (330,739) (366,152) (1,064,523) (329,454)
Other................................. 117,463 25,020 34,946 61,289
----------- ----------- ----------- -----------
Other income (expense), net........ 66,063 678,822 (110,547) (97,408)
----------- ----------- ----------- -----------
Income before income taxes.............. 1,739,597 4,768,360 2,459,304 146,871
----------- ----------- ----------- -----------
Income taxes:
Current............................... 123,309 213,349 213,560 62,365
Deferred income tax benefit........... -- (406,515) (1,000,324) (2,402,164)
----------- ----------- ----------- -----------
Income tax expense (benefit)....... 123,309 (193,166) (786,764) (2,339,799)
----------- ----------- ----------- -----------
Net income.............................. $ 1,616,288 $ 4,961,526 $ 3,246,068 $ 2,486,670
=========== =========== =========== ===========
Net income per common share:
Primary............................... $ 0.51 $ 1.23 $ 0.74 $ 0.51
=========== =========== =========== ===========
Assuming full dilution................ N/A N/A $ 0.72 $ 0.50
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Primary............................... 3,175,957 4,029,669 4,379,236 4,923,846
=========== =========== =========== ===========
Assuming full dilution................ N/A N/A 4,518,453 4,931,666
=========== =========== =========== ===========
</TABLE>
15
<PAGE> 21
PATTERSON ENERGY, INC.
PRO FORMA COMBINED BALANCE SHEET DATA
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Current assets:
Cash and cash equivalents.................................................. $10,309,773
Marketable securities...................................................... 524,323
Accounts receivable:
Trade
Billed................................................................ 9,557,677
Unbilled.............................................................. 1,426,103
Oil and gas sales....................................................... 639,655
Equipment inventory........................................................ 478,234
Deferred income taxes...................................................... 1,058,947
Undeveloped oil and gas properties held for sale........................... 2,785,351
Other current assets....................................................... 330,646
-----------
Total current assets............................................... 27,110,709
-----------
Property and equipment, at cost, net......................................... 34,813,539
Deferred income taxes........................................................ 1,957,784
Deposits on workers' compensation insurance policy........................... 343,760
Other assets................................................................. 739,409
-----------
Total assets....................................................... $64,965,201
===========
Current liabilities:
Current maturities of notes payable........................................ $ 2,207,005
Accounts payable:
Trade................................................................... 6,542,449
Revenue distribution.................................................... 1,572,988
Other................................................................... 290,900
Accrued expenses........................................................... 1,950,417
-----------
Total current liabilities.......................................... 12,563,759
-----------
Deferred liabilities......................................................... 376,746
Notes payable, less current maturities....................................... 12,592,363
-----------
12,969,109
-----------
Commitments and contingencies................................................ --
Stockholders' equity:
Preferred stock............................................................ --
Common stock............................................................... 47,472
Additional paid-in capital................................................. 19,047,037
Retained earnings.......................................................... 20,337,824
-----------
Total stockholders' equity......................................... 39,432,333
-----------
Total liabilities and stockholders' equity....................... $64,965,201
===========
</TABLE>
16
<PAGE> 22
COMPARATIVE PER COMMON SHARE DATA
OF PATTERSON ENERGY, INC. AND
TUCKER DRILLING COMPANY, INC.
The following table sets forth per share data of Patterson and Tucker on a
historical basis, and pro forma combined data for Patterson as if the Merger had
been effective for all periods presented. Pro forma information for Tucker is
presented on a pro forma equivalent basis, which reflects the pro forma combined
per share amounts multiplied by the Exchange Ratio of 0.74. Pro forma
information gives effect to the Merger under the pooling of interests method of
accounting and reflects certain assumptions described in the Notes to Unaudited
Pro Forma Combined Financial Statements. The data set forth below should be read
in conjunction with the audited and unaudited historical financial statements of
Patterson and the audited historical financial statements of Tucker, including
the respective notes thereto, which are incorporated by reference herein, and
the unaudited pro forma combined financial statements, including the notes
thereto, appearing elsewhere in this Prospectus/Joint Proxy Statement. See
"Available Information," "Incorporation of Certain Documents by Reference" and
"Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA
-----------------------
HISTORICAL TUCKER
------------------- PATTERSON EQUIVALENT
PATTERSON TUCKER COMBINED (0.74X)
--------- ------ --------- ----------
<S> <C> <C> <C> <C>
Three Months ended March 31, 1996
Income from continuing operations................... $ .53 $ .36 $ .51 $ .38
Book value as of March 31, 1996..................... $6.64 $8.20 $8.01 $ 5.93
Year ended December 31, 1995 and March 31, 1996
Income from continuing operations................... $ .68 $ .71 $ .74 $ .55
Year ended December 31, 1994 and March 31, 1995
Income from continuing operations................... $1.01 $1.25 $1.23 $ .91
Year ended December 31, 1993 and March 31, 1994
Income (loss) from continuing operations............ $ .95 $(.13 ) $ .51 $ .38
</TABLE>
17
<PAGE> 23
RISK FACTORS
IN ADDITION TO RISKS INHERENT IN THE OIL AND GAS CONTRACT DRILLING BUSINESS
AND THE OIL AND GAS INDUSTRY GENERALLY AS DESCRIBED IN THE PATTERSON 1995 FORM
10-KSB ATTACHED TO THIS PROSPECTUS/JOINT PROXY STATEMENT AS ANNEX IV, INCLUDING,
AMONG OTHERS, VOLATILITY OF OIL AND GAS PRICES, UNSTABLE MARKET CONDITIONS FOR
CONTRACT DRILLING SERVICES, EXISTING SEVERE SHORTAGES OF NEW DRILL PIPE,
OPERATIONAL HAZARDS AND UNINSURED RISKS, ENVIRONMENTAL AND OTHER GOVERNMENTAL
REGULATIONS AND LAWS, COMPETITION AND THE IMPACT OF THOSE FACTORS ON THE ONGOING
FINANCIAL CONDITION AND OPERATIONS OF PATTERSON AND THE SURVIVING CORPORATION
FOLLOWING THE EFFECTIVE TIME OF THE MERGER, PATTERSON AND TUCKER STOCKHOLDERS
SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS THE OTHER MATTERS
DISCUSSED IN THIS PROSPECTUS/JOINT PROXY STATEMENT.
EXCHANGE RATIO
The Exchange Ratio was determined by negotiations between Patterson and
Tucker and was based on a number of factors. See "Background of and Reasons for
the Merger--Patterson's Reasons for the Merger; Recommendation of Patterson
Board of Directors" and "--Tucker's Reasons for the Merger; Recommendation of
Tucker Board of Directors." The Exchange Ratio does not necessarily reflect the
relative stock prices, asset values, cash flow per share, earnings per share or
other attributes of either Patterson or Tucker. In addition, the price of
Patterson Common Stock at the Effective Time, as well as the prices at the date
of this Prospectus/Joint Proxy Statement and at the date of the Special
Meetings, may vary as a result of changes in the business operations or
prospects of Patterson, market assessments of the likelihood the Merger will be
consummated and the timing thereof, general market and economic conditions and
other factors. Furthermore, the Exchange Ratio is a fixed ratio in the Merger
Agreement. Accordingly, the Exchange Ratio will not be adjusted in the event of
an increase or decrease in the market price of either the Patterson Common Stock
or the Tucker Common Stock, or both. Patterson and Tucker stockholders should
obtain current market quotations for the Patterson Common Stock and the Tucker
Common Stock.
POSSIBLE VOLATILITY OF PATTERSON COMMON STOCK PRICE
The value realized by Tucker stockholders in the Merger will depend upon
the market price of Patterson Common Stock, which is subject to fluctuation. The
sale price of Patterson Common Stock ranged from a low of $6 per share to a high
of $17.25 per share during the 18-month period ended May 31, 1996. Following the
Effective Time of the Merger, the market price of Patterson Common Stock may be
volatile due to, among other things, the relatively small size of the Patterson
stockholder base.
PATTERSON INDEBTEDNESS--CONSEQUENCE OF FAILURE TO SERVICE
All of Patterson's drilling rigs and certain of its developed oil and gas
properties are pledged as collateral for Patterson's indebtedness for borrowed
money. This indebtedness, totalling approximately $15,500,000 at May 31, 1996,
is recourse indebtedness. Patterson expects to continue to borrow money (if
available) from time to time in the future for general corporate purposes, which
may include acquisitions of drilling rigs and related equipment, and for oil and
gas leasehold acquisition, exploration and development. Any such borrowings
would also be recourse indebtedness, collateralized by assets of Patterson.
Patterson's ability to repay its indebtedness could be materially adversely
affected by a decline in general economic conditions in the oil and gas industry
or by unsuccessful results in Patterson's contract drilling or oil and gas
activities. The inability of Patterson to meet its debt obligations could result
in foreclosure against Patterson and loss of the collateralized assets and/or
bankruptcy. In addition, one of the loan agreements relating to this
indebtedness contains certain financial covenants, including maintenance of
certain financial ratios. Failure to comply with these covenants could result in
default, which in turn could cause the loan to be declared immediately due and
payable.
18
<PAGE> 24
NO ANTICIPATED CASH DIVIDENDS
Following the Merger, Patterson does not anticipate paying cash dividends
in the foreseeable future. Currently, the terms of an existing bank line of
credit prohibits the payment of dividends by Patterson without the prior written
consent of the bank.
RELIANCE ON KEY PATTERSON PERSONNEL
Except for a 60-day transition period following the Effective Time of the
Merger, none of the current key management of Tucker other than its Vice
President-Contract Drilling is expected to continue as an officer or employee of
Patterson or the Surviving Corporation following the Effective Time of the
Merger. Additionally, none of the directors of Tucker will become a director of
Patterson. As a result, the ongoing operations of Patterson will continue to be
highly dependent upon Patterson's existing directors, 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 Patterson, respectively, could have a material
adverse effect on Patterson. Patterson has no employment agreements with any of
its executive officers. Patterson maintains for its benefit keyman insurance on
the lives of Messrs. Talbott and Patterson in the amount of $3 million each.
CONCENTRATION OF STOCK OWNERSHIP
The existing officers and directors of Patterson currently beneficially own
approximately 28% of the outstanding shares of Patterson Common Stock.
Immediately after the Effective Time, and assuming the issuance of 1,652,106
shares of Patterson Common Stock upon consummation of the Merger, these persons
will beneficially own approximately 19% of the then outstanding shares of
Patterson's Common Stock. As a result, such persons will have the ability to
exercise significant influence over the combined companies' direction and to
significantly influence the outcome of corporate actions requiring stockholder
approval. This concentration of ownership may have the effect of delaying or
preventing a change of control of Patterson.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Patterson's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. These provisions
include: (i) a special meeting of stockholders may be called only by the Board
of Directors, the Chief Executive Officer, the President or the holders of a
majority of the outstanding stock entitled to vote at such special meeting; (ii)
a stockholder action may be taken only at an annual or special meeting and not
by written consent of the stockholders; (iii) advance notice is required for
stockholder proposals and director nominations; and (iv) the authorization of
unissued "blank check" preferred stock. In addition, Patterson is subject to
Section 203 of the Delaware General Corporation Law which regulates transactions
with certain stockholders owning 15% or more of a Delaware corporation's capital
stock. See "Description of Patterson Capital Stock--Certain Provisions Affecting
Patterson Stockholders."
19
<PAGE> 25
INTRODUCTION
This Prospectus/Joint Proxy Statement is being furnished in connection with
the solicitation of proxies by the Board of Directors of Patterson for use at
the Patterson Special Meeting to be held on July 30, 1996. This Prospectus/Joint
Proxy Statement is also being furnished in connection with the solicitation of
proxies by the Board of Directors of Tucker for use at the Tucker Special
Meeting to be held on July 30, 1996. This Prospectus/Joint Proxy Statement also
serves as a prospectus for the Patterson Common Stock which will be issued in
the Merger.
All information contained in this Prospectus/Joint Proxy Statement relating
to Patterson has been furnished by Patterson, and Tucker is relying upon the
accuracy of that information. All information contained in this Prospectus/Joint
Proxy Statement relating to Tucker has been furnished by Tucker, and Patterson
is relying on the accuracy of that information.
THE PATTERSON SPECIAL MEETING
DATE, TIME AND PLACE
The Patterson Special Meeting will be held on July 30, 1996, at 11:00 a.m.,
local time, at 3000 Thanksgiving Tower, 1601 Elm Street, Dallas Texas.
PURPOSE
At the Patterson Special Meeting, holders of shares of Patterson Common
Stock will consider and vote upon proposals to (i) approve an amendment to
Patterson's Certificate of Incorporation to increase the number of authorized
shares of Patterson Common Stock from 5,000,000 shares to 9,000,000 shares
(referred to herein as the "Charter Amendment"), and (ii) approve, as required
by the Nasdaq National Market, the issuance of shares of Patterson Common Stock
in connection with the Merger Agreement (referred to herein as the "Stock
Issuance"), including the issuance of shares of Patterson Common Stock in the
Merger and the reservation of shares of Patterson Common Stock for issuance upon
exercise of the Tucker Stock Options which, following the Merger, will
constitute options to purchase Patterson Common Stock upon the terms set forth
in the governing stock option plans and the Merger Agreement. Holders of shares
of Patterson Common Stock entitled to vote also will consider and vote upon any
other matter that may properly come before the Patterson Special Meeting or any
adjournments or postponements thereof.
RECORD DATE; SHARES ENTITLED TO VOTE
The close of business on the Patterson Record Date (June 20, 1996) has been
fixed by the Board of Directors of Patterson as the record date for the
determination of holders of shares of Patterson Common Stock entitled to notice
of and to vote at the Patterson Special Meeting. At the close of business on the
Patterson Record Date, there were 3,194,951 shares of Patterson Common Stock
issued and outstanding and held by 69 holders of record. Holders of record of
Patterson Common Stock on the Patterson Record Date are entitled to one vote per
share.
QUORUM
A majority of the outstanding shares of Patterson Common Stock entitled to
vote must be present in person or by proxy at the Patterson Special Meeting in
order for a quorum to be present. Shares of Patterson Common Stock represented
by proxies which are marked "abstain" or which are not marked as to any
particular matter or matters will be counted as shares present for purposes of
determining the presence of a quorum on all matters. Proxies relating to "street
name" shares that are voted by brokers will be counted as shares present for
purposes of determining the presence of a quorum on all matters, but will not be
treated as shares having voted at the Patterson Special Meeting as to any
proposal as to which authority to vote is withheld by the brokers.
20
<PAGE> 26
In the event a quorum is not present in person or by proxy at the Patterson
Special Meeting, the Patterson Special Meeting is expected to be adjourned or
postponed.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Patterson Common Stock is required to approve the Charter Amendment. The
affirmative vote of the holders of a majority of the outstanding shares of
Patterson Common Stock present, in person or by proxy, and entitled to vote at
the Patterson Special Meeting is required to approve the Stock Issuance.
Abstentions will be counted as shares present for purposes of determining
the presence of a quorum on all matters. See "--Quorum." Abstentions will have
the effect of votes against the approval of the Charter Amendment and the Stock
Issuance. In addition, brokers who hold shares of Patterson Common Stock as
nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners thereof. Votes which are not
cast for this reason ("broker non-votes") also will have the effect of a vote
against the Charter Amendment. Broker non-votes with respect to the Stock
Issuance will not have the effect of a vote for or against the matter.
As of the Patterson Record Date, the directors and executive offers of
Patterson beneficially owned an aggregate of 924,198 shares (approximately 28%)
of the outstanding shares of Patterson Common Stock, including 47,760 shares
subject to options currently exercisable and options exercisable within 60 days.
Each of such directors and executive officers has advised Patterson that he
plans to vote or direct the vote of all such shares of Patterson Common Stock
entitled to vote in favor of the matters submitted to the stockholders of
Patterson at the Patterson Special Meeting.
VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for
the Patterson Special Meeting and which have not been revoked will be voted at
such meeting in the manner specified by the holders thereof. PROXIES WHICH DO
NOT CONTAIN AN INSTRUCTION TO VOTE FOR OR AGAINST OR TO ABSTAIN FROM VOTING ON A
PARTICULAR MATTER DESCRIBED IN THE PROXY WILL BE VOTED IN FAVOR OF SUCH MATTER.
It is not expected that any matter other than those referred to herein will
be brought before the Patterson Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Patterson form of proxy does not
preclude a Patterson stockholder from voting in person. A Patterson stockholder
may revoke a proxy at any time prior to its exercise by submitting a later dated
proxy with respect to the same shares, by filing with the Secretary of Patterson
a duly executed revocation, or by voting in person at the Patterson Special
Meeting. Attendance at the Patterson Special Meeting will not in and of itself
constitute a revocation of a proxy.
NO APPRAISAL RIGHTS
Under Delaware law, Patterson's stockholders will not be entitled to any
appraisal or dissenter's rights with regard to the Charter Amendment or the
Stock Issuance or otherwise in connection with the Merger.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Patterson will bear the cost of the
solicitation of proxies from the Patterson stockholders. In addition to
solicitation by mail, the directors, officers and employees of Patterson may
solicit proxies from the Patterson stockholders by telephone or telegram or in
person. The Patterson directors, officers and employees will not be additionally
compensated for such solicitation but may be reimbursed for out-of-pocket
expenses in connection therewith. Arrangements also will be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to
21
<PAGE> 27
the beneficial owners of shares held of record by such persons, and Patterson
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
HOLDERS OF PATTERSON COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
THE TUCKER SPECIAL MEETING
DATE, TIME AND PLACE
The Tucker Special Meeting will be held on July 30, 1996, at 10:00 a.m.,
local time, at 3000 Thanksgiving Tower, 1601 Elm Street, Dallas, Texas.
PURPOSE
At the Tucker Special Meeting, holders of shares of Tucker Common Stock
will consider and vote upon a proposal to approve and adopt the Merger Agreement
and the Merger. Holders of shares of Tucker Common Stock entitled to vote also
will consider and vote upon any other matter that may properly come before the
Tucker Special Meeting or any adjournments or postponements thereof.
RECORD DATE; SHARES ENTITLED TO VOTE
The close of business on the Tucker Record Date (June 20, 1996) has been
fixed by the Board of Directors of Tucker as the record date for the
determination of holders of shares of Tucker Common Stock entitled to notice of
and to vote at the Tucker Special Meeting. At the close of business on the
Tucker Record Date, there were 2,104,076 shares of Tucker Common Stock issued
and outstanding and held by 423 holders of record. Holders of record of Tucker
Common Stock on the Tucker Record Date are entitled to one vote per share.
QUORUM
A majority of the outstanding shares of Tucker Common Stock entitled to
vote must be present in person or by proxy at the Tucker Special Meeting in
order for a quorum to be present. Shares of Tucker Common Stock represented by
proxies which are marked "abstain" or which are not marked as to any particular
matter or matters will be counted as shares present for purposes of determining
the presence of a quorum on all matters. Proxies relating to "street name"
shares that are voted by brokers will be counted as shares present for purposes
of determining the presence of a quorum on all matters, but will not be treated
as shares having voted at the Tucker Special Meeting as to any proposal as to
which authority to vote is withheld by the brokers.
In the event a quorum is not present in person or by proxy at the Tucker
Special Meeting, the Tucker Special Meeting is expected to be adjourned or
postponed.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Tucker Common Stock is required to approve and adopt the Merger Agreement.
Abstentions will be counted as shares present for purposes of determining
the presence of a quorum on all matters. See "--Quorum." Abstentions will have
the effect of votes against the approval and adoption of the Merger Agreement,
the Merger and the other transactions contemplated by the Merger Agreement. In
addition, brokers who hold shares of Tucker Common Stock as nominees will not
have discretionary authority to vote such shares in the absence of instructions
from the beneficial owners thereof. Broker non-votes also will have the effect
of a vote against the approval and adoption of the Merger Agreement, the Merger
and the other transactions contemplated by the Merger Agreement.
22
<PAGE> 28
As of the Tucker Record Date, the directors and executive officers of
Tucker beneficially owned an aggregate of 231,741 shares (approximately 11%) of
the outstanding Tucker Common Stock, including 81,500 shares subject to options,
all of which are fully vested and currently exercisable. Each of such directors
and executive officers has advised Tucker that he plans to vote or direct the
vote of all such shares of Tucker Common Stock entitled to vote in favor of the
approval and adoption of the Merger Agreement, the Merger and the other
transactions contemplated by the Merger Agreement.
VOTING OF PROXIES
Shares represented by all properly executed proxies received in time for
the Tucker Special Meeting and which have not been revoked will be voted at such
meeting in the manner specified by the holders thereof. PROXIES WHICH DO NOT
CONTAIN AN INSTRUCTION TO VOTE FOR OR AGAINST OR TO ABSTAIN FROM VOTING ON THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT WILL BE VOTED IN FAVOR OF THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT, THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
It is not expected that any matter other than those referred to herein will
be brought before the Tucker Special Meeting. If, however, other matters are
properly presented, the persons named as proxies will vote in accordance with
their judgment with respect to such matters, unless authority to do so is
withheld in the proxy.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Tucker form of proxy does not preclude
a Tucker stockholder from voting in person. A Tucker stockholder may revoke a
proxy at any time prior to its exercise by submitting a later dated proxy with
respect to the same shares, by filing with the Secretary of Tucker a duly
executed revocation, or by voting in person at the Tucker Special Meeting.
Attendance at the Tucker Special Meeting will not in and of itself constitute a
revocation of a proxy.
NO APPRAISAL RIGHTS
Under Delaware law, Tucker stockholders will not be entitled to any
appraisal or dissenter's rights in connection with the Merger.
SOLICITATION OF PROXIES
Subject to the Merger Agreement, Tucker will bear the cost of the
solicitation of proxies from the Tucker stockholders. In addition to
solicitation by mail, the directors, officers and employees of Tucker may
solicit proxies from the Tucker stockholders by telephone or telegram or in
person. The Tucker directors, officers and employees will not be additionally
compensated for such solicitation but may be reimbursed for out-of-pocket
expenses in connection therewith. Arrangements also will be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of shares held of record by such
persons, and Tucker will reimburse such custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses in connection therewith.
Georgeson & Company, Inc. will assist in the solicitation of proxies by
Tucker for fees of $7,500, plus reimbursement of out-of-pocket expenses.
HOLDERS OF TUCKER COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
23
<PAGE> 29
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER
In June 1995, the Tucker Board of Directors, in view of the significant
increase in Tucker's cash balances and the improved outlook for contract
drilling, authorized Tucker's management to evaluate alternatives for enhancing
stockholder value. Management engaged Arthur Andersen LLP ("Arthur Andersen") to
assist it in this evaluation. Based on Arthur Andersen's analysis of
alternatives, Tucker's management determined to pursue one or more acquisitions
of contract drilling companies. Management and Arthur Andersen identified and
Arthur Andersen contacted 16 privately owned contract drilling companies. Tucker
entered into confidentiality agreements with five of these drilling companies
and during October and November of 1995 conducted significant due diligence on
two of the companies. An offer was made to purchase one of these two companies
but was rejected and discussions were terminated.
On December 26, 1995, a Tucker stockholder contacted Cloyce Talbott, the
Chairman of the Board and Chief Executive Officer of Patterson, to inquire
whether Patterson would be interested in acquiring Tucker. Mr. Talbott indicated
that Patterson would be interested.
The Tucker stockholder then contacted Larry Tucker, the Chairman of the
Board, President and Chief Executive Officer of Tucker, and inquired if Tucker
would be interested in being acquired by Patterson in an exchange of stock
transaction. Management of Tucker had begun to doubt the viability of its search
for acquisition candidates and whether such an acquisition would have the
desired effect on stockholder value. Mr. Tucker indicated to the stockholder
that Tucker might be interested in discussing a possible combination with
Patterson. Mr. Tucker indicated that he would discuss the telephone inquiry with
other senior officers of Tucker and then contact Mr. Talbott. After conferring
with the other senior officers of Tucker, Mr. Tucker contacted Mr. Talbott and
indicated an interest in discussing a business combination with Patterson.
On December 27, 1995, A. Glenn Patterson, the President and Chief Operating
Officer and a director of Patterson, contacted Larry Tucker, and Mr. Tucker and
Mr. Patterson then met in Robert Lee, Texas on the same date for a general
discussion of the benefits of combining the companies. Following this meeting,
Mr. Tucker contacted Mr. Talbott and arranged to meet Mr. Talbott in Snyder,
Texas to further discuss a business combination.
On December 29, 1995, Larry Tucker, Mark Tucker (the Vice President-Land
and a director of Tucker), Charles B. Middlekauf (the Executive Vice President
and Chief Financial Officer and a director of Tucker) and Ron Scandolari (the
Vice President-Contract Drilling of Tucker) met with Cloyce Talbott, Glenn
Patterson and James Brown, the Vice President-Finance and the Chief Financial
Officer of Patterson, at the offices of Patterson in Snyder, Texas. At the
meeting, Mr. Talbott proposed that Patterson acquire Tucker in a tax-free stock
for stock exchange based upon then current per share market prices of Patterson
Common Stock and Tucker Common Stock. Those present at the meeting then
discussed the businesses of both Patterson and Tucker and the benefits of
combining the two companies. At the conclusion of the discussion, Larry Tucker
indicated that Tucker was interested in further pursuing a merger of Tucker into
Patterson but not based upon then current per share market prices and not at the
present time because of other potential business transactions being considered
by Tucker and that Tucker desired to continue discussions in March 1996.
Larry Tucker then advised members of the Tucker Board of Directors of the
discussions with Patterson on December 29, 1995 and called a meeting of the
Board of Directors, which was held on January 3, 1996. All directors of Tucker
were present in person or by conference telephone. A full and detailed
discussion of the possible merger with Patterson ensued. Larry Tucker proposed
that negotiations with Patterson should be pursued at that time. The Board of
Directors, after a full and detailed discussion, then unanimously approved
responding to Patterson that the Board would consider a merger with Patterson on
the basis that Tucker stockholders would receive Patterson Common Stock having a
market value immediately prior to the merger of $10.50 per share of Tucker
Common Stock. The proposal was orally communicated to Cloyce Talbott by Larry
Tucker in a telephone conference on January 3, 1996. Mr. Talbott stated that he
would consider the proposal and give Mr. Tucker a prompt response.
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On January 4, 1996, Mr. Talbott contacted Mr. Tucker and rejected the
$10.50 per share proposal, but proposed a merger of Tucker and Patterson on the
basis of Tucker stockholders receiving 0.68 of a share of Patterson Common Stock
for each issued and outstanding share of Tucker Common Stock, Patterson paying
all amounts due under all severance pay agreements with Tucker officers, or,
alternatively at Tucker's option, in the event all severance pay agreements with
Tucker officers were terminated before a merger, then all Tucker stockholders
would receive in the merger 0.73 of a share of Patterson Common Stock for each
share of Tucker Common Stock.
On January 4, 1996, Mr. Tucker discussed the proposal of Patterson with the
senior officers and the directors of Tucker and a decision was made to reject
the Patterson proposal and to communicate the rejection of the proposal to
Cloyce Talbott. On January 5, 1996, Larry Tucker communicated the decision to
Cloyce Talbott and terminated all proposed merger discussions.
On January 8, 1996, the Tucker Board of Directors unanimously voted to
immediately engage an investment banking firm to continue to analyze strategic
alternatives of Tucker and recommend possible courses of action to enhance
stockholder value. The Tucker Board of Directors met with three potential
financial advisors. On January 12, 1996, all of the members of the Board of
Directors met in Dallas with officers of Rauscher Pierce to discuss the
engagement of that firm to act as financial advisor to the Tucker Board of
Directors. On January 13, 1996, the Board of Directors authorized the engagement
of Rauscher Pierce as financial advisor.
On January 15, 1996, Tucker formally engaged Rauscher Pierce as financial
advisor and issued a press release on January 18, 1996 announcing the engagement
of Rauscher Pierce to evaluate strategic alternatives for enhancing stockholder
value, including, but not limited to, acquisitions or a sale or merger.
Thereafter, Rauscher Pierce made its analysis of strategic alternatives and
submitted its recommendation to the Board of Directors. Based upon that
recommendation and studies of the officers and directors, the Board of Directors
authorized Rauscher Pierce to establish a list of contacts which might be
interested in a business combination with Tucker. After reviewing the prospects,
Rauscher Pierce was authorized to contact the candidates recommended by it and
approved by the senior officers of Tucker and solicit confidential and
preliminary indications of interest in a business combination with Tucker.
Indications of interest were received by February 27, 1996 by Rauscher
Pierce from four interested bidders, including Patterson. During March, the four
bidders performed such due diligence with respect to Tucker as they deemed
necessary. On or about March 28, 1996, final bid proposals were received from
three parties and thereafter analyzed by officers of Tucker and Rauscher Pierce.
On April 2, 1996, Rauscher Pierce presented to the Tucker Board of Directors the
proposals, the analysis of the proposals and the recommendation of Rauscher
Pierce to commence merger negotiations with Patterson. The Tucker Board of
Directors, by unanimous vote of all directors present, resolved to proceed to
negotiate an agreement with Patterson. During the next three weeks, Tucker
management, representatives of Rauscher Pierce and Tucker's legal counsel met
with Patterson management and its financial advisors and legal counsel to
negotiate a definitive merger agreement. On April 17, 1996, Tucker and Patterson
issued a joint press release announcing that they were engaged in negotiations
regarding a transaction whereby Patterson would acquire Tucker in a
stock-for-stock merger. On April 22, 1996, the substantially final Merger
Agreement among Tucker, Patterson and Sub was reviewed and discussed in detail
at a meeting of the Tucker Board of Directors. All directors were present in
person and legal counsel was present and Rauscher Pierce gave its presentation
and recommendation with respect to the proposed merger with Patterson and
delivered to the Tucker Board of Directors its written opinion that the Merger
was fair to the stockholders of Tucker from a financial point of view.
Thereupon, the Board of Directors (with Larry Tucker presiding and all directors
present in person and voting) unanimously approved the merger with Patterson and
the terms and conditions of the Merger Agreement, unanimously determined the
Merger was fair to and advisable and in the best interests of Tucker and its
stockholders and authorized Larry Tucker to execute and deliver the Merger
Agreement. An amendment to the Merger Agreement was authorized and executed May
16, 1996 and on such date the Tucker Board of Directors reaffirmed its
conclusions and recommendation of April 22, 1996.
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PATTERSON'S REASONS FOR THE MERGER; RECOMMENDATION OF PATTERSON BOARD OF
DIRECTORS
At a meeting held on April 21, 1996, the Patterson Board of Directors
determined by unanimous vote that the terms of the Merger are fair to and
advisable and in the best interests of Patterson and its stockholders and
approved the Merger Agreement, the Charter Amendment and the Stock Issuance.
In reaching its determination the Board of Directors of Patterson
considered with the assistance of Patterson management and its legal and
financial advisors the following factors, among others:
(i) The complementary nature of Patterson's and Tucker's respective
businesses, assets and strategic objectives;
(ii) Information concerning the historical financial performance and
condition, business operations and prospects of Patterson and Tucker as separate
entities and on a combined basis;
(iii) Projected operating efficiencies that should result from the Merger,
including the enhanced utilization of Tucker's drilling rigs, the integration of
office facilities and other support functions and the combined purchasing power
of the two companies;
(iv) Recent and prior market prices of Patterson Common Stock and Tucker
Common Stock;
(v) The terms of the Merger and the Merger Agreement, including the
Exchange Ratio, the structure and the anticipated accounting and federal income
tax treatments;
(vi) The recommendations of Patterson's management, including the
management members of the Patterson Board of Directors;
(vii) The analyses of Patterson's financial advisors, including the
respective opinions of TM Capital and Gilford Securities described below in this
Section as to the fairness of the consideration to be paid in the Merger and the
Exchange Ratio from a financial point of view;
(viii) The increase in the number of shares of Patterson Common Stock that
would be held by public stockholders after the Merger and the impact thereof on
liquidity for holders of Patterson Common Stock;
(ix) The strategic fit between Patterson and Tucker, particularly in the
Permian and Hardeman Basins of West Texas; and
(x) Examination of pro forma combined historical financial information of
Patterson and Tucker with regard to debt to equity ratio, book value per share,
net income per share and net cash flow per share and of projections of combined
operating results with regard to net income per share and net cash flow per
share.
The Patterson Board of Directors believes that the Merger will result in a
combined entity with stronger financial resources that will provide it with the
increased ability to compete more effectively, particularly in respect of its
contract drilling operations in West Texas.
The Patterson Board of Directors has determined that the consummation of
the Merger is in the best interests of Patterson and its stockholders. The
Patterson Board of Directors believes that the combination is a continuation of
Patterson's objective of expansion of its onshore drilling rig fleet and should
help consolidate the highly fragmented onshore drilling industry. Following the
Merger, the addition of Tucker's 13 drilling rigs will increase the size of
Patterson's fleet to a total of 40 drilling rigs. The Merger will also enhance
Patterson's balance sheet and provide Patterson with increased flexibility and
liquidity. The Patterson Board of Directors believes that the expansion of
Patterson's onshore drilling fleet, the enhancement of Patterson's balance sheet
and the possible positive impact on Patterson's earnings that could result from
any consolidation savings realized in the Merger will enhance Patterson's
long-term growth potential.
After consideration of all of those factors and without assigning weight to
any specific factor, the Patterson Board of Directors determined that the Merger
was fair to and advisable and in the best interests of Patterson and its
stockholders.
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THE BOARD OF DIRECTORS OF PATTERSON UNANIMOUSLY RECOMMENDS THAT PATTERSON
STOCKHOLDERS VOTE IN FAVOR OF THE CHARTER AMENDMENT AND THE STOCK ISSUANCE.
TUCKER'S REASONS FOR THE MERGER; RECOMMENDATION OF TUCKER BOARD OF DIRECTORS
At a meeting held on April 22, 1996, the Tucker Board of Directors
unanimously determined that the Merger was fair to and advisable and in the best
interests of Tucker and its stockholders and approved the Merger Agreement. See
"Terms of the Merger--Interests of Certain Persons in the Merger." In reaching
its conclusion to approve the Merger Agreement as originally executed and to
recommend adoption of the Merger Agreement by the Tucker stockholders, the
Tucker Board of Directors considered a number of factors, including, without
limitation, the following:
(i) the arm's length negotiations with Patterson, which resulted in the
agreement by Patterson to acquire all outstanding Tucker Common Stock in
exchange for Patterson Common Stock, at approximately a 49.3% premium over the
closing price for the Tucker Common Stock on December 18, 1995, one month prior
to the announcement of Tucker's engagement of Rauscher Pierce;
(ii) the process of soliciting indications of interest for the acquisition
of Tucker, comparing offers made by interested parties and determining that the
Merger was the best available alternative;
(iii) the historical and current financial conditions, results of
operations, prospects and businesses of Tucker and Patterson before and after
giving effect to the Merger;
(iv) current market conditions, historical market prices and trading
information for both the Tucker Common Stock and the Patterson Common Stock;
(v) the structure of the Merger, which provides that the Tucker
stockholders will initially maintain a continuing equity interest in the
combined companies that is more liquid than their interests in the Tucker Common
Stock;
(vi) the expectation that the Merger will afford the Tucker stockholders
the opportunity to receive Patterson Common Stock in a tax-free transaction;
(vii) the opinion of Rauscher Pierce that, as of the date of the Merger
Agreement, the consideration to be received by the Tucker stockholders in the
Merger was fair to such stockholders from a financial point of view (in
considering the opinion of Rauscher Pierce, the Tucker Board of Directors took
into account, among other things, the terms of Rauscher Pierce's engagement by
Tucker and the fees payable to Rauscher Pierce thereunder; see "--Opinion of
Financial Advisors--Tucker"); and
(viii) the expectation that the complementary businesses of Tucker and
Patterson will provide significant growth opportunities after consummation of
the Merger.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger Agreement, the Tucker Board of Directors did not find
it practicable to, and did not, quantify or otherwise attempt to assign relative
weights to specific factors considered in reaching its determinations.
THE TUCKER BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND
ADVISABLE AND IN THE BEST INTERESTS OF TUCKER AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT THE TUCKER STOCKHOLDERS VOTE FOR THE MERGER.
OPINIONS OF FINANCIAL ADVISORS
PATTERSON
TM Capital and Gilford Securities (collectively, the "Patterson Financial
Advisors") delivered their respective oral opinions to the Patterson Board of
Directors on April 21, 1996, and their respective written opinions on April 22,
1996 and on the date of this Prospectus/Joint Proxy Statement in each case that,
as of
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each of those dates, the consideration to be paid by Patterson pursuant to the
Merger Agreement and the Exchange Ratio are fair to Patterson and its
stockholders from a financial point of view. The Patterson Financial Advisors'
opinions relate only to the consideration to be paid by Patterson pursuant to
the Merger Agreement and the Exchange Ratio and do not constitute a
recommendation to any stockholder of Patterson as to how such stockholder should
vote at the Patterson Special Meeting. In rendering their opinions, the
Patterson Financial Advisors have assumed and relied upon Patterson's ability to
use the pooling of interests accounting method in connection with the Merger.
The full text of the respective written opinions of the Patterson Financial
Advisors, dated the date of this Prospectus/Joint Proxy Statement, which set
forth the assumptions made, the matters considered and the limitations of the
review undertaken in rendering such opinions, are attached as Annex II to this
Prospectus/Joint Proxy Statement and are incorporated herein by reference.
Stockholders are encouraged to read the respective opinions in their entirety.
As set forth in their opinions, the Patterson Financial Advisors relied on
the accuracy and completeness of publicly available information and such other
information provided to them regarding Patterson and Tucker, including the views
of management of Patterson and Tucker, and have not assumed any responsibility
for the independent verification of such information. The Patterson Financial
Advisors further relied upon the assurance of management of Patterson and Tucker
that they were unaware of any facts that would make such information incomplete
or misleading. In arriving at their opinions, the Patterson Financial Advisors
did not perform nor obtain any independent evaluation or appraisal of the assets
of Patterson or Tucker. The Patterson Financial Advisors' opinions are
necessarily based on the economic, market and other conditions existing on the
date of the opinions.
In rendering their respective opinions, the Patterson Financial Advisors,
among other things: (i) reviewed this Prospectus/Joint Proxy Statement,
including the Merger Agreement attached hereto as Annex I; (ii) reviewed
publicly available information relating to both Patterson and Tucker, including
Patterson's annual reports on Form 10-KSB and annual reports to stockholders for
the three fiscal years ended December 31, 1995, the Patterson First Quarter 1996
Form 10-Q and the prospectus for the initial public offering of Patterson dated
November 2, 1993, and Tucker's annual reports on Form 10-KSB and annual reports
to stockholders for the five fiscal years ended March 31, 1996; (iii) discussed
with senior management of both Patterson and Tucker the companies' historical
and current operations, financial condition and future prospects and reviewed
certain internal financial information, business plans and forecasts prepared by
their respective managements; (iv) visited the headquarters, as well as certain
rig sites, of both Patterson and Tucker; (v) reviewed the historical market
prices and trading volumes of both the Patterson Common Stock and Tucker Common
Stock; (vi) reviewed certain financial and market data for both Patterson and
Tucker and compared such information with similar information for certain
publicly traded companies which the Patterson Financial Advisors deemed
comparable; (vii) reviewed the financial terms of certain mergers and
acquisitions of businesses which the Patterson Financial Advisors deemed
comparable; (viii) analyzed the pro forma contributions of Patterson and Tucker
to the combined business; and (ix) performed such other analyses and
investigations and considered such other factors as the Patterson Financial
Advisors deemed appropriate.
In rendering their opinions and making their presentation to the Patterson
Board of Directors, the Patterson Financial Advisors discussed various financial
analyses and certain other factors they deemed relevant in rendering their
opinions, which are summarized below. The summary set forth below relates to the
presentation made to the Patterson Board of Directors on April 21, 1996, and
does not purport to be a complete description of the Patterson Financial
Advisors' analyses performed and the assumptions made by the Patterson Financial
Advisors in reaching their respective opinions.
The Patterson Financial Advisors considered the financial and stock market
performance of a group of selected publicly traded companies, and reviewed
selected recent transactions involving mergers and acquisitions of companies
deemed reasonably comparable to Patterson and Tucker. The companies and
transactions analyzed were deemed by the Patterson Financial Advisors to be
reasonably comparable in certain relevant aspects to Patterson and Tucker for
the purpose of this analysis. However, an analysis of these results is not
mathematical; rather it involves complex considerations and judgments concerning
differences in
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financial and operating characteristics of the comparable companies and
transactions and other factors that could affect the valuation of the companies
to which they are being compared.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. The Patterson
Financial Advisors compared selected historical operating financials and
financial ratios for Patterson and Tucker with similar data as well as stock
market data for a group of selected publicly traded companies (the "Public
Comparables"). The Public Comparables included: DI Industries, Inc.; Nabors
Industries, Inc.; Parker Drilling Company, TMBR/Sharp Drilling, Inc.; and UTI
Energy Corp. The Patterson Financial Advisors considered these companies to be
reasonably similar to Patterson and Tucker because they compete in the same
general industry.
For the Public Comparables, the Patterson Financial Advisors calculated the
multiples of market capitalization and debt-free market value for a variety of
financial parameters including total revenues, earnings before interest expense,
income taxes, depreciation, depletion and amortization ("EBITDA"), operating
income, net income and net cash flow for the latest twelve months ("LTM") and
the three most recent fiscal years, and book value as of the end of the latest
fiscal quarter. The analysis of the Public Comparables (excluding certain
companies where multiples were not considered meaningful because the denominator
was negative or minimal or where information regarding that statistic was not
available) yielded the following ranges of debt-free market value multiples of
LTM and the average of LTM and latest three fiscal years (such average being
referred to herein as the "Historical") total revenues, EBITDA and operating
income. With respect to debt-free market value multiples of total revenues, the
range was from 0.6x to 2.5x for LTM total revenues and 0.8x to 2.9x for
Historical total revenues; the Merger (in all cases based upon the Exchange
Ratio and the closing price of Patterson Common Stock as of April 12, 1996 of
$14.125) results in multiples of 0.7x LTM total revenues and 0.7x Historical
total revenues. With respect to debt-free market value multiples of EBITDA, the
range was from 8.4x to 16.0x for LTM EBITDA and 12.8x to 24.8x for Historical
EBITDA; the Merger results in 4.8x LTM EBITDA and 5.4x Historical EBITDA. With
respect to debt-free market value multiples of operating income, the range was
from 13.7x to 22.2x for LTM operating income and 22.6x to 27.8x for Historical
operating income; the Merger results in 16.5x LTM operating income and 39.4x
Historical operating income. The analysis of this group of companies yielded a
range of market capitalization multiplies of 17.5x to 59.6x for LTM net income
and 30.0x to 30.3x for Historical net income; the Merger results in 16.9x LTM
net income and 32.9x Historical net income. With respect to market
capitalization multiples of net cash flow, the range was from 8.9x to 15.6x for
LTM net cash flow and 7.4x to 29.7x for Historical net cash flow; the Merger
results in 6.3x LTM net cash flow and 7.3x Historical net cash flow. The
analysis of these companies also resulted in market capitalization multiples of
14.3x to 59.6x for current fiscal year forecast net income. The market
capitalization multiple of next fiscal year forecast net income was available
for only one of the Public Comparables. The multiple for that Public Comparable
is 17.9x. The Merger results in 16.0x current fiscal year forecast net income
and 16.9x for next fiscal year forecast net income. The analysis of this group
of companies yielded a range of market capitalization multiples of book value
per share as of the latest fiscal quarter of 1.8x to 3.8x; the Merger results in
a multiple of 1.3x.
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS. The Patterson Financial
Advisors also reviewed certain mergers and acquisitions of businesses (the
"Merger Comparables") in the contract oil and gas drilling services industry
over the past three years. The Patterson Financial Advisors reviewed recent
transactions involving the purchase of at least a majority interest in the
following businesses: Sundowner Offshore Services, Inc.; Chiles Offshore
Corporation; DI Industries, Inc.; Service Fracturing Company; UTI Energy Corp.;
and FWA Drilling Company. These six transactions were selected by the Patterson
Financial Advisors because their services, markets and/or customers are broadly
similar to those of Tucker.
For the Merger Comparables, the Patterson Financial Advisors calculated the
multiples of acquisition price and debt-free acquisition price for a variety of
financial parameters, including total revenues, EBITDA, operating income, net
income and net cash flow for the LTM and the three most recent fiscal years, and
book value as of the end of the latest fiscal quarter. The analysis of Merger
Comparables (excluding certain companies where multiples were not considered
meaningful because the denominator was negative or minimal or where information
regarding that statistic was not available) yielded the following ranges of
debt-free acquisition price multiples of LTM and Historical total revenues,
EBITDA, and operating income. With
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respect to the debt-free acquisition price multiple of total revenues, the range
was from 0.3x to 2.0x for LTM total revenues and from 0.2x to 2.6x for
Historical total revenues; the Tucker multiple was 0.7x LTM total revenues and
0.7x Historical total revenues. With respect to debt-free acquisition price
multiples of EBITDA, the range was from 3.8x to 18.3x for LTM EBITDA and from
4.0x to 17.7x for Historical EBITDA; the Tucker multiple was 4.8x LTM EBITDA and
5.4x Historical EBITDA. With respect to debt-free acquisition price multiples of
operating income, the range was from 8.5x to 13.9x for LTM operating income and
from 10.3x to 40.1x for Historical operating income; the Tucker multiple was
16.5x LTM operating income and 39.4x Historical operating income. The analysis
of this group of mergers yielded a range of acquisition price to net cash flow
multiples of 3.7x to 34.5x for the LTM period and 2.6x to 17.7x for the
Historical period; the Tucker multiples were 6.3x LTM net cash flow and 7.3x
Historical net cash flow. With respect to acquisition price multiples of net
income, the range was from 12.8x to 18.9x for LTM net income and from 15.8x to
27.5x for Historical net income; the Tucker multiples were 16.9x LTM net income
and 32.9x Historical net income. The analysis of this group of mergers yielded a
range of multiples for book value as of the latest fiscal quarter of 0.9x to
2.2x; the Tucker multiple for book value was 1.3x.
The Patterson Financial Advisors also analyzed the acquisition premiums
inherent in the Merger over the prices at which Tucker Common Stock had traded
prior to the delivery of the Patterson Financial Advisors' opinion and compared
such premiums to those paid in the Merger Comparables. The Merger Comparables
yielded a range of premiums of (28.0%) to 58.3% and (30.0%) to 45.4% relative to
the target companies' stock price one day and one month prior to the
announcement of such transaction, respectively; the Merger results in premiums
of 0.7% and 13.0% over the price at which Tucker Common Stock traded one day and
one month prior to April 12, 1996, respectively.
STOCK TRADING HISTORY. The Patterson Financial Advisors examined the
historical price and trading volume of the shares of Patterson Common Stock and
Tucker Common Stock. The Patterson Financial Advisors also compared the share
price performance of Patterson and Tucker to an index of the Public Comparables
and the S&P 500.
DISCOUNTED CASH FLOW ANALYSIS. The Patterson Financial Advisors also
analyzed, through the use of a discounted cash flow analysis, the present value
of the future unleveraged after-tax cash flow streams that Tucker could produce
over a five-year period if Tucker performed in accordance with forecasts and
other information provided by management. After-tax cash flow was calculated by
taking projected operating income, adding depreciation, depletion and
amortization and other non-cash items and then subtracting income taxes,
increases in working capital and capital expenditures. The Patterson Financial
Advisors estimated the terminal value for Tucker at the end of the five-year
period by applying a range of multiples to the terminal-year EBITDA. In
performing this analysis, the Patterson Financial Advisors utilized discount
rates ranging from 12.5% to 17.5% and EBITDA multiples ranging from 5.0x to 7.0x
which resulted in common equity values for Tucker ranging from $23.3 million to
$33.2 million; the Merger results in a common equity value of $21.7 million.
PRO FORMA MERGER ANALYSIS. The Patterson Financial Advisors reviewed
certain pro forma effects which could result from the Merger. This review
included pro forma combined balance sheet data as of December 31, 1995 and pro
forma combined income statements for the latest twelve months ended December 31,
1995 and the projected twelve month period; the latter adjusted to reflect
projected operating synergies from the Merger. The pro forma analyses assumed
Patterson's ability to use the pooling of interests accounting method in
connection with the Merger. In each case, the analysis assumes the Merger had
been completed at the commencement of each period. This data indicated increased
book value for Patterson on a pro forma combined basis as of December 31, 1995
of $1.37 per share and increased earnings per share for Patterson on a pro forma
combined basis of $0.06 and $0.24 for the latest twelve months ended December
31, 1995 and the projected twelve month period, respectively.
PRO FORMA CONTRIBUTION ANALYSIS. The Patterson Financial Advisors reviewed
the pro forma contributions of certain historical and projected operating
information and certain historical balance sheet information of Patterson and
Tucker to the combined business as it compared to the pro forma contribution of
the market value of common stock and the debt-free market value of the proposed
Merger. This review included an
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analysis of operating data, including total revenues, gross profit, EBITDA,
operating income, net income and net cash flow for the LTM period ended December
31, 1995 and the projected twelve month period for both Patterson and Tucker. In
the LTM period, the operating data pro forma contributions by Tucker ranged from
26.9% to 40.1%. For the projected twelve month period, the operating data pro
forma contributions by Tucker ranged from 28.9% to 50.3%. This review also
included an analysis of certain balance sheet data, including cash and
equivalents, total assets, total debt, total liabilities and total equity which
reflect Patterson's and Tucker's December 31, 1995 balance sheet. The balance
sheet pro forma contributions by Tucker ranged from 0.0% to 74.5%. By way of
comparison, the pro forma contributions by Tucker of the market value of the
Tucker Common Stock and the debt-free market value based on the proposed Merger
were 32.6% and 20.6%, respectively.
PRO FORMA EQUITY OWNERSHIP ANALYSIS. The Patterson Financial Advisors
performed an analysis of the Merger which considered various Patterson Common
Stock prices above and below the $14.125 Patterson closing share price as of
April 12, 1996, and the resulting relative pro forma ownership in the combined
company. Based upon the 0.74 fixed Exchange Ratio, ownership by Patterson
stockholders and Tucker stockholders at any Patterson share price would be 67.4%
and 32.6% of the combined equity, respectively.
The Patterson Financial Advisors advised the Patterson Board of Directors
that in connection with rendering their respective opinions dated the date of
this Prospectus/Joint Proxy Statement, they performed procedures to update
certain of their analyses made in connection with their respective April 22,
1996 opinions and reviewed the assumptions on which such analyses were based and
the factors considered in connection therewith. The Patterson Financial Advisors
considered, among other things, Patterson's and Tucker's recent financial
performance, including Patterson's results of operations for the quarter ended
March 31, 1996 and Tucker's results of operations for the fiscal year ended
March 31, 1996.
In reaching their conclusions, the Patterson Financial Advisors broadly
considered all of the above discussed analyses and did not assign specific
weights to any analysis. The Patterson Financial Advisors did not consider any
single analysis as a threshold measurement for rendering their respective
opinions. Ranges of fairness within each analysis and with respect to the
consideration to be paid pursuant to the Merger Agreement and the Exchange Ratio
were not established. In addition, the Patterson Financial Advisors considered
other factors, as discussed above, including historical market and trading
volume of Patterson Common Stock and Tucker Common Stock, past and current
business prospects and managements' prepared projections. Based on the
foregoing, the Patterson Financial Advisors concluded that the consideration to
be paid by Patterson pursuant to the Merger Agreement and the Exchange Ratio
were within the fair values indicated by the above analyses considered in the
aggregate.
The analysis conducted by the Patterson Financial Advisors in arriving at
their respective opinions included numerous macroeconomic, operating and
financial assumptions and involved the application of complex methodologies and
educated judgment. Such analysis involves complex consideration and judgments
concerning differences in financial operating characteristics of the comparable
companies and transactions and other factors that could affect the valuations of
the companies to which they are being compared. As indicated above, in preparing
their respective opinions, the Patterson Financial Advisors relied on the
accuracy and the completeness of all information supplied or otherwise made
available to them by Patterson and Tucker and assumed, without independent
verification, that financial projections had been reasonably prepared and
reflected the best currently available estimates and judgments of Patterson's
and Tucker's management as to the expected future financial performance of
Patterson and Tucker. The Patterson Financial Advisors also made numerous
assumptions regarding industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Patterson
and Tucker. Any estimates incorporated in the analyses performed by the
Patterson Financial Advisors are not necessarily indicative of the actual past
or future results or values, which may be significantly more or less favorable
than such estimates. Estimates of values do not purport to be appraisals and do
not necessarily reflect the prices at which companies may be sold in the future.
Pursuant to a letter agreement dated March 22, 1996, Patterson agreed to
pay the Patterson Financial Advisors a retainer fee of $10,000 per month for
financial advisory services in connection with the proposed
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Merger. Patterson has paid the Patterson Financial Advisors $30,000 in retainer
fees to date. In addition, Patterson has paid the Patterson Financial Advisors
an opinion fee of $75,000. A financial advisory fee of $100,000 (less any
retainer fees paid) will be payable to the Patterson Financial Advisors upon
completion of the Merger. Patterson has also agreed to reimburse the Patterson
Financial Advisors for their reasonable out-of-pocket expenses, and to indemnify
the Patterson Financial Advisors against certain liabilities, including
liabilities under federal securities laws.
In addition, Gilford Securities served as co-managing underwriter of the
initial public offering (the "IPO") of Common Stock and Redeemable Warrants by
Patterson completed during December 1993. Gilford Securities acts as a market
maker with respect to Patterson Common Stock. In addition to shares held in
connection with market making activities, as of May 28, 1996, Gilford Securities
and its affiliates owned 23,241 shares of Patterson Common Stock and
underwriters' warrants to purchase 37,658 shares of Patterson Common Stock. The
underwriters' warrants are part of the warrants issued to Gilford Securities as
part of its compensation in connection with the IPO. Certain of the shares of
the Patterson Common Stock owned by Gilford Securities and its affiliates were
acquired upon previous exercise of the underwriters' warrants.
The Patterson Financial Advisors are investment banking firms engaged on a
regular basis to provide a range of investment banking and financial advisory
services, including, particularly in the case of TM Capital, the valuation of
businesses and their securities in connection with mergers and acquisitions.
Patterson selected the Patterson Financial Advisors on the basis of the
background, experience and reputation which the two firms offer.
TUCKER
The full text of the opinion of Rauscher Pierce, dated the date of this
Prospectus/Joint Proxy Statement (the "Rauscher Pierce Opinion"), which sets
forth assumptions made, matters considered and limits on the review undertaken,
is attached as Annex III to this Prospectus/Joint Proxy Statement. Tucker
stockholders are urged to read such opinion in its entirety.
Tucker retained Rauscher Pierce to provide advice regarding potential
mergers, acquisitions or sale of Tucker, to assist if necessary in negotiating a
potential transaction, and to render an opinion as to the fairness from a
financial point of view to Tucker of the consideration to be paid to Tucker in
the event of a merger. Rauscher Pierce was selected to serve as Tucker's
financial advisor based on Rauscher Pierce's qualifications, expertise and
reputation and its knowledge of the onshore contract drilling industry.
In connection with the Tucker Board of Director's consideration of the
Merger Agreement, Rauscher Pierce delivered a written opinion on April 22, 1996
to the effect that, as of the date of such opinion, based on its review and
assumptions and subject to the limitations described therein, the Merger is fair
to Tucker stockholders from a financial point of view. Rauscher Pierce
subsequently delivered the Rauscher Pierce Opinion to the Tucker Board of
Directors to the effect that, as of the date of this Prospectus/Joint Proxy
Statement, the Merger is fair to Tucker stockholders from a financial point of
view. The Rauscher Pierce Opinion does not constitute a recommendation to any
holder of shares of Tucker Common Stock as to how such stockholder should vote
with respect to the Merger. The complete text of the Rauscher Pierce Opinion,
dated the date of this Prospectus/Joint Proxy Statement, which is substantially
identical to the Rauscher Pierce written opinion delivered to the Tucker Board
of Directors on April 22, 1996, is attached to this Prospectus/Joint Proxy
Statement as Annex III.
In arriving at its opinion, Rauscher Pierce, among other things: (i)
reviewed Tucker's Annual Reports, Forms 10-KSB and related financial information
for each of the three fiscal years ended March 31, 1996 and Tucker's Quarterly
Reports on Form 10-QSB for the interim periods ended June 30, 1995, September
30, 1995 and December 31, 1995; (ii) reviewed Patterson's Annual Reports, Forms
10-KSB and related financial information for each of the three fiscal years
ended December 31, 1995; (iii) reviewed certain information, including
historical financial data and financial forecasts, relating to the business,
earnings, cash flow, assets and prospects of Tucker and Patterson, furnished to
Rauscher Pierce by Tucker and Patterson; (iv) conducted discussions with members
of senior management of Tucker and Patterson concerning their respective
businesses and prospects; (v) reviewed the current and historical market prices
and trading activity for the
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Tucker and Patterson Common Stock and compared it with that of certain
publicly-traded companies which Rauscher Pierce deemed to be reasonably similar
to Tucker and Patterson; (vi) compared the consolidated results of operations of
Tucker and Patterson with that of certain companies which Rauscher Pierce deemed
to be reasonably similar to Tucker and Patterson respectively; (vii) compared
the proposed financial terms of the transactions contemplated by the Merger
Agreement with the financial terms of certain other mergers and acquisitions
which Rauscher Pierce deemed to be relevant; (viii) considered the pro forma
effect of the Merger on Tucker's capitalization ratios and earnings and cash
flow per share; (ix) reviewed the Merger Agreement dated April 22, 1996; and (x)
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as Rauscher Pierce
deemed necessary.
In preparing its various analyses, Rauscher Pierce used certain financial
forecasts furnished by Tucker and Patterson. The Tucker financial forecasts
assume revenues decrease 25.0% in fiscal year 1996 from actual fiscal year 1995
revenues, which reflects the impact of reduced rig utilization experienced in
the second and third quarters of fiscal year 1996. For fiscal year 1997, Tucker
assumed revenue growth was 22.8%. Tucker's operating costs and expenses as a
percentage of revenues increased from approximately 77.4% for fiscal year 1996
to approximately 78.7% for fiscal year 1997. General and administrative expenses
for Tucker were assumed to decrease 6.9% in fiscal year 1996. The Patterson
financial forecasts assume revenues increase 15.3% in fiscal year 1996 over
fiscal year 1995, which reflects an increase in rig fleet and utilization.
Patterson assumed additional revenue growth of 2.0% in fiscal year 1997.
Patterson's operating costs and expenses as a percentage of revenues are held at
approximately the same levels as experienced in fiscal year 1995, approximately
74.0% of revenues, and Patterson's general and administrative expenses are
expected to decrease 27.9% in fiscal year 1996.
THE TUCKER AND PATTERSON PROJECTIONS WERE PREPARED FOR INTERNAL MANAGEMENT
PURPOSES ONLY. THE PROJECTIONS WERE NOT PREPARED BY TUCKER OR PATTERSON WITH A
VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE
SECURITIES AND EXCHANGE COMMISSION OR THE GUIDELINES ESTABLISHED BY THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS. THEY ARE
INCLUDED IN THIS PROSPECTUS/JOINT PROXY STATEMENT ONLY BECAUSE SUCH INFORMATION
WAS PROVIDED TO RAUSCHER PIERCE FOR USE BY SUCH FIRM IN PREPARING ITS VARIOUS
ANALYSES. THE ESTIMATES AND ASSUMPTIONS UNDERLYING THE PROJECTIONS ARE
INHERENTLY SUBJECT TO SIGNIFICANT ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES BEYOND THE CONTROL OF TUCKER OR PATTERSON, AND THERE CAN BE NO
ASSURANCE WHATSOEVER THAT ANY OF THE PROJECTIONS CAN OR WILL BE REALIZED.
In preparing its opinion, Rauscher Pierce relied on the accuracy and
completeness of all information supplied or otherwise made available to it by
Tucker and Patterson and assumed that the financial forecasts had been
reasonably prepared on bases reflecting the best currently available estimates
and judgment of the respective managements of Tucker and Patterson as to the
expected future financial performance of their respective companies. Rauscher
Pierce did not independently verify such information or assumptions, including
financial forecasts, or undertake an independent appraisal of the assets of
Tucker or Patterson. The Rauscher Pierce Opinion is based upon market, economic,
financial and other conditions as they existed and could be evaluated as of the
date of the opinion. The Rauscher Pierce Opinion does not constitute a
recommendation to any holder of shares of Tucker Common Stock as to how any such
stockholder should vote on the Merger and the related transactions. The Rauscher
Pierce Opinion does not address the relative merits of the Merger nor any other
transactions or business strategies that may have been discussed by the Tucker
Board of Directors as alternatives to the Merger or the decision of the Tucker
Board of Directors to proceed with the Merger. No opinion was expressed by
Rauscher Pierce as to the price at which Patterson Common Stock to be issued in
the Merger to the stockholders of Tucker may trade at any time.
Rauscher Pierce assumed that there had been no material change in Tucker's
or Patterson's assets, financial condition, results of operations, business or
prospects since the date of the last financial statements made available to
Rauscher Pierce. Rauscher Pierce has no responsibility to revise or update its
opinion if
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there is a change in the financial condition or prospects of Tucker or Patterson
from that disclosed or projected in the information Rauscher Pierce reviewed as
set forth above or in general, economic or market conditions. Rauscher Pierce
relied upon Tucker with respect to the accounting treatment to be accorded to
the transaction. In rendering its opinion, Rauscher Pierce was not engaged to
act as an agent or fiduciary of Tucker's stockholders or any other third party.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Although certain of the analyses and
factors considered are more supportive of the fairness opinion than others,
Rauscher Pierce indicated that each of the types of analyses discussed below
supported the conclusion stated in the Rauscher Pierce Opinion. However, in
arriving at its fairness opinion, Rauscher Pierce did not attribute any
particular weight to any analysis or factor considered by it. Accordingly,
Rauscher Pierce believes that its analysis must be considered as a whole and
that considering any portion of such analysis and of the factors considered
without considering all analyses and factors could create a misleading or
incomplete view of the process underlying its opinion. In its analyses, Rauscher
Pierce made numerous assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of Tucker and Patterson. Any estimates contained in these analyses are
not necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein, and neither Tucker, Patterson nor Rauscher Pierce assumes
responsibility for their accuracy. In addition, analyses relating to the value
of the businesses do not purport to be appraisals or to reflect the prices at
which businesses may actually be sold.
The following paragraphs summarize the significant analyses performed by
Rauscher Pierce in arriving at the written Rauscher Pierce Opinion presented to
the Tucker Board of Directors, dated April 22, 1996. In its various analyses,
Rauscher Pierce assumed a market price per share of Patterson Common Stock of
$14.63, which was equal to the closing price on April 19, 1996.
CONTRIBUTION ANALYSES. Rauscher Pierce prepared a contribution analysis in
order to compare the historical and projected revenue, earnings and cash flow
contributions of Tucker and Patterson to the combined company (the "Combined
Company") in relation to the contribution of Tucker and Patterson to the assumed
total entity and equity values of the Combined Company. Rauscher Pierce reviewed
Tucker's and Patterson's historical financial information for the year ended
December 31, 1995, and financial projections for the year ended December 31,
1996. For those periods, Rauscher Pierce analyzed the pro forma income statement
contributions of each of Tucker and Patterson to the Combined Company assuming
the Merger was consummated as of the beginning of each period reviewed and
received pooling of interests accounting treatment. Rauscher Pierce assumed that
Tucker would hold 32% of the total pro forma fully-diluted shares outstanding of
the Combined Company. This compares to a contribution by Tucker to the Combined
Company of 30.5% of revenues and 28.3% of earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the year ended December 31, 1995
and 28.5% of projected revenues and 20.9% of projected EBITDA for the year ended
December 31, 1996. Similarly, Tucker would contribute to the Combined Company
40.1% of net income and 35.4% of net cash flow (net income plus depreciation and
amortization, deferred taxes and certain other non-cash charges) for calendar
1995 and 28.1% of net income and 23.8% of net cash flow for the projected 1996
calendar year.
Rauscher Pierce selected EBITDA as a measure of cash flow available to
service the entire capital structure of the business entity including debt and
equity, and to provide funds to pay income taxes and for capital expenditures.
As such, EBITDA was used by Rauscher Pierce as a measure of entity performance
and for valuing the entire business entity, from which a common stock valuation
could be determined. Net cash flow was selected by Rauscher Pierce as a measure
of cash available for working capital after the payment of interest expense and
taxes, to be used for capital spending, dividends on common stock and other
needs, and was used by Rauscher Pierce as a measure of entity performance and
for valuing the common stock portion of the business entity.
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DILUTION ANALYSIS. Rauscher Pierce performed an analysis of the effect of
the Merger on Patterson's earnings per share and net cash flow per share for the
pro forma combined year ended December 31, 1995 and the projected results for
the year ending December 31, 1996, which assumed that the Merger was consummated
on January 1, 1995. In performing this analysis, Rauscher Pierce assumed no cost
savings were realized although some will likely occur. Rauscher Pierce combined
the projected operating results of Tucker with the corresponding projected
operating results of Patterson to arrive at the Combined Company projected net
income and cash flow. Rauscher Pierce divided these results by the pro forma
shares outstanding to arrive at a Combined Company earnings per share and net
cash flow per share. Rauscher Pierce then compared the Combined Company earnings
per share and cash flow per share adjusted by the 0.74 exchange ratio to
Tucker's stand alone earnings per share to determine the pro forma impact on
Tucker's earnings and cash flow per share and net cash flow per share. This
analysis indicated that the pro forma impact of the Merger was not dilutive to
Tucker's earnings and net cash flow per share for the projected year ending
December 31, 1996.
COMPARATIVE MULTIPLE ANALYSIS. Rauscher Pierce performed an analysis of
the implied multiples of the Merger for historical operating results for
Tucker's latest twelve months ended December 31, 1995 and the projected
operating results of Tucker for the calendar year ended December 31, 1996.
Rauscher Pierce compared the Tucker multiples resulting from the Merger to the
trading multiples of Patterson's Common Stock. Rauscher Pierce utilized
Patterson's stock price of $14.63 to determine such trading multiples, which
after applying the 0.74 Exchange Ratio, resulted in a market value for the
outstanding Tucker Common Stock of $22.7 million. Rauscher Pierce selected
multiples of EBITDA, net income and cash flow because it believed that these
variables were commonly relied upon in analyzing companies similar to Tucker and
Patterson. Based on Tucker's historical operating results for the year ended
December 31, 1995, this analysis resulted in a multiple of EBITDA of 5.1x, a
multiple of net income of 17.5x, and a multiple of net cash flow of 6.1x,
compared to Patterson's trading multiples for the year ended December 31, 1995
of 10.8x EBITDA, 21.5x net income and 6.3x net cash flow. Based on Tucker's
projected operating results for year ended December 31, 1996, this analysis
resulted in a multiple of EBITDA of 5.5x, a multiple of net income of 23.0x and
a multiple of net cash flow of 7.3x, compared to Patterson multiples based on
projected operating results for the year ended December 31, 1996 of 5.4x EBITDA,
20.4x net income and 5.8x net cash flow.
SELECTED COMPARABLE PUBLIC COMPANY ANALYSIS. Using public information,
Rauscher Pierce compared selected historical and projected financial and
valuation data of Tucker and Patterson to the corresponding data of certain
publicly-traded companies. This analysis was made in order to compare the
valuations of Patterson, Tucker and the Combined Company to the market value of
existing publicly-traded onshore contract drilling companies. These comparable
companies consisted of: Bonray Drilling Corporation, DI Industries, Inc., Nabors
Industries, Inc., Parker Drilling Company, TMBR/Sharp Drilling, Inc. and UTI
Energy Corp. Rauscher Pierce noted that its analysis of such publicly-traded
companies resulted in the following ranges: market value of capital to LTM
EBITDA of 5.7x to 14.0x; equity value to LTM earnings of 14.1x to 24.2x; equity
value to projected calendar 1996 earnings of 12.3x to 19.8x; equity value to LTM
cash flow of 4.7x to 15.0x; and equity value to projected calendar 1996 cash
flow of 4.7x to 12.1x. Rauscher Pierce compared these multiples to those
determined for Tucker and Patterson which were: market value of capital LTM
EBITDA multiples of 5.1x and 10.8x, respectively, equity value of LTM earnings
of 17.5x and 21.5x, respectively, equity value to projected 1996 earnings of
23.0x and 20.4x, respectively, and equity value to projected 1996 net cash flow
of 7.3x and 5.8x, respectively.
SELECTED OIL-SERVICE COMPANY TRANSACTION ANALYSIS. Using public
information, Rauscher Pierce compared selected financial and valuation data for
Tucker implied by the valuation used for the Merger with that of certain
oilfield services companies that have recently consummated transactions similar
to the Merger. This analysis was made to compare the valuation of Tucker implied
by the Merger to the valuations implied by other recently announced industry
merger and acquisition transactions. These comparable company transactions
consisted of: Norex Drilling Ltd.'s acquisition of DI Industries, Inc., Nabors
Industries, Inc.'s merger with Sundowner Offshore Services, Inc., Nowsco Well
Service, Ltd.'s acquisition of Service Fracturing Company, UTI Energy Corp.'s
acquisition of FWA Drilling Company, Inc., Key Energy Group, Inc.'s merger with
Welltech, Inc., Patterson Energy, Inc.'s acquisition of certain assets of
Questor Drilling Corp. and Remy Capital Partners III L.P.'s acquisition of UTI
Energy Corp. Rauscher Pierce noted that its analysis of such
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publicly announced transactions resulted in the following ranges: market value
of capital to LTM EBITDA of 3.4x to 16.3x, equity value to LTM earnings of 17.0x
to 26.6x; and equity value to LTM net cash flow of 4.0x to 12.1x. Rauscher
Pierce also noted that the Merger resulted in the following acquisition
multiples for Tucker, market value of capital to LTM EBITDA of 5.6x; equity
value to LTM earnings of 17.5x; and equity value to LTM net cash flow of 6.1x.
ACQUISITION PREMIUM ANALYSIS. Rauscher Pierce also reviewed the
acquisition premium reflected in the Merger over the price at which Tucker
Common Stock had traded one month prior to the announcement of Tucker's
engagement of Rauscher Pierce and compared the premium to those received by
comparable companies in transactions similar to the Merger. These companies'
merger transactions yielded one-month acquisition premiums ranging from -24.8%
to 34.7%. The one-month acquisition premium resulting from the Merger is 49.3%.
AGREEMENT WITH RAUSCHER PIERCE. Pursuant to an engagement letter with
Tucker, Rauscher Pierce received an initial retainer of $50,000. The initial
engagement letter was amended. Pursuant to the amended engagement letter, upon
closing of the Merger, Rauscher Pierce would receive an additional payment so
that its aggregate fee would equal $450,000. The amount of Rauscher Pierce's
fee, therefore, is substantially contingent upon the closing of the Merger. In
addition, Tucker agreed to reimburse Rauscher Pierce for all its reasonable
related expenses. Tucker also agreed to indemnify Rauscher Pierce, its
affiliates and each of its directors, officers, agents and employees and each
person, if any, controlling Rauscher Pierce or any of its affiliates against
certain liabilities, including liabilities under federal securities laws.
Rauscher Pierce is a prominent investment banking and financial advisory
firm, with experience in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and valuations for corporate and
other purposes. Rauscher Pierce was the lead underwriter for the 1980 public
offering of Tucker.
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TERMS OF THE MERGER
THIS PORTION OF THE PROSPECTUS/JOINT PROXY STATEMENT DESCRIBES VARIOUS
ASPECTS OF THE MERGER. THE FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT ATTACHED
HERETO AS ANNEX I AND INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS OF
PATTERSON AND TUCKER ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
GENERAL
The Merger Agreement provides that, subject to the satisfaction (including,
among other things, adoption of the Merger Agreement by the stockholders of
Tucker and approval of the Charter Amendment and the Stock Issuance by the
stockholders of Patterson) or, in certain cases, waiver of certain conditions,
Sub will merge with and into Tucker. Upon consummation of the Merger, the
separate corporate existence of Sub will cease, Tucker will be the Surviving
Corporation under Sub's name, "Patterson Drilling Company", the stockholders of
Tucker will become stockholders of Patterson and the stockholders of Patterson
will remain as Patterson stockholders.
MERGER CONSIDERATION
Upon consummation of the Merger, each issued and outstanding share of
Tucker Common Stock will be converted into 0.74 of a validly issued, fully paid
and nonassessable share of Patterson Common Stock (referred to herein as the
"Exchange Ratio"). Fractional shares of Patterson Common Stock will not be
issued in the Merger. Holders of Tucker Common Stock otherwise entitled to a
fractional share of Patterson Common Stock will be paid cash in lieu of such
fractional share determined and paid as described in "--Fractional Shares"
below.
The Exchange Ratio was determined through negotiations between Patterson
and Tucker, each of which was advised with respect to such negotiations by its
respective financial advisor or, in the case of Patterson, financial advisors.
Based on the number of shares of Tucker Common Stock and the number of Tucker
Stock Options outstanding on the Tucker Record Date, a maximum of 1,652,106
shares of Patterson Common Stock may be issued in respect of shares of Tucker
Common Stock in the Merger including 95,090 shares that would be reserved for
issuance upon exercise of Tucker Stock Options which, pursuant to the Merger
Agreement and the terms of the governing stock option plans, following the
Merger will constitute options (referred to herein as "Substituted Options") to
purchase Patterson Common Stock upon the terms set forth in such stock option
plans and the Merger Agreement.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing and acceptance of the
Certificate of Merger with the Secretary of State of the State of Delaware or
such later date as is specified in such Certificate. The filing of the
Certificate of Merger will occur as soon as practicable following the
satisfaction or waiver (where permissible) of the conditions set forth in the
Merger Agreement.
CONVERSION OF TUCKER COMMON STOCK; PROCEDURES FOR EXCHANGE OF STOCK CERTIFICATES
The conversion of the Tucker Common Stock into Patterson Common Stock will
occur at the Effective Time. As soon as practicable after the Effective Time,
Patterson will deposit with Continental Stock Transfer & Trust Company, New
York, New York, as exchange agent (the "Exchange Agent"), for the benefit of the
holders of certificates which immediately prior to the Effective Time
represented shares of Tucker Common Stock (the "Certificates"), certificates
representing the shares of Patterson Common Stock (such shares of Patterson
Common Stock, together with any dividends or distributions with respect thereto
payable as described below, being hereinafter referred to as the "Exchange
Fund") issuable in exchange for outstanding shares of Tucker Common Stock.
As soon as practicable after the Effective Time, the Exchange Agent will
mail to each holder of record of a Certificate whose shares are converted into
shares of Patterson Common Stock a letter of transmittal (which
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will specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon actual and proper delivery of the Certificates
to the Exchange Agent and will contain instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Patterson Common Stock and will be in such form and contain such other
provisions as Patterson and Tucker may reasonably specify). Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Certificate will be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Patterson Common Stock which such holder has the right to receive
pursuant to the Merger, and the Certificate so surrendered will be cancelled.
Until surrendered as described above, each Certificate will, at and after the
Effective Time, be deemed to represent only the right to receive, upon surrender
of such Certificate, the certificate representing the appropriate number of
shares of Patterson Common Stock and cash in lieu of fractional shares and any
dividends and other distributions as referenced below.
TUCKER STOCKHOLDERS SHOULD NOT FORWARD TUCKER STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
Dividends or other distributions, if any, that are declared after the
Effective Time on Patterson Common Stock or are payable to the holders of record
thereof after the Effective Time will not be paid to persons entitled by reason
of the Merger to receive certificates representing Patterson Common Stock until
such persons surrender their Certificates, as described above, and no cash
payment in lieu of fractional shares will be paid to any such holder until such
holder of such Certificate surrenders such Certificate. Subject to the effect of
applicable law, there will be paid to the record holder of the certificates
representing such Patterson Common Stock (i) at the time of such surrender or as
promptly as practicable thereafter, the amount of any dividends or other
distributions, if any, theretofore paid with respect to whole shares of such
Patterson Common Stock and having a record after the Effective Time and a
payment date prior to such surrender and (ii) at the appropriate payment date or
as promptly as practicable thereafter, the amount of dividends or other
distributions, if any, payable with respect to whole shares of Patterson Common
Stock and having a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender. In no event will the person entitled
to receive any such dividends or other distributions be entitled to receive
interest on any such dividends or other distributions. If any cash or
certificate representing shares of Patterson Common Stock is to be paid to or
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it will be a condition of such exchange that
the Certificate so surrendered be properly endorsed and otherwise in proper form
for transfer and that the person requesting such exchange pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
certificates for such shares of Patterson Common Stock in a name other than that
of the registered holder of the Certificate surrendered or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
applicable.
Any portion of the Exchange Fund which remains undistributed to the former
stockholders of Tucker for one year after the Effective Time will be delivered
to Patterson, upon demand of Patterson, and any former stockholders of Tucker
who have not theretofore complied with the provisions described above will
thereafter look only to Patterson for payment of their claim for Patterson
Common Stock, any cash in lieu of fractional shares of Patterson Common Stock
and any dividends or distributions with respect to Patterson Common Stock. None
of Patterson, Tucker or the Surviving Corporation will be liable to any holder
of shares of Tucker Common Stock for shares (or dividends or other
distributions, if any, with respect thereto) or cash in lieu of fractional
shares of Patterson Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Patterson Common
Stock will be issued upon the surrender for exchange of Certificates pursuant to
the Merger Agreement, and such fractional interests will not entitle the owner
thereof to vote or to any rights of a security holder of Patterson. In lieu of
any such fractional securities, each holder of shares of Tucker Common Stock who
would otherwise have been entitled to receive a fraction of a share of Patterson
Common Stock (after taking into account all shares of Tucker
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Common Stock then held of record by such holder) will receive cash (without
interest) in an amount equal to the product of such fractional part of a share
of Patterson Common Stock multiplied by the Closing Price (as defined below).
"Closing Price" means the average of the daily closing price of Patterson Common
Stock, rounded to four decimal places, as reported under Nasdaq National Market
Issues Reports in The Wall Street Journal for each of the first 20 consecutive
Trading Days in the period commencing 25 Trading Days prior to the date of the
closing under the Merger Agreement. "Trading Day" means a day on which the
Nasdaq National Market is open for trading.
REASONABLE EFFORTS
Upon the terms and subject to the conditions set forth in the Merger
Agreement, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by the Merger
Agreement and the prompt satisfaction of the conditions thereto, provided,
however, that neither of the parties is under any obligation to take any action
to the extent that the board of directors of such party shall conclude in good
faith, after consultation with and based upon the written advice of respective
counsel, that such action would cause a breach of that board of directors'
fiduciary obligations under applicable law.
TUCKER STOCK OPTIONS
The Merger Agreement provides that no later than the Effective Time, each
Tucker Stock Option that is outstanding immediately prior to the Effective Time
pursuant to Tucker's stock option plans in effect on the date of the Merger
Agreement will become and represent an option to purchase the number of shares
of Patterson Common Stock (decreased to the nearest full share) determined by
multiplying (i) the number of shares of Tucker Common Stock subject to such
Tucker Stock Option immediately prior to the Effective Time by (ii) the Exchange
Ratio, at an exercise price per share of Patterson Common Stock (a "Substituted
Option") (rounded down to the nearest whole cent) equal to the exercise price
per share of Tucker Common Stock immediately prior to the Effective Time divided
by the Exchange Ratio. After the Effective Time, except as provided in the
Merger Agreement, each Substituted Option will be exercisable upon the same
terms and conditions as were applicable under the related Tucker Stock Option at
the Effective Time.
EMPLOYEE BENEFITS
Pursuant to the Merger Agreement, at the Effective Time, all employee
benefits plans and programs of Tucker, other than the Supplemental Executive
Retirement Plan of Tucker Drilling Company, Inc. (the "SERP"), the severance
payment agreements of Tucker specified in the Merger Agreement and the Tucker
Stock Options, will terminate, subject to all applicable laws, and all vested
rights and benefits of such benefit plans and programs will be distributed to
the eligible recipients in accordance with the terms of such plans of Tucker,
except that, with respect to the qualified benefit plans, the parties may elect
prior to the Effective Time to freeze benefit accruals in lieu of terminating
the plans as of the Effective Time. The officers and employees of Tucker who
continue as employees of Patterson or any of Patterson's subsidiaries (including
the Surviving Corporation) will be provided by Patterson with employee benefits
under plans and programs which, in the aggregate, are no less favorable than
those provided pursuant to the plans and programs of Patterson and its
subsidiaries in effect on the date of the Merger Agreement. In addition,
Patterson will maintain the accounting records of the SERP and the Supplemental
Executive Retirement Trust (the "Trust") following the Effective Time and will
honor or cause to be honored all severance payment agreements that existed as of
the date of the Merger Agreement with Tucker's officers and employees. Also,
certain non-officer employees of Tucker who continue as employees of Patterson
or the Surviving Corporation after the Effective Time will receive a "severance
payment" in the event of termination of such employment, whether voluntarily or
involuntarily, on or before the expiration of six months following the Effective
Time. For this purpose, "severance payment" for the non-officer employees of
Tucker means an amount equal to one week's salary for each year of employment
with Tucker. Any portion of a year over six months will be treated as a full
year.
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CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, each of Patterson and Tucker has agreed
that during the period from the date of the Merger Agreement through the
Effective Time (except as otherwise specifically required by the terms of the
Merger Agreement), it will, and, in the case of Patterson, Patterson will cause
its subsidiaries to, in all material respects, carry on their respective
businesses in the ordinary course and consistent with past practice and, to the
extent consistent therewith and with the terms of the Merger Agreement, use all
reasonable efforts to preserve intact their current business organizations, keep
available the services of their current officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and ongoing businesses be
unimpaired at the Effective Time.
Without limiting the generality of the foregoing, each of Patterson and
Tucker has agreed that, prior to the Effective Time, except as otherwise
expressly contemplated by the Merger Agreement, it will not, and, in the case of
Patterson, Patterson will cause its subsidiaries not to, without the prior
written consent of the other parties to the Merger Agreement: (i) (x) declare,
set aside or pay any dividends on, or make any other distributions in respect
of, any of its respective capital stock, or otherwise make any payments to its
respective stockholders in their capacity as such, (y) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (z) purchase, redeem or otherwise acquire any shares of
capital stock or other securities, or any rights, warrants or options to acquire
any such shares or other securities, except in connection with the terms of
their respective stock option plans in existence on December 31, 1995; (ii)
issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its
or, in the case of Patterson, its subsidiaries', capital stock, any other voting
securities or equity equivalent or any securities convertible into, or any
rights, warrants or options to acquire, any such shares, voting securities or
convertible securities or equity equivalent (other than upon the exercise of
stock options outstanding on the date of the Merger Agreement in accordance with
their current terms); (iii) amend its Certificate of Incorporation or amend in
any material respects its By-laws, other than the Charter Amendment; (iv)
acquire, merge or consolidate with, or purchase a portion of the assets of or
equity in, any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets, in each case
that involves a transaction exceeding $50,000 in the aggregate, or commence any
proceedings with respect thereto, or engage in any negotiations with any person
or entity concerning any such transaction, except as previously disclosed in
writing to Patterson or Tucker, as the case may be, and except that Tucker and
Patterson may acquire oil and natural gas interests and land drilling rigs and
related equipment in the ordinary course of business consistent with past
practice; (v) except in the ordinary course of business, sell, lease or
otherwise dispose of or agree to sell, lease or otherwise dispose of, any
business or line of business or any of its assets, in each case that are
material, individually or in the aggregate, to Tucker or to Patterson and its
subsidiaries taken as a whole, respectively; (vi) make any capital expenditures,
except in the ordinary course of business and as previously disclosed in writing
to Patterson or Tucker, as the case may be; (vii) (A) pay, discharge or satisfy
any material claims, liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction of its liabilities or its obligations in the ordinary course of
business or in accordance with their terms as in effect on the date of the
Merger Agreement; (B) adopt a plan of complete or partial liquidation or
resolutions providing for or authorizing such a liquidation or a dissolution,
restructuring, recapitalization or reorganization; (C) enter into any collective
bargaining agreement, successor collective bargaining agreement or amended
collective bargaining agreement; (D) change any accounting principle used by it,
except for such changes required to be implemented prior to the Effective Time
pursuant to generally accepted accounting principles or rules of the Commission;
or (E) settle or compromise any litigation brought against it, other than
settlements or compromises of any litigation where the amount paid in settlement
or compromise does not exceed $100,000, exclusive of amounts covered by
insurance; (viii) (A) enter into any new, or amend any existing, severance
agreement or arrangement, deferred compensation arrangement or employment
agreement with any officer, director or employee, except that, subject to the
Merger Agreement, Patterson and Tucker may hire additional employees to the
extent deemed by their respective managements to be in the best interests of
Patterson or Tucker, as the case may be, provided that neither Tucker nor
Patterson may enter into any employment or severance agreement or any deferred
compensation arrangement with any such additional
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employees, (B) adopt any new, or amend any existing, incentive, retirement or
welfare benefit arrangements, plans or programs for the benefit of current,
former or retired employees (other than amendments required by law or to
maintain the tax qualified status of such plans under the Code), or (C) grant
any increases in employee compensation, other than in the ordinary course or
pursuant to promotions, in each case consistent with past practice; (ix) incur
any indebtedness for borrowed money or guarantee any such indebtedness in excess
of $4,000,000 or issue or sell any debt securities or guarantee any debt
securities of others or make any loans, advances or capital contributions to, or
investments in, any other person, other than to Tucker or Patterson or any
wholly-owned subsidiary of Patterson, respectively; or (x) authorize or enter
into any agreement to do any of the foregoing.
Pursuant to the Merger Agreement, during the period from the date of the
Merger Agreement through the Effective Time, Sub will not engage in any
activities of any nature except as expressly provided in or contemplated by the
Merger Agreement or incident thereto.
ACCESS TO INFORMATION
The Merger Agreement provides that, subject to applicable provisions
regarding confidentiality, each of Patterson and Tucker will, and, in the case
of Patterson, will cause each of its subsidiaries to, afford to the other
parties, and to their accountants, counsel, financial advisors and other
representatives, reasonable access and permit them to make such inspections as
they may reasonably require during the period from the date of the Merger
Agreement through the Effective Time to all their respective properties, books,
contracts, commitments and records.
NO SOLICITATION
Pursuant to the Merger Agreement, from the date of the Merger Agreement,
Tucker will not, and will cause its officers, directors, employees, agents and
other representatives not to, directly or indirectly, solicit or initiate any
takeover proposal or offer for Tucker, or solicit or initiate, directly or
indirectly, discussions, negotiations, considerations or inquiries concerning a
takeover proposal or offer for Tucker, from any person, or engage in discussions
or negotiations relating thereto, or provide to any other person any information
or data relating to Tucker for the purpose of, or have any substantive
discussions with, any person relating to, or otherwise cooperate with or assist
or participate in, or facilitate, any takeover proposal or offer or any inquiry
or proposal which would reasonably be expected to lead to any effort or attempt
by any other person to seek to effect a takeover proposal or offer, or agree to
or endorse any such inquiry, takeover proposal or offer; provided, however, that
(i) Tucker may engage in discussions or negotiations with a third party who,
without Tucker taking any action which is proscribed as provided in the Merger
Agreement, seeks to initiate such discussions or negotiations or may furnish
such third-party information concerning Tucker and its business, properties or
assets (provided that such third party executes a confidentiality agreement with
Tucker) and (ii) the Tucker Board of Directors may take and disclose to Tucker
stockholders a position contemplated by Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act, but in each case referred to in the foregoing clauses
(i) and (ii) only to the extent that a majority of the Board of Directors of
Tucker concludes in good faith, after consultation with and based upon the
written advice of Gardere & Wynne, L.L.P. (which advice need not constitute an
opinion), Tucker's counsel, that such action is necessary in order for the Board
of Directors of Tucker not to breach its fiduciary obligations under applicable
law. Tucker will promptly (but in no case later than 24 hours) notify Patterson
of any inquiry relating to a takeover proposal or offer for Tucker, including
the material terms and conditions thereof, but will not be required to indicate
the identity of the person or group making such takeover proposal or offer.
Prior to termination of the Merger Agreement, Tucker has agreed that it will not
enter into any written agreement with any person that provides for, or in any
way facilitates, a takeover proposal or offer, other than a confidentiality
agreement. Except as permitted by the Merger Agreement, Tucker has also agreed
to cease existing discussions, negotiations and other activities with any
parties (other than Patterson) relating to any possible takeover proposal or
offer. As used in the Merger Agreement, "takeover proposal" or "offer" means any
proposal or offer (other than a proposal or offer by Patterson or any of its
affiliates) for a tender or exchange offer, a merger, consolidation or other
business
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combination involving Tucker or any proposal to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets of,
Tucker.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Patterson, including, among other things: (i) that the documents filed by
Patterson with the Commission since January 1, 1994, do not contain material
misstatements or omissions; (ii) that the information supplied to Patterson's
petroleum engineers was true and correct in all material respects and that no
material adverse change in the assets, properties, condition (financial or
otherwise), business or results of operations of Patterson ("Material Adverse
Change") has occurred in the matters covered by such engineers' report since
December 31, 1995; (iii) that the information supplied by Patterson to be
included herein and in the Registration Statement in connection with the Merger
will be free from material misstatements and omissions; (iv) that there has been
no Material Adverse Change with respect to Patterson, except as disclosed in its
documents filed with the Commission; (v) as to actions taken or not taken that
would jeopardize the contemplated tax and accounting treatment of the Merger;
(vi) as to title to properties; (vii) as to employee benefit plans, programs and
arrangements and labor matters; (viii) with respect to environmental matters;
(ix) with respect to pending or threatened litigation; (x) as to governmental
licenses and permits and compliance with laws; (xi) that the Patterson Financial
Advisors have each rendered its written opinion that the consideration to be
paid by Patterson pursuant to the Merger Agreement and the Exchange Ratio are
fair to the stockholders of Patterson from a financial point of view; and (xii)
as to the Patterson Board of Directors' actions with respect to the Merger
Agreement, the Merger, the Charter Amendment, the Stock Issuance and related
matters. In addition, the Merger Agreement contains representations and
warranties by Patterson as to its organization, capital structure, authority to
enter into the Merger Agreement and the binding effect of the Merger Agreement
on it.
The Merger Agreement also contains similar customary representations and
warranties of Tucker.
In addition, the Merger Agreement contains customary representations and
warranties of Sub, including, among other things, as to Sub's organization,
capital structure, authority to enter into the Merger Agreement and the binding
effect of the Merger Agreement on Sub, and to the effect that Sub was organized
solely for the purpose of acquiring Tucker and has not engaged in any business
since its formation which is not in connection with the Merger and the Merger
Agreement.
FEES AND EXPENSES
Regardless of whether the Merger is consummated, except as described below
upon certain terminations of the Merger Agreement, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such costs and
expenses.
If Patterson terminates the Merger Agreement pursuant to clause (ii)(a) or
(v) under "--Termination of the Merger Agreement" below, then Tucker will pay to
Patterson, within five business days following such termination, an amount in
cash equal to all out-of-pocket expenses actually and reasonably incurred by
Patterson and its subsidiaries in connection with the Merger Agreement and the
transactions contemplated thereby; provided, however, that Tucker will not be
obligated to pay to Patterson fees and expenses of the Patterson Financial
Advisors in excess of $60,000. In addition, but subject to the last sentence of
this paragraph, if within nine months after such termination, Tucker enters into
an agreement with respect to a Third-Party Acquisition (as hereinafter defined)
of Tucker (a "Tucker Acquisition Agreement") or there occurs, or the Board of
Directors recommends to the stockholders of Tucker or resolves to recommend to
the stockholders, a Third-Party Acquisition, then upon the earliest of such
events, Tucker will immediately pay to Patterson an amount in cash equal to
$2,000,000 less the amount paid by Tucker to Patterson pursuant to the
immediately preceding sentence in respect of Patterson's expenses. In addition,
if a More Than 25% Stockholder (hereinafter defined) votes against the Merger or
abstains from voting on the Merger or does not vote, and if Patterson terminates
the Merger Agreement pursuant to clause (ii)(b) under "--Termination of the
Merger Agreement" below, or Tucker terminates the Merger Agreement pursuant to
clause (iii)(b)
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under "--Termination of the Merger Agreement" below, and, in addition, within 24
months after such termination Tucker enters into a Tucker Acquisition Agreement
or there occurs, or the Board of Directors recommends to the stockholders of
Tucker or resolves to do so, a Third-Party Acquisition, then, upon the earliest
of such events, Tucker will immediately pay to Patterson cash in the amount of
$2,000,000. A "More Than 25% Stockholder" means a Person or Group (as
hereinafter defined in this subsection) who acquires beneficial ownership of
more than 25%, but less than 50%, of the outstanding shares of Tucker Common
Stock after the date of the Merger Agreement and prior to the Tucker Special
Meeting. If Patterson terminates the Merger Agreement pursuant to clause (vi)(a)
under "--Termination of the Merger Agreement" below, then Tucker will
immediately pay to Patterson cash in the amount of $250,000 and, if within nine
months thereafter, Tucker enters into a Tucker Acquisition Agreement or there
occurs, or the Board of Directors recommends to the stockholders of Tucker or
resolves to recommend to the stockholders, a Third-Party Acquisition, then upon
the earliest of such events, Tucker will immediately pay to Patterson cash in
the amount of $1,750,000. If Tucker terminates the Merger Agreement pursuant to
clause (viii) under "--Termination of the Merger Agreement" below or Patterson
terminates the Merger Agreement pursuant to clause (vi)(b) or (ix) under
"--Termination of the Merger Agreement" below, then Tucker will immediately pay
to Patterson cash in the amount of $2,000,000. Notwithstanding the foregoing,
however, (a) Tucker will in no event be obligated to make payments under the
Merger Agreement exceeding, in the aggregate, $2,000,000 in connection with any
termination of the Merger Agreement and (b) if a More Than 25% Stockholder votes
in favor of the Merger and if Patterson terminates the Merger Agreement pursuant
to clause (ii)(b) under "--Termination of the Merger Agreement" below, or Tucker
terminates this Merger Agreement pursuant to clause (iii)(c) under
"--Termination of the Merger Agreement" below, then Tucker shall have no
obligation to pay Patterson or Sub any money.
If Patterson terminates the Merger Agreement pursuant to clause (ii)(b)
under "--Termination of the Merger Agreement" below or Tucker terminates the
Merger Agreement pursuant to clause (iii)(b) under "--Termination of the Merger
Agreement" below, Tucker shall pay to Patterson, within five business days
following such termination, an amount in cash equal to all out-of-pocket
expenses actually and reasonably incurred by Patterson in connection with the
Merger Agreement and the transactions contemplated thereby; provided, however,
that Tucker will not be obligated to pay to Patterson fees and expenses of the
Patterson Financial Advisors in excess of $60,000. If Tucker terminates the
Merger Agreement pursuant to clause (iii)(a) or (v) or (iii)(c) under
"--Termination of the Merger Agreement" below or if Patterson terminates the
Merger Agreement pursuant to clause (ii)(c) under "--Termination of the Merger
Agreement" below, Patterson shall pay to Tucker within five business days
following such termination an amount in cash equal to all out-of-pocket expenses
actually and reasonably incurred by Tucker in connection with the Merger
Agreement and the transactions contemplated thereby; provided, however, that
Patterson will not be obligated to pay Tucker fees and expenses of Tucker's
financial advisor in excess of $60,000.
For purposes of the Merger Agreement, the term "Third-Party Acquisition"
means the occurrence of any of the following events: (i) the acquisition of
Tucker by merger, tender offer or otherwise, other than by Patterson or any of
its affiliates, (ii) the acquisition of more than 50% of the outstanding shares
of Tucker Common Stock (measured after such issuance), or securities
exercisable, convertible or exchangeable into more than 50% of the outstanding
shares of Tucker Common Stock (assuming the exercise, conversion or exchange of
such securities), or any other securities which represent, or are exercisable,
convertible or exchangeable into securities which represent, more than 50% of
the voting power of the outstanding securities of Tucker (assuming the exercise,
conversion or exchange of such securities) ordinarily (absent the occurrence of
any contingency) having the right to vote in the election of directors of
Tucker, by any person within the meaning of Section 3(a)(9) of the Exchange Act
("Person") or any syndicate or group deemed to be a Person within the meaning of
Section 13(d)(3) of the Exchange Act ("Group") other than Patterson or its
affiliates or (iii) the issuance to any person (other than Patterson or its
affiliates) of more than 30% of the outstanding shares of Tucker Common Stock
(measured after such issuance), or securities exercisable, convertible or
exchangeable into more than 30% of the outstanding shares of Tucker Common Stock
(assuming the exercise, conversion or exchange of such securities), or any other
securities which represent, or are exercisable, convertible or exchangeable into
securities which represent, more than 30% of the voting power of the outstanding
securities of Tucker (assuming the exercise, conversion or exchange of such
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securities) ordinarily (absent the occurrence of any contingency) having the
right to vote in the election of directors of Tucker, in connection with an
acquisition by Tucker of any other person or entity.
CONDITIONS TO THE MERGER
The Merger Agreement provides that the respective obligations of each party
to effect the Merger are subject to the fulfillment or waiver (where
permissible) at or prior to the Effective Time of each of the following
conditions: (i) the Merger shall have been approved by the requisite vote of the
holders of Tucker Common Stock, and the Charter Amendment and Stock Issuance
shall have been approved by the requisite vote of the holders of Patterson
Common Stock; (ii) the Patterson Common Stock issuable in the Merger and
pursuant to Substituted Options shall have been authorized for trading on the
Nasdaq National Market, upon official notice of issuance; (iii) the Registration
Statement shall have become effective in accordance with the provisions of the
Securities Act and all necessary state securities or "Blue Sky" authorizations
shall have been received; (iv) no governmental entity, or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of prohibiting the Merger or the transactions contemplated thereby;
provided that, in the case of any such decree, injunction or other order, each
of the parties shall have used reasonable best efforts to prevent the entry of
any such injunction or other order and to appeal as promptly as practicable any
decree, injunction or other order that may be entered; (v) all authorizations,
consents, orders, declarations or approvals of, or filings with, or terminations
or expirations of waiting periods imposed by, any governmental entity, the
failure to obtain which would have a material adverse effect on Patterson
(assuming the Merger had taken place) shall have been obtained, shall have
occurred or shall have been filed; (vi) Patterson and Tucker each shall have
received the opinion of Coopers & Lybrand L.L.P. to the effect that, as of the
Effective Time, the Merger qualifies for pooling of interests accounting
treatment if closed and consummated in accordance with the Merger Agreement; and
(vii) Patterson and Tucker shall each have received a "cold comfort" letter from
Coopers & Lybrand L.L.P., Patterson's independent accountants, with respect to
such financial information regarding Patterson and its subsidiaries, and from
Arthur Andersen LLP, Tucker's independent public accountants, with respect to
such financial information regarding Tucker, all as may be mutually agreed to by
Patterson and Tucker.
The Merger Agreement also provides that the obligation of Tucker to effect
the Merger is subject to the fulfillment or waiver at or prior to the Effective
Time of the following additional conditions: (i) Patterson and Sub shall have
performed in all material respects each of their agreements contained in the
Merger Agreement required to be performed on or prior to the Effective Time and
each of the representations and warranties of Patterson and Sub contained in the
Merger Agreement shall be true and correct in all material respects on and as of
the Effective Time as if made on and as of such date; (ii) receipt by Tucker of
customary officers' certificates and opinions of counsel to Patterson; (iii)
stock option assumption agreements relating to the Tucker Stock Options shall
have been executed and delivered by Patterson; (iv) Tucker shall have received
an opinion from its counsel to the effect that the Merger will be treated for
federal income tax purposes as a reorganization transaction described in Section
368(a) of the Code; and (v) the fairness opinion of its financial advisor shall
not have been withdrawn.
The Merger Agreement further provides that the obligations of Patterson and
Sub to effect the Merger are subject to the fulfillment or waiver at or prior to
the Effective Time of the following additional conditions: (i) Tucker shall have
performed in all material respects each of its agreements contained in the
Merger Agreement required to be performed on or prior to the Effective Time and
each of the representations and warranties of Tucker contained in the Merger
Agreement shall be true and correct in all material respects on and as of the
Effective Time as if made on and as of such date; (ii) receipt by Patterson of
customary officers' certificates and opinions of counsel to Tucker; and (iii)
receipt by Patterson of required third-party consents and approvals; (iv)
Patterson shall have received the opinion from its counsel to the effect that
the Merger will be treated for federal income tax purposes as a reorganization
transaction described in Section 368(a) of the Code; and (v) the respective
fairness opinions of the Patterson Financial Advisors shall not have been
withdrawn.
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TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after any approval by the stockholders of Tucker: (i) by
mutual written consent of Patterson and Tucker; (ii) by Patterson if (a) Tucker
shall have failed to comply in any material respect with any of its covenants or
agreements contained in the Merger Agreement required to be complied with by
Tucker prior to the date of such termination, which failure to comply has not
been cured within ten business days following receipt by Tucker of notice of
such failure to comply, (b) the stockholders of Tucker shall have failed to
approve the Merger at the Tucker Special Meeting, or (c) the stockholders of
Patterson shall have failed to approve the Charter Amendment or the Stock
Issuance at the Patterson Special Meeting; (iii) by Tucker if (a) Patterson or
Sub shall have failed to comply in any material respect with any of its
covenants or agreements contained in the Merger Agreement required to be
complied with by Patterson or Sub prior to the date of such termination, which
failure to comply has not been cured within ten business days following receipt
by Patterson of notice of such failure to comply, (b) the stockholders of Tucker
shall have failed to approve the Merger at the Tucker Special Meeting, or (c)
the stockholders of Patterson shall have failed to approve the Charter Amendment
or the Stock Issuance at the Patterson Special Meeting; (iv) by either Patterson
or Tucker if (a) the Merger has not been effected on or prior to the close of
business on November 30, 1996; provided, however, that the right to terminate
the Merger Agreement pursuant to this clause shall not be available to any party
whose failure to fulfill any obligation of the Merger Agreement has been the
cause of, or resulted in, the failure of the Merger to have occurred on or prior
to the aforesaid date, or (b) any court of competent jurisdiction or any
governmental, administrative or regulatory authority, agency or body shall have
issued an order, decree or ruling or taken any other action permanently
enjoining or otherwise prohibiting the transactions contemplated by the Merger
Agreement and such order, decree, ruling or other action shall have become final
and nonappealable; (v) by either Patterson or Tucker if there has been (a) a
material breach by the other of any representation or warranty that is not
qualified as to materiality or (b) a breach by the other of any representation
or warranty that is qualified as to materiality, in each case which breach has
not been cured within five business days following receipt by the breaching
party of notice of the breach; (vi) by Patterson, (a) if the Board of Directors
of Tucker shall not have recommended, or shall have resolved not to recommend,
or shall have modified or withdrawn its recommendation of the Merger or
declaration that the Merger is fair to and advisable and in the best interests
of Tucker and its stockholders, or shall have resolved to do so, or (b) if the
Board of Directors of Tucker shall have recommended, or shall have resolved to
recommend, to the stockholders of Tucker any takeover proposal or offer for
Tucker; (vii) by Tucker if the Board of Directors of Patterson shall not have
recommended, or shall have resolved not to recommend, or shall have modified or
withdrawn its recommendation of the Merger Agreement, the Charter Amendment and
the Stock Issuance or declaration that such transactions are fair to and
advisable and in the best interest of Patterson and its stockholders, or shall
have resolved to do so; (viii) by Tucker if there is an offer to acquire all of
the outstanding shares of Tucker Common Stock, or substantially all of the
assets of Tucker, for consideration that provides stockholders of Tucker a value
per share of Tucker Common Stock which, in the good faith judgment of the Board
of Directors of Tucker, is higher than the consideration per share pursuant to
the Merger; or (ix) by Patterson, if a Third-Party Acquisition occurs.
In the event of termination of the Merger Agreement by either Patterson or
Tucker, the Merger Agreement shall forthwith become void and there shall be no
liability hereunder on the part of Tucker, Patterson or Sub or their respective
officers or directors, except as provided in the Merger Agreement.
AMENDMENT
The Merger Agreement may be amended by the parties thereto, by or pursuant
to action taken by their respective Boards of Directors, at any time before or
after approval of the Merger by the stockholders of Tucker but, after any such
approval by stockholders of Tucker, no amendment will be made which changes the
Exchange Ratio or which in any way materially adversely affects the rights of
such stockholders, without the further approval of such stockholders.
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WAIVER
The Merger Agreement provides that, at any time prior to the Effective
Time, the parties thereto may (i) extend the time for the performance of any of
the obligations or other acts of the other parties thereto, (ii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto and (iii) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement which may legally be waived.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes certain material federal income tax
considerations of the Merger that are generally applicable to Tucker
stockholders. This discussion is based on currently existing provisions of the
Code, existing and proposed Treasury Regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences for Patterson, Sub, Tucker or the Tucker stockholders, as described
herein.
The Merger has been structured with the intent that it be treated as a
reorganization for federal income tax purposes so that no gain or loss will be
recognized by the Tucker stockholders upon consummation of the Merger, except
with respect to cash received in lieu of fractional shares. Consummation of the
Merger is conditioned upon, among other things, the receipt by Tucker of a
written opinion (the "Tax Opinion") of Gardere & Wynne, L.L.P., Tucker's legal
counsel, substantially to the effect that, on the basis of certain facts and
representations, the following are the federal income tax consequences of the
Merger:
(a) The Merger will constitute a reorganization in accordance with Section
368(a) of the Code;
(b) With the exception of the amount of any cash received in lieu of
fractional shares, no gain or loss will be recognized by the Tucker stockholders
upon their receipt in the Merger of the Patterson Common Stock in exchange for
their Tucker Common Stock;
(c) The tax basis of the Patterson Common Stock to be received (and
fractional share interests deemed received) by the Tucker stockholders in the
Merger will be the same as the tax basis of such stockholders in the Tucker
Common Stock exchanged for such Patterson Common Stock;
(d) The holding period of the Patterson Common Stock to be received (and
the fractional share interests deemed received) by the Tucker stockholders in
the Merger will include the period during which the recipient held the Tucker
Common Stock exchanged for the Patterson Common Stock, provided that such Tucker
Common Stock was held as a capital asset at the time of the Merger; and
(e) None of Patterson, Sub or Tucker will recognize income, gain or loss as
a result of the Merger.
In connection with the Tax Opinion, Gardere & Wynne, L.L.P. will make such
factual assumptions as are customary in similar tax opinions. The Tax Opinion
cannot be relied upon if any such factual assumption is, or later becomes,
inaccurate. No ruling from the Internal Revenue Service concerning the tax
consequences of the Merger has been (or will be) requested, and the Tax Opinion
will not be binding upon the Internal Revenue Service or the courts. If the
Merger is consummated, and it is later determined that the Merger did not
qualify as a reorganization under the Code, the Tucker stockholders would
recognize taxable gain or loss in the Merger equal to the difference between the
fair market value of the Patterson Common Stock they received and their tax
basis in the Tucker Common Stock.
A Tucker stockholder who receives cash in the Merger in lieu of a
fractional share of Patterson Common Stock will be treated as if the fractional
share were distributed in the Merger and then as having received a cash
distribution in redemption of such fractional share, resulting in income, gain
or loss upon receipt of such cash being taxed as provided in Section 302 of the
Code.
As of March 31, 1996, Tucker had a net operating loss carryforward ("NOLC")
for regular tax purposes of approximately $2,485,000, which is scheduled to
expire in years 2003 through 2008 (if not used prior to such time). Pursuant to
Section 382 of the Code, if a more than 50 percentage point change in Tucker's
stock ownership occurs within a three-year period (an "Ownership Change"), then
generally the utilization of the
46
<PAGE> 52
NOLC against taxable income becomes limited to a specific annual amount (the
"Annual Limitation Amount"). The Annual Limitation Amount generally would equal
a statutory percentage for the month of the Merger (e.g., 5.78% for June 1996)
multiplied by the fair market value of the Tucker Common Stock immediately
before the Merger. If the Annual Limitation Amount exceeds taxable income for a
given taxable year, then such excess is carried forward and added to the Annual
Limitation Amount for the following taxable year. Tucker has determined that the
Merger will cause an Ownership Change. Based on Tucker's current financial
projections and on the expected computed Annual Limitation Amount, however,
Tucker believes that an Ownership Change resulting from the Merger should not
have a material effect on the use of the NOLC to offset future taxable income of
the Surviving Corporation.
The foregoing summary of material federal income tax consequences is not
intended to constitute advice regarding the federal income tax consequences of
the Merger to any holder of Tucker Common Stock. This summary does not discuss
tax consequences under the laws of foreign, state or local governments or of any
other jurisdiction or tax consequences to categories of stockholders that may be
subject to special rules, such as foreign persons, tax-exempt entities,
insurance companies, financial institutions and dealers in stocks and
securities. In addition, the foregoing may not be applicable to a holder of
shares of Tucker Common Stock who received such shares as employee compensation
or pursuant to the exercise of an employee stock option. Each holder of Tucker
Common Stock is urged to consult their own tax advisors as to the specific
consequences of the Merger, including the applicable federal, state, local and
foreign tax consequences to them of the Merger in light of their particular
circumstances.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Tucker Board of Directors with
respect to the Merger, the Tucker stockholders should be aware that certain
members of the Tucker Board of Directors and management have certain interests
respecting the Merger separate from their interests as holders of Tucker Common
Stock, including those referred to below.
Each of Messrs. Larry Tucker, Charles Middlekauf and Mark Tucker, who are
directors and officers of Tucker, are parties to Severance Pay Agreements
entered into and approved by the stockholders of Tucker in 1988, which have been
amended and restated in connection with the Merger. The Amended and Restated
Severance Pay Agreements provide that Messrs. Larry Tucker, Charles Middlekauf
and Mark Tucker will be employed by Patterson for 60 days after the Effective
Date and will then be terminated and paid by Patterson or the Surviving
Corporation $300,000, $190,000 and $150,000, respectively. The Amended and
Restated Severance Pay Agreements did not change the severance payment amounts
required by the original Severance Pay Agreements.
In addition, pursuant to a Settlement Agreement Relating to Payments Under
the Supplemental Executive Retirement Plan of Tucker Drilling Company, Inc. (the
"Settlement Agreement") entered into in connection with the Merger, Messrs.
Larry Tucker, Charles Middlekauf and Mark Tucker, along with three other
participants in the SERP, have agreed to accept in full settlement of Tucker's
obligations under the SERP, the amounts, if any, which the Trust receives under
a certain annuity contract and life insurance policies owned by the Trust. The
life insurance company issuing the annuity contract and life insurance policies
is currently under regulatory supervision by the Commission of Insurance of the
State of Michigan. Under the terms of the Settlement Agreement, Messrs. Larry
Tucker, Charles Middlekauf and Mark Tucker and the three other participants who
are parties to the Settlement Agreement might receive payments prior to
attaining age 65.
The Merger Agreement provides that Patterson will indemnify all past and
present officers and directors of Tucker to the full extent such persons would
be indemnified by Tucker pursuant to Tucker's Certificate of Incorporation and
By-Laws for acts or omissions occurring at or prior to the Effective Time.
See "--Employee Benefits" as to post-Merger arrangements respecting Tucker
employee benefit plans.
47
<PAGE> 53
ACCOUNTING TREATMENT
Patterson and Tucker intend that the Merger be treated as a "pooling of
interests" for accounting and financial reporting purposes. Consummation of the
Merger is conditioned upon, among other things, Patterson and Tucker receiving
the opinion of Coopers & Lybrand L.L.P., independent accountants to Patterson,
to the effect that, as of the Effective Time, the Merger qualifies for "pooling
of interests" accounting treatment if closed and consummated in accordance with
the Merger Agreement. In addition, Tucker and Patterson have received the
opinion of Arthur Andersen LLP, the independent public accountants to Tucker, to
the effect that, as of the date of the Merger Agreement, the requirements for
pooling of interests accounting treatment relating to the prior operations of
Tucker are satisfied.
Under the pooling of interests method of accounting, the historical basis
of the assets and liabilities of Patterson and Tucker will be combined when the
Merger becomes effective and carried forward at their previously recorded
amounts, the shareholders' equity accounts of Patterson and Tucker will be
combined on Patterson's consolidated balance sheet, and no goodwill or other
intangible assets will be created. Financial statements of Patterson issued
after consummation of the Merger will be restated retroactively to reflect the
consolidated operations of Patterson and Tucker as if the Merger had been in
effect for the periods presented therein.
The pro forma financial information presented in this Prospectus/Joint
Proxy Statement has been prepared using the pooling of interests accounting
method to account for the Merger. See "Unaudited Pro Forma Combined Financial
Statements."
RESALES OF PATTERSON COMMON STOCK RECEIVED IN THE MERGER
Patterson Common Stock that will be issued if the Merger is consummated
will have been registered under the Securities Act and will be freely
transferable, except for shares received by persons, including directors and
officers of Tucker and Patterson, who may be deemed to be "affiliates" of Tucker
and Patterson, as that term is used in (i) paragraphs (c) and (d) of Rule 145
under the Securities Act, and/or (ii) Accounting Series Releases 130 and 135, as
amended, of the Commission. Affiliates may not sell their shares of Patterson
Common Stock acquired pursuant to the Merger, except (a) pursuant to an
effective registration statement under the Securities Act covering those shares,
(b) in compliance with Rule 145, or (c) in the opinion of counsel reasonably
satisfactory to Patterson, pursuant to another applicable exemption from the
registration requirements of the Securities Act. Commission guidelines further
indicate that the pooling of interests method of accounting will generally not
be challenged on the basis of sales by affiliates of the acquiring or acquired
company if such affiliates do not dispose of any of the shares of the acquiring
or acquired company they owned prior to the consummation of a merger or shares
of the acquiring corporation they receive in connection with a merger during the
period beginning 30 days before the merger and ending when financial results
covering at least 30 days of post-merger operations of the combined entity have
been published. Tucker and Patterson intend to obtain customary agreements with
all directors, officers and affiliates of Tucker and Patterson under which those
persons would represent that they will not dispose of their shares of Patterson
Common Stock received in the Merger or the shares of Patterson Common Stock or
Tucker Common Stock held by them prior to the Merger, except in compliance with
the Securities Act and the rules and regulations promulgated thereunder, and in
a manner that would not adversely affect the ability of Patterson to treat the
Merger as a pooling of interests for financial reporting purposes. This
Prospectus/Joint Proxy Statement does not cover any resales of Patterson Common
Stock received by affiliates of Tucker or Patterson. Forms of the agreements of
the affiliates of Tucker and Patterson are set forth as Exhibit I(A) and I(B),
respectively, to the Merger Agreement.
48
<PAGE> 54
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements reflect
adjustments to the historical consolidated balance sheets and statements of
income of Patterson and the historical balance sheets and statements of
operations of Tucker to give effect to the Merger, using the pooling of
interests method of accounting. The unaudited pro forma combined balance sheet
at March 31, 1996, assumes the Merger was consummated as of March 31, 1996 and
the unaudited pro forma combined statements of income assume the Merger was
consummated as of January 1, 1993.
The following unaudited pro forma combined financial statements have been
prepared from, and should be read in conjunction with, the historical
consolidated financial statements and notes thereto of Patterson that are
incorporated herein by reference and attached hereto as a part of Annexes IV and
VI, and the historical balance sheets and statements of operations of Tucker
that are incorporated herein by reference and attached hereto as a part of Annex
VII. The pro forma combined statements of income are not necessarily indicative
of operating results that would have occurred had the Merger been consummated as
of January 1, 1993, nor are they indicative of future operating results of the
combined companies.
49
<PAGE> 55
PATTERSON ENERGY, INC.
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TUCKER
PATTERSON DRILLING PRO FORMA
ENERGY, INC. COMPANY, INC. -----------------------------
MARCH 31, 1996 MARCH 31, 1996 ADJUSTMENTS COMBINED
-------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 3,432,761 $ 6,877,012 $ -- $10,309,773
Marketable securities................... -- 524,323 -- 524,323
Accounts receivable:
Trade
Billed.............................. 7,709,159 2,073,988 (225,470)(f) 9,557,677
Unbilled............................ 1,184,350 -- 241,753 (a) 1,426,103
Oil and gas sales..................... 414,185 -- 225,470 (f) 639,655
Cost of uncompleted drilling contracts
in excess of related billings......... -- 227,269 (227,269)(a) --
Equipment inventory..................... 469,606 8,628 -- 478,234
Deferred income taxes................... 614,567 444,380 -- 1,058,947
Undeveloped oil and gas properties held
for resale............................ 2,785,351 -- -- 2,785,351
Other current assets.................... 153,655 176,991 -- 330,646
----------- ----------- --------- -----------
Total current assets............. 16,763,634 10,332,591 14,484 27,110,709
----------- ----------- --------- -----------
Property and equipment, at cost, net...... 26,898,518 7,773,401 141,620 (b) 34,813,539
Deferred income taxes..................... 1,609,892 396,043 (48,151)(b) 1,957,784
Deposits on workers' compensation
insurance policy........................ 343,760 -- -- 343,760
Other assets.............................. 148,977 590,432 -- 739,409
----------- ----------- --------- -----------
Total assets..................... $45,764,781 $19,092,467 $ 107,953 $64,965,201
=========== =========== ========= ===========
Current liabilities:
Current maturities of notes payable..... $ 2,207,005 $ -- $ -- $ 2,207,005
Accounts payable:
Trade................................. 5,529,134 1,013,315 -- 6,542,449
Revenue distribution.................. 1,481,773 91,215 -- 1,572,988
Other................................. 290,900 -- -- 290,900
Accrued expenses........................ 1,514,347 436,070 -- 1,950,417
----------- ----------- --------- -----------
Total current liabilities........ 11,023,159 1,540,600 -- 12,563,759
----------- ----------- --------- -----------
Deferred liabilities...................... -- 376,746 -- 376,746
Notes payable, less current maturities.... 12,592,363 -- -- 12,592,363
----------- ----------- --------- -----------
12,592,363 376,746 -- 12,969,109
----------- ----------- --------- -----------
Commitments and contingencies............. -- -- -- --
Stockholders' equity:
Preferred stock......................... -- -- -- --
Common stock............................ 31,950 20,975 (5,453)(e) 47,472
Additional paid-in capital.............. 14,095,200 4,946,384 5,453 (e) 19,047,037
Retained earnings....................... 8,022,109 12,207,762 107,953 (a)(b) 20,337,824
----------- ----------- --------- -----------
Total stockholders' equity....... 22,149,259 17,175,121 107,953 39,432,333
----------- ----------- --------- -----------
Total liabilities and
stockholders' equity......... $45,764,781 $19,092,467 $ 107,953 $64,965,201
=========== =========== ========= ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
50
<PAGE> 56
PATTERSON ENERGY, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE QUARTER ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TUCKER
PATTERSON DRILLING
ENERGY, INC. COMPANY, INC. PRO FORMA
MARCH 31, MARCH 31, ---------------------------
1996 1996 ADJUSTMENTS COMBINED
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenue:
Drilling..................................... $10,533,137 $3,426,479 $136,120 (a) $14,095,736
Oil and gas sales............................ 1,324,143 365,815 -- 1,689,958
Well operation fees.......................... 344,827 -- 40,995 (c) 385,822
Other........................................ 74,015 -- -- 74,015
----------- ---------- -------- -----------
12,276,122 3,792,294 177,115 16,245,531
----------- ---------- -------- -----------
Operating costs and expenses:
Direct drilling costs........................ 8,746,180 2,563,989 113,178 (a) 11,423,347
Lease operating and production............... 387,546 93,827 -- 481,373
Writedown due to impairment of long-lived
assets..................................... -- 159,403 -- 159,403
Exploration costs............................ 115,929 -- -- 115,929
Dry holes and abandonments................... 67,921 83,776 -- 151,697
Depreciation, depletion and amortization..... 1,733,382 538,026 21,818 (a)(b) 2,293,226
General and administrative................... 808,092 527,190 40,995 (c) 1,376,277
----------- ---------- -------- -----------
11,859,050 3,966,211 175,991 16,001,252
----------- ---------- -------- -----------
Operating income (loss)........................ 417,072 (173,917) 1,124 244,279
----------- ---------- -------- -----------
Other income (expense):
Net gain on sale of assets................... 26,613 24,281 (970)(b) 49,924
Interest income.............................. 34,640 86,193 -- 120,833
Interest expense............................. (329,454) -- -- (329,454)
Other........................................ 40,777 20,512 -- 61,289
----------- ---------- -------- -----------
Other income (expense), net................ (227,424) 130,986 (970) (97,408)
----------- ---------- -------- -----------
Income (loss) before income taxes.............. 189,648 (42,931) 154 146,871
----------- ---------- -------- -----------
Income taxes:
Current...................................... 23,439 38,926 -- 62,365
Deferred income tax benefit.................. (1,609,892) (840,423) 48,151 (b) (2,402,164)
----------- ---------- -------- -----------
Income tax benefit......................... (1,586,453) (801,497) 48,151 (2,339,799)
----------- ---------- -------- -----------
Net income..................................... $ 1,776,101 $ 758,566 $(47,997) $ 2,486,670
=========== ========== ======== ===========
Net income per common share:
Primary...................................... $ 0.53 $ 0.36 $ 0.51
=========== ========== ===========
Assuming full dilution....................... $ 0.53 N/A $ 0.50
=========== ========== ===========
Weighted average number of common shares
outstanding:
Primary...................................... 3,334,032 2,094,179 4,923,846
=========== ========== ===========
Assuming full dilution....................... 3,340,594 N/A 4,931,666
=========== ========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
51
<PAGE> 57
PATTERSON ENERGY, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PATTERSON TUCKER DRILLING PRO FORMA
ENERGY, INC. COMPANY, INC. ---------------------------
DECEMBER 31, 1995 MARCH 31, 1996 ADJUSTMENTS COMBINED
----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenue:
Drilling......................... $41,248,844 $16,594,979 $(244,643)(a) $57,599,180
Oil and gas sales................ 4,124,473 1,275,063 -- 5,399,536
Well operation fees.............. 1,132,279 -- 163,978 (c) 1,296,257
Other............................ 148,976 -- -- 148,976
----------- ----------- --------- -----------
46,654,572 17,870,042 (80,665) 64,443,949
----------- ----------- --------- -----------
Operating costs and expenses:
Direct drilling costs............ 33,491,622 13,140,272 (172,394)(a) 46,459,500
Lease operating and production... 1,174,658 334,548 -- 1,509,206
Exploration costs................ 369,133 -- -- 369,133
Writedown due to impairment of
long-lived assets............. -- 159,403 -- 159,403
Dry holes and abandonments....... 682,597 108,624 -- 791,221
Depreciation, depletion and
amortization.................. 5,313,917 2,184,236 24,542 (a)(b) 7,522,695
General and administrative....... 3,201,452 1,697,510 163,978 (c) 5,062,940
----------- ----------- --------- -----------
44,233,379 17,624,593 16,126 61,874,098
----------- ----------- --------- -----------
Operating income................... 2,421,193 245,449 (96,791) 2,569,851
----------- ----------- --------- -----------
Other income (expense):
Net gain on sale of assets....... 313,167 64,280 (3,880)(b) 373,567
Interest income.................. 145,774 399,689 -- 545,463
Interest expense................. (1,064,523) -- -- (1,064,523)
Other............................ 11,914 23,032 -- 34,946
----------- ----------- --------- -----------
Other income (expense), net... (593,668) 487,001 (3,880) (110,547)
----------- ----------- --------- -----------
Income before income taxes......... 1,827,525 732,450 (100,671) 2,459,304
----------- ----------- --------- -----------
Income taxes:
Current.......................... 120,634 92,926 -- 213,560
Deferred income tax benefit...... (208,052) (840,423) 48,151 (b) (1,000,324)
----------- ----------- --------- -----------
Income tax benefit............ (87,418) (747,497) 48,151 (786,764)
----------- ----------- --------- -----------
Net income......................... $ 1,914,943 $ 1,479,947 $(148,822) $ 3,246,068
=========== =========== ========= ===========
Net income per common share:
Primary.......................... $ 0.68 $ 0.71 $ 0.74
=========== =========== ===========
Assuming full dilution........... $ 0.65 N/A $ 0.72
=========== =========== ===========
Weighted average number of common
shares outstanding:
Primary.......................... 2,836,391 2,084,925 4,379,236
=========== =========== ===========
Assuming full dilution........... 2,961,475 N/A 4,518,453
=========== =========== ===========
</TABLE>
See accompany notes to unaudited pro forma combined financial statements.
52
<PAGE> 58
PATTERSON ENERGY, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
TUCKER
PATTERSON DRILLING PRO FORMA
ENERGY, INC. COMPANY, INC. -----------------------------
DECEMBER 31, 1994 MARCH 31, 1995 ADJUSTMENTS COMBINED
----------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenue:
Drilling.......................... $31,408,087 $23,189,704 $ 224,975 (a) $54,822,766
Oil and gas sales................. 2,741,597 852,189 -- 3,593,786
Well operation fees............... 833,963 -- 145,793 (c) 979,756
Other............................. 133,240 -- -- 133,240
----------- ----------- --------- -----------
35,116,887 24,041,893 370,768 59,529,548
----------- ----------- --------- -----------
Operating costs and expenses:
Direct drilling costs............. 25,167,186 17,743,859 169,481 (a) 43,080,526
Lease operating and production.... 873,568 294,711 (26,888)(d) 1,141,391
Exploration costs................. 206,659 -- 26,888 (d) 233,547
Dry holes and abandonments........ 1,093,165 185,968 -- 1,279,133
Depreciation, depletion and
amortization................... 2,880,985 1,942,899 88,045 (a)(b) 4,911,929
General and administrative........ 2,863,331 1,784,360 145,793 (c) 4,793,484
----------- ----------- --------- -----------
33,084,894 21,951,797 403,319 55,440,010
----------- ----------- --------- -----------
Operating income.................... 2,031,993 2,090,096 (32,551) 4,089,538
----------- ----------- --------- -----------
Other income (expense):
Net gain on sale of assets........ 359,083 357,390 (105,464)(b) 611,009
Interest income................... 193,417 215,528 -- 408,945
Interest expense.................. (366,152) -- -- (366,152)
Other............................. 64,052 (39,032) -- 25,020
----------- ----------- --------- -----------
Other income, net.............. 250,400 533,886 (105,464) 678,822
----------- ----------- --------- -----------
Income before income taxes.......... 2,282,393 2,623,982 (138,015) 4,768,360
----------- ----------- --------- -----------
Income taxes:
Current........................... 165,462 47,887 -- 213,349
Deferred income tax benefit....... (406,515) -- -- (406,515)
----------- ----------- --------- -----------
Income tax expense (benefit)... (241,053) 47,887 -- (193,166)
----------- ----------- --------- -----------
Net income.......................... $ 2,523,446 $ 2,576,095 $(138,015) $ 4,961,526
=========== =========== ========= ===========
Net income per common share:
Primary........................... $ 1.01 $ 1.25 $ 1.23
=========== =========== ===========
Assuming full dilution............ N/A N/A N/A
=========== =========== ===========
Weighted average number of common
shares outstanding:
Primary........................... 2,501,438 2,065,177 4,029,669
=========== =========== ===========
Assuming full dilution............ N/A N/A N/A
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
53
<PAGE> 59
PATTERSON ENERGY, INC.
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
TUCKER
PATTERSON DRILLING PRO FORMA
ENERGY, INC. COMPANY, INC. ------------------------------
DECEMBER 31, 1993 MARCH 31, 1994 ADJUSTMENTS COMBINED
----------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenue:
Drilling......................... $21,395,891 $16,431,026 $ (80,440)(a) $37,746,477
Oil and gas sales................ 2,447,786 1,465,960 -- 3,913,746
Well operation fees.............. 815,360 -- 248,269 (c) 1,063,629
Other............................ 168,926 -- -- 168,926
----------- ----------- --------- -----------
24,827,963 17,896,986 167,829 42,892,778
----------- ----------- --------- -----------
Operating costs and expenses:
Direct drilling costs............ 17,250,733 13,446,419 (65,760)(a) 30,631,392
Lease operating and production... 725,486 518,751 (37,441)(d) 1,206,796
Exploration costs................ 279,644 -- 37,441 (d) 317,085
Dry holes and abandonments....... 189,981 205,527 -- 395,508
Depreciation, depletion and
amortization.................. 2,321,306 2,673,152 (339,761)(a)(b) 4,654,697
General and administrative....... 2,317,741 1,447,756 248,269 (c) 4,013,766
----------- ----------- --------- -----------
23,084,891 18,291,605 (157,252) 41,219,244
----------- ----------- --------- -----------
Operating income (loss)............ 1,743,072 (394,619) 325,081 1,673,534
----------- ----------- --------- -----------
Other income (expense):
Net gain on sale of assets....... 84,215 54,057 -- 138,272
Interest income.................. 62,327 78,740 -- 141,067
Interest expense................. (330,739) -- -- (330,739)
Other............................ 122,022 (4,559) -- 117,463
----------- ----------- --------- -----------
Other income (expense), net... (62,175) 128,238 -- 66,063
----------- ----------- --------- -----------
Income (loss) before income
taxes............................ 1,680,897 (266,381) 325,081 1,739,597
----------- ----------- --------- -----------
Income taxes:
Current.......................... 123,309 -- -- 123,309
Deferred income tax benefit...... -- -- -- --
----------- ----------- --------- -----------
Income tax expense............ 123,309 -- -- 123,309
----------- ----------- --------- -----------
Net income (loss).................. $ 1,557,588 $ (266,381) $ 325,081 $ 1,616,288
=========== =========== ========= ===========
Net income (loss) per common share:
Primary.......................... $ 0.95 $ (0.13) $ 0.51
=========== =========== ===========
Assuming full dilution........... N/A N/A N/A
=========== =========== ===========
Weighted average number of common
shares outstanding:
Primary.......................... 1,647,801 2,065,076 3,175,957
=========== =========== ===========
Assuming full dilution........... N/A N/A N/A
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
54
<PAGE> 60
PATTERSON ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. PRO FORMA FINANCIAL STATEMENTS
The basis of the unaudited pro forma combined balance sheet reflects the
conversion of each outstanding share of Tucker Common Stock into 0.74 of a share
of Patterson Common Stock. This conversion results in a reallocation of
approximately $5,453 between common stock and additional paid-in capital. The
unaudited pro forma combined statements of income reflect the conversion of the
historical number of shares of Tucker Common Stock outstanding used in computing
earnings per share into Patterson Common Stock using the Exchange Ratio of 0.74.
See "Terms of the Merger--Merger Consideration." The actual number of shares to
be issued in the Merger will be determined by the actual number of shares of
Tucker Common Stock outstanding at the Effective Time. The Merger Agreement
obligates Patterson to consider Tucker Stock Options outstanding at such time.
See "Terms of the Merger--Tucker Stock Options." Common stock equivalents have
been considered in the income per common share calculation for the year ended
December 31, 1995 and the quarter ended March 31, 1996.
2. PERIODS PRESENTED
The unaudited pro forma annual combined statements of income were prepared
using Patterson audited historical consolidated statements of income for the
periods ending December 31, 1993, 1994, and 1995 and Tucker audited historical
statements of income for the years ended March 31, 1994, 1995 and 1996. The
unaudited pro forma combined statement of income for the three months ended
March 31, 1996 was prepared using Patterson's unaudited consolidated statement
of income for the three month period ended March 31, 1996 and Tucker's annual
statement of income for the twelve months ended March 31, 1996 less activity
through December 31, 1995 as reflected in Tucker's unaudited statement of income
for the nine months ended December 31, 1995.
3. RECLASSIFICATIONS
Certain reclassifications have been made to the historical consolidated
financial statements of Patterson to conform with the 1996 presentation.
4. PRO FORMA ADJUSTMENTS
Differences exist between certain methods of accounting for various oil and
gas producing activities and contract drilling activities. The following pro
forma adjustments to Tucker's financial statements are necessary to apply
consistent methods of accounting treatment and presentation among the activities
of both Patterson and Tucker:
a. Accounts receivable trade-unbilled has been increased for the adjustment
required to convert Tucker's methodology of accounting for wells in progress
from the completed contract method for day work and footage drilling
arrangements to the percentage-of-completion method. Furthermore, this
adjustment requires that drilling revenues and direct drilling and certain
depreciation costs be recognized to the extent incurred for each period. As
such, drilling revenues and direct drilling and depreciation costs have been
increased for each period presented.
b. Property and equipment has been increased for the adjustment necessary
to convert Tucker's method of evaluating impairment of its oil and gas
properties (i.e., ceiling test) from the use of discounted future cash flows to
undiscounted future cash flows. Property and equipment has been increased to its
original historical cost basis for the adjustment necessary ($331,971 for fiscal
year ended March 31, 1994). Depreciation, depletion and amortization expense has
been increased ($7,666, $73,355 and $40,352 for fiscal years ended March 31,
1994, 1995 and 1996, respectively) and any gain realized on the sale of such
assets ($105,464 and $3,880 for fiscal years ended March 31, 1995 and 1996,
respectively) has been reduced as a result of Tucker's
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<PAGE> 61
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS--(CONTINUED)
increased basis in its oil and gas properties. In addition, provision for income
taxes has been adjusted by $48,151 for the effect on deferred tax amounts
relating to these adjustments.
c. Well operation fees and general and administrative expenses have been
increased by the same amount to reflect the adjustment necessary to separately
present such activities of Tucker. Tucker netted well operation activities
against general and administrative expenses.
d. Exploration costs have been increased for amounts previously included in
lease operating and production costs by Tucker. Patterson provides for separate
presentation for such expenses.
e. Tucker Common Stock has been decreased and additional paid-in capital
has been increased to adjust for the number of shares of Patterson Common Stock
issued to consummate the Merger pursuant to the Exchange Ratio of 0.74.
f. Tucker oil and gas sales receivables have been reclassified from
accounts receivable trade-billed.
5. MERGER COSTS
The unaudited pro forma combined financial statements do not include
estimated Merger expenses, which are not expected to exceed $2,130,000. The
expenses, which consist primarily of financial advisory fees, outside legal,
accounting and professional fees and one-time costs of consolidating certain
operational and administrative functions of the companies, in the approximate
amount of $1,880,000 will be expensed during the year ended December 31, 1996.
The remaining approximately $250,000 is expected to be expensed after year ended
December 31, 1996. The estimated Merger expenses include severance payments to
certain Tucker employees that will result from the consolidation of certain
operational and administrative functions. These expenses are estimated to be
approximately $825,000. The level of severance is dependent upon organizational
and employment decisions that will not be finalized until after the Merger.
Certain of the employees that are expected to be terminated are covered by the
severance agreements. The unaudited pro forma combined financial statements do
not include any cost savings expected to occur as a result of the Merger.
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<PAGE> 62
BUSINESS OF PATTERSON
Patterson was organized as a Texas corporation in January 1978 and was
reincorporated as a Delaware corporation in October 1993. Patterson was
organized under the name Patterson Drilling Company, Inc. In 1984, Patterson
changed its name to Patterson Energy, Inc., but continues to conduct business
under the assumed name of Patterson Drilling Company. Patterson completed an
initial public offering ("IPO") of Common Stock and Redeemable Warrants during
December 1993. All of the Redeemable Warrants have either been exercised or
redeemed.
Patterson is engaged in onshore contract drilling for oil and gas, and, to
a lesser extent, in the exploration, development and production of oil and gas.
Patterson's operations are conducted in the Permian Basin in West Texas and
Southeastern New Mexico and in South and Southeast Texas, primarily in the
Austin Chalk Trend.
CONTRACT DRILLING OPERATIONS
Patterson has been engaged in the contract drilling business since its
inception in 1978 and is a leading provider of contract drilling services in the
Austin Chalk Trend and the Permian Basin. Patterson owns 27 drilling rigs, 26 of
which are currently operable. Fourteen of the 27 rigs and interests in two
others owned in part by Patterson were acquired (or, in the case of one of the
rigs, constructed) after Patterson's IPO. Patterson's rigs have rated maximum
depth capabilities ranging from 9,000 to 22,000 feet and can be used for either
vertical or horizontal drilling.
Patterson markets its contract drilling services to major oil companies and
independent producers primarily under standard day work and footage contracts.
During 1995, Patterson contract drilled 215 wells for 68 nonaffiliated
customers, as compared to 171 wells drilled for 61 nonaffiliated customers in
1994. Patterson has substantial experience in contract drilling horizontal
wells, primarily in the Austin Chalk Trend. Of the wells drilled in 1995 and
1994, 54 in each year were horizontal wells.
Patterson's business strategy for its contract drilling operations is to
build upon its reputation in the market place by, among other things, continuing
its ongoing program of upgrading and maintaining its drilling rigs in good
operating condition and retaining high quality, experienced drilling supervisors
in the field. In addition, if favorable opportunities arise, Patterson will seek
to expand its rig fleet through selected acquisitions and/or mergers.
OIL AND GAS OPERATIONS
Patterson has been engaged in oil and gas exploration, development and
production in the Austin Chalk Trend and Permian Basin since early 1982.
Beginning in the first quarter of 1986, Patterson's exploration and development
effort was severely curtailed due to a steep drop in the price of oil and gas, a
decline in cash flow and a severe liquidity shortage. Prior to its IPO,
Patterson's ability to significantly expand its exploration, development and
production activities in the Austin Chalk Trend and the Permian Basin was
impaired due to a continuing liquidity shortage. Net proceeds from the IPO
provided Patterson with initial capital to expand these activities.
From completion of the IPO in December 1993 through December 31, 1995,
Patterson participated as a working interest owner in the drilling of 68 gross
(8.6 net) development wells and nine gross (2.0 net) exploratory wells in its
two areas of operations, of which 53 gross (6.4 net) development wells and two
gross (0.4 net) exploratory wells were completed as productive. Primarily as a
result of these operations, Patterson increased its proved developed reserves
from approximately 407,000 BOE at December 31, 1993, to approximately 1,267,000
BOE at December 31, 1995. Over this same period, Patterson's present value of
estimated future net revenues before income taxes discounted at 10% increased
from approximately $2,603,000 to approximately $7,858,000 at December 31, 1995.
Patterson's average daily production increased from approximately 382 BOE in the
fourth quarter of 1993 to approximately 900 BOE in the fourth quarter of 1995.
As of December 31, 1995, Patterson was the operator of 223 wells as compared to
approximately 89 Patterson-operated wells at the time of the IPO. Patterson owns
a working interest in substantially all of the
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<PAGE> 63
operated wells. At that date, Patterson had a working interest in 40,496 gross
(7,139 net) developed acres, 297 (10 net) productive wells and 29,970 gross
(7,323 net) undeveloped acres.
Patterson's strategy for its oil and gas operations is to increase its oil
and gas reserves primarily through development drilling, as well as selected
acquisitions of producing properties for further development. The development
drilling is expected to occur near producing properties. Although Patterson from
time to time will participate through a working interest in exploratory
drilling, the focus of Patterson's drilling activities for the foreseeable
future will be exploration and development drilling in South and Southeast
Texas, including the Austin Chalk Trend (horizontal drilling of the Austin
Chalk, Buda, Edwards, Glenrose and Georgetown formations) and three dimensional
seismic prospects in the Permian Basin of West Texas and Southeastern New Mexico
and in South Texas.
OTHER ACTIVITIES
Patterson is also engaged in the marketing of oil produced from
Patterson-operated wells through Patterson Petroleum Trading Company, Inc., a
wholly-owned subsidiary. Patterson believes that this business is not material
to is overall operations.
In October 1994, Patterson incorporated Patterson Drilling Programs, Inc.
as a wholly-owned subsidiary to act as managing partner of general and/or
limited partnerships which may be organized from time to time for the purpose of
exploration, development and production of oil and gas. No partnerships have
been organized to date, and no assurance can be given that any partnerships will
be organized.
RECENT DEVELOPMENTS
On April 30, 1996, Patterson's credit facility with CIT Group/Equipment
Financing, Inc. ("CIT") was increased from $7 million to $10 million, provided
that 62% of the collateral value for the loan exceeds such amount. In addition,
the related loan agreement between CIT and Patterson dated March 14, 1995, was
further amended to change: (i) the consolidated cash flow ratio from 1.5:1.0 to
2.0:1.0; (ii) the consolidated tangible net worth requirement from $12 million
to $13 million; and (iii) the ratio of total liabilities to tangible net worth
from 1.75:1.0 to up to 2.0:1.0 in increments of .10 should Patterson acquire
assets or stock with proceeds of indebtedness other than the CIT loan. For
additional information concerning the CIT loan see Note 4 of Notes to
Consolidated Financial Statements of Patterson Energy, Inc. and Subsidiaries
included as a part of the Patterson 1996 Form 10-KSB attached hereto as Annex
IV. As of the date of this Prospectus/Joint Proxy Statement, the total principal
balance outstanding under the CIT loan was $7,700,000.
Additional information concerning Patterson, including its business,
financial affairs and directors and executive officers is variously contained in
the Patterson 1995 Form 10-KSB, the Patterson 1996 Proxy Statement, and the
Patterson First Quarter 1996 Form 10-Q, included herein as Annexes IV, V and VI,
respectively.
BUSINESS OF TUCKER
Tucker is principally engaged in onshore contract oil and gas drilling
operations in Texas, and also engages in oil and gas exploration and development
for its own account and in the production and sale of oil and gas from its net
reserves. Most of Tucker's contract drilling activities are conducted in West
and North Texas in the Permian and Hardeman Basins.
CONTRACT DRILLING
Tucker engages in onshore contract drilling of oil and gas wells for major
oil companies, independent oil and gas producers and for its own account. Tucker
owns and operates 13 land drilling rigs with depth capacities to 13,500 feet.
Generally, Tucker's rigs are operated in the Permian Basin of West Texas and the
Hardeman Basin of North Texas. An onshore drilling rig consists of engines,
drawworks, mast, pumps to circulate the drilling fluid, blowout preventers, the
drillstring and related equipment. The size and type of rig utilized depend upon
well depth and site conditions, among other factors.
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<PAGE> 64
For the year ended March 31, 1996, Tucker drilled a total of 157 wells for
40 unaffiliated customers, most of whom were independent oil and gas operators.
This compared with 276 wells drilled for 38 unaffiliated customers for the year
ended March 31, 1995. During the year ended March 31, 1996, two contract
drilling customers accounted for 21% and 19%, respectively, of revenues. During
the year ended March 31, 1995, three contract drilling customers accounted for
17%, 15%, and 14%, respectively, of revenues.
OIL AND GAS OPERATIONS
Tucker's oil and gas operations consist of the geological evaluation of
prospective oil and gas properties, the acquisition of oil and gas leases or
other mineral interests for the purpose of drilling for its own account, and the
production and sale of oil and gas from its properties. These operations are
principally conducted in West Texas.
Tucker has a full time technical staff which currently includes two
geologists whose services are principally utilized in the generation and
evaluation of oil and gas prospects. From time to time Tucker also utilizes the
services of independent consulting geologists.
Tucker participates with other individuals, partnerships and corporations
in its oil and gas operations, as is customary in the industry. For some of the
wells in which it has an interest Tucker acted as drilling contractor and acts
as operator through agreements with other interest owners. These agreements give
Tucker responsibility for and control of drilling, completion and operations of
the wells.
Tucker's agreements involving the drilling of wells with participants vary
but generally provide for a working interest with a proportionate or less than
proportionate share of costs to Tucker on the first well drilled on a prospect
to the point a well is determined to be commercially productive or is otherwise
plugged and abandoned. These agreements also provide that all participants,
including Tucker, pay their proportionate share of all subsequent costs. In
addition, where Tucker is the operator, interest owners make an additional per
well payment to Tucker to compensate it for its administrative and supervisory
services.
At March 31, 1996, Tucker owned a working interest in 7,720 gross (1,290
net) developed acres, 72 gross (12.70 net) productive wells and 34,000 gross
(5,600 net) undeveloped acres. At that date, Tucker had proved developed
reserves of 151,894 Bbls of oil and 1,298,421 Mcf of natural gas or 368,298 BOE.
Tucker's present value of estimated future net revenues before income taxes
discounted at 10% was approximately $2,437,000 at March 31, 1996.
RECENT DEVELOPMENTS
The Tucker Board of Directors granted Larry J. Tucker, the Chairman of the
Board of Directors, President and Chief Executive Officer of Tucker, a leave of
absence on May 1, 1996. Upon Larry Tucker's leave of absence, T. Mark Tucker,
the Vice President-Land of Tucker, began serving as acting Chairman of the Board
and President of Tucker. Each of the current directors of Tucker (including
Larry Tucker) were serving as directors at the time the Tucker Board of
Directors approved the Merger Agreement and determined that the Merger is fair
and advisable and in the best interests of Tucker and its stockholders.
Additional information concerning Tucker, including its business, financial
affairs and directors and executive officers is contained in the Tucker 1996
Form 10-KSB included as Annex VII to this Prospectus/Joint Proxy Statement.
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<PAGE> 65
POST-MERGER PROFILE AND STRATEGY
CONTRACT DRILLING RIGS AND OIL AND GAS INTERESTS
As a result of the Merger, Patterson will own 40 drilling rigs, 39 of which
will be operable. Patterson will also own leasehold interests in 48,000 gross
(8,000 net) developed acres, 354 gross (38 net) productive wells and 64,000
gross (13,000 net) undeveloped acres. Based on the December 31, 1995 proved
developed reserves of Patterson and the March 31, 1996 proved developed reserves
of Tucker, Patterson will have proved developed reserves of 757,000 Bbls and
5,270,000 Mcf of natural gas or 1,635,000 BOE.
Following the Merger, Patterson intends to transfer its contract drilling
rigs and related equipment to Patterson Drilling Company (the Surviving
Corporation). As a result of this transfer, Patterson will serve as a holding
company for its contract drilling operations and its oil and gas operations.
Patterson's contract drilling operations will be conducted through Patterson
Drilling Company and its oil and gas operations will be conducted through
Patterson Drilling Company and through Patterson Petroleum, Inc., another
wholly-owned subsidiary of Patterson.
STRATEGIES
Patterson's existing strategies with respect to its contract drilling and
oil and gas operations will continue following the Merger, except that the
Hardeman Basin in North Texas will be added as an area of operation for both
segments.
Patterson anticipates that the combined entity will be able to realize
significant reductions in general and administrative expenses from the
pre-Merger expenses of Patterson and Tucker. It is expected that most of the
cost reductions will be through elimination of duplicative personnel, accounting
systems and certain other administrative and fixed costs of the two pre-Merger
companies.
MANAGEMENT
Patterson's Board of Directors and executive officers (except for Ronald L.
Scandolari, who will become the Vice President-Contract Drilling of the
Surviving Corporation) will remain unchanged after the Merger. For information
concerning each of the members of the Board of Directors and current executive
officers of Patterson, see the Patterson 1996 Proxy Statement included as Annex
V to this Prospectus/Joint Proxy Statement. For information concerning Ronald L.
Scandolari, see the Tucker 1996 Form 10-KSB included as Annex VII to this
Prospectus/Joint Proxy Statement.
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<PAGE> 66
PRINCIPAL STOCKHOLDERS OF PATTERSON AND TUCKER
PATTERSON
The following table sets forth, as of the Patterson Record Date,
information concerning the beneficial ownership of Patterson Common Stock by:
(i) each person known to Patterson to be the beneficial owner of more than 5% of
the outstanding shares of Patterson Common Stock; (ii) each director of
Patterson; (iii) each of the executive officers named in the Summary
Compensation Table set forth in the Patterson 1996 Proxy Statement attached
hereto as Annex V; and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF CLASS
OF BENEFICIAL ------------------------
OWNERSHIP OF BEFORE THE AFTER THE
NAME AND ADDRESS COMMON STOCK(1)(2) MERGER MERGER(3)
- ----------------------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Cloyce A. Talbott.................................... 639,974(4) 20.03% 13.47%
2500 Towle Park Road
Snyder, Texas 79549
Metropolitan Life Insurance Company.................. 250,000(5) 7.82% 5.26%
One Madison Avenue
New York, New York 10010
C.A. Delaney Capital Management, Ltd................. 280,500(6) 8.78% 5.90%
161 Bay Street, Suite 5100
P.O. Box 713
Toronto, Ontario, M5J 2S1
A. Glenn Patterson................................... 198,081(7) 6.16% 4.15%
2807 34th Street
Snyder, Texas 79549
Kenneth E. Davis..................................... 71,554(8) 2.23% 1.50%
Box 8297
Horseshoe Bay, Texas 78654
Robert C. Gist....................................... 17,943(9) * *
12809 Plum Hollow Drive
Oklahoma City, Oklahoma 73142
All executive officers and directors as a group (8
persons)........................................... 924,198(10) 28.50% 19.26%
</TABLE>
- ---------------
* Less than 1%
(1) Except as stated in the following notes, each person has sole voting and
investment powers associated with the shares stated as beneficially owned
by him.
(2) Beneficial ownership includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of Patterson 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.
(3) Does not give effect to shares purchasable under Tucker Stock Options to be
assumed by Patterson at the Effective Time of the Merger and based upon
2,104,076 shares of Tucker Common Stock outstanding as of the Patterson
Record Date. See "Terms of the Merger--Tucker Stock Options."
(4) Includes 37,862 shares owned by H.A. and Audrey Talbott Trust, of which
Cloyce A. Talbott is a beneficiary and co-trustee, and 57,298 shares owned
by SSI Oil & Gas, Inc., a Texas corporation beneficially owned 50% by
Cloyce A. Talbott and 50% by A. Glenn Patterson.
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<PAGE> 67
(5) 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 Schedule 13G with the Securities
and Exchange Commission for the same shares.
(6) Number of shares stated was obtained from a Schedule 13G filed with the
Securities and Exchange Commission by C.A. Delaney Capital Management, Ltd.
(7) Includes 19,360 shares purchasable under exercisable employee stock options
and 57,298 shares owned by SSI Oil & Gas, Inc., a Texas corporation
beneficially owned 50% by Cloyce A. Talbott and 50% by A. Glenn Patterson
(see note 4 above).
(8) Includes 5,474 shares owned by the wife of Mr. Davis and 5,000 shares
purchasable under exercisable Non-Employee Directors Stock Options.
(9) Includes 5,000 shares purchasable under exercisable Non-Employee Directors
Stock Options.
(10) Includes a total of 47,760 shares purchasable under exercisable employee
stock options including the 19,360 shares referenced in note (7) above for
Mr. Patterson and 10,000 shares purchasable under Non-Employee Directors
Stock Options (see notes 8 and 9 above).
TUCKER
The following table indicates the beneficial ownership as of the Tucker
Record Date of the Tucker Common Stock by: (i) each director; (ii) each of the
executive officers named in the Summary Compensation Table set forth in the
Tucker 1996 Form 10-KSB attached hereto as Annex VII; (iii) each person known by
Tucker to own more than 5% of the outstanding shares of Tucker Common Stock; and
(iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF CLASS
OF BENEFICIAL ------------------------
OWNERSHIP OF BEFORE THE AFTER THE
NAME AND ADDRESS COMMON STOCK(1)(2) MERGER MERGER(3)
- ----------------------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Dimensional Fund Advisors, Inc....................... 149,600(4) 7.11% 2.33%
1299 Ocean Ave., Suite 650
Santa Monica, California 90401
Larry J. Tucker...................................... 116,732(5)(6) 5.50% 1.81%
P.O. Box 1876
San Angelo, Texas 76902
Stavisky Family...................................... 114,500(7) 5.44% 1.78%
c/o Reid & Priest
40 West 57th Street
New York, New York 10019
T. Mark Tucker....................................... 66,804(8) 3.15% 1.04%
3226 Ridgecrest
San Angelo, Texas 76904
Charles B. Middlekauf................................ 16,000(9) 0.75% .25%
3209 Clearview
San Angelo, Texas 76904
Bruce L. Fly......................................... 9,505(10) 0.45% .15%
3102 San Antonio
San Angelo, Texas 76901
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF CLASS
OF BENEFICIAL ------------------------
OWNERSHIP OF BEFORE THE AFTER THE
NAME AND ADDRESS COMMON STOCK(1)(2) MERGER MERGER(3)
- ----------------------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Marcus H. Cheaney.................................... 8,000(10) 0.38% .12%
3706 Inglewood
San Angelo, Texas 76904
W. P. Carr Jr........................................ 8,000(10) 0.38% .12%
8333 Douglas, Suite 950
Dallas, Texas 75225
All executive officers and directors as a group (7
persons)........................................... 231,741(11) 10.61% 3.67%
</TABLE>
- ---------------
(1) Except as stated in the following notes, each person has sole voting and
investment power with respect to the shares stated as beneficially owned by
him.
(2) Beneficial ownership includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of Tucker Common
Stock subject to options currently exercisable are deemed outstanding for
computing the percentage ownership of any person holding the options, but
not deemed outstanding for computing the percentage ownership of any other
person.
(3) Based upon 4,751,967 shares of Patterson Common Stock outstanding
immediately after the Merger, assuming conversion in the Merger of the
2,104,076 shares of Tucker Common Stock outstanding as of the Tucker Record
Date.
(4) According to Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment adviser, Dimensional is deemed to have beneficial ownership of
149,600 shares of Common Stock as of March 31, 1996, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in series of the DFA Group
Trust, a Delaware business trust, or the DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, for both of which
Dimensional serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
(5) Excludes 1,100 shares held by Mrs. Larry J. Tucker; Larry J. Tucker
disclaims any beneficial interest in all of such shares.
(6) Includes 26,332 shares held by children of Larry J. Tucker. Includes 20,000
shares issuable upon exercise of options granted by Tucker.
(7) Members of the Stavisky Family filed a Schedule 13D with the Commission
dated July 27, 1994 on behalf of Theresa Stavisky, Aron Stavisky, Nellie
Stavisky and Eugene Roshwalb, Trustee for Hedva Stavisky-Weiss, Jeremy
Stavisky and Abigail Stavisky-Lipner. Theresa Stavisky, Aron Stavisky and
Nellie Stavisky have sole voting and dispositive power over 10,000; 23,000;
and 13,000 shares, respectively. Hedva Stavisky-Weiss, Jeremy Stavisky and
Abigail Stavisky-Lipner share voting power, and Eugene Roshwalb, Trustee
for Hedva Stavisky-Weiss, Jeremy Stavisky and Abigail Stavisky-Lipner, has
sole dispositive power, over 68,500 shares.
(8) Includes 16,000 shares issuable upon exercise of options granted by Tucker.
(9) Includes 14,800 shares issuable upon exercise of options granted by Tucker.
(10) Includes 8,000 shares issuable upon exercise of options granted by Tucker.
(11) Includes 74,800 shares purchasable under exercisable employee stock options
referenced in Note 6 and Notes 8 through 10 above and 6,700 shares
purchasable under exercisable employee stock options held by an executive
officer not named in the table.
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<PAGE> 69
DESCRIPTION OF PATTERSON CAPITAL STOCK
Patterson's authorized capital consists of 5,000,000 shares of Patterson
Common Stock and 1,000,000 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"). As of the Patterson Record Date, there were 3,194,951
shares of Patterson Common Stock outstanding. No shares of Preferred Stock have
been issued. At the Patterson Special Meeting, the stockholders of Patterson
will vote on the Charter Amendment which, if approved, will increase the
authorized shares of Patterson Common Stock from 5,000,000 shares to 9,000,000
shares. See "The Charter Amendment."
THE FOLLOWING SUMMARY DESCRIPTION OF PATTERSON'S CAPITAL STOCK DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
PATTERSON'S CERTIFICATE OF INCORPORATION (THE "PATTERSON CHARTER") AND BYLAWS
(THE "PATTERSON BYLAWS"), COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS/JOINT PROXY STATEMENT IS A PART.
PATTERSON COMMON STOCK
Holders of Patterson Common Stock are entitled to one vote for each share
of Patterson Common Stock held of record on all matters submitted to a vote of
stockholders. Holders of a majority of the shares of Patterson Common Stock
outstanding may authorize a merger, consolidation, dissolution of Patterson, the
sale of all or substantially all of Patterson's assets if not made in the usual
or ordinary course of Patterson's business, or an amendment of Patterson's
Charter. In the event of liquidation, holders of Patterson Common Stock are
entitled to share pro rata in any distribution of Patterson's assets to holders
of Patterson 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 Patterson
Common Stock. Holders of Patterson Common Stock are entitled to receive such
dividends as may be declared on Patterson Common Stock by the Board of Directors
in its discretion out of funds legally available for that purpose.
All outstanding shares of Patterson Common Stock are, and all shares to be
issued by Patterson pursuant to the Merger Agreement will be, validly issued,
fully paid and nonassessable. The Patterson Board of Directors is authorized to
issue additional shares of Patterson Common Stock within the limits authorized
by the Patterson Charter without stockholder action.
PATTERSON 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
Patterson's Charter, 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, redemptions provisions, sinking fund
provisions and other matters. The Board of Directors may authorize the issuance
of Preferred Stock which ranks senior to Patterson 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 Patterson 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 Patterson Common Stock. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of Patterson.
Patterson has no present intention to issue shares of Preferred Stock.
TRANSFER AGENT
The transfer agent for the Patterson Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
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<PAGE> 70
CERTAIN PROVISIONS AFFECTING PATTERSON STOCKHOLDERS
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. Section 203 of the General Corporation Law of the State of Delaware
(the "DGCL"), which applies to Patterson since the Patterson Common Stock is
traded on the Nasdaq National Market, restricts certain "business combinations"
with "interested stockholders" for three years following the date that person
becomes an interested stockholder, unless the Board of Directors approves the
business combination. (Section 203 of the DGCL also currently applies to
Tucker.) "Business combination" 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
Patterson Common Stock.
The Patterson Charter and Patterson 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 Patterson Charter provides that
special meetings of stockholders may be called only by the Board of Directors
(or a majority of the members thereof), 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 Patterson Charter 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 Patterson 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
Patterson 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 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 meeting was mailed. The Patterson 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 "--Patterson Preferred Stock" for
information concerning Patterson Preferred Stock.
The foregoing provisions of the Patterson Charter and the Patterson Bylaws
may deter any potential unfriendly offers or other efforts to obtain control of
Patterson that are not approved by the Board of Directors and could thereby
deprive the stockholders of opportunities to realize a premium on their
Patterson Common Stock and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any persons seeking control of Patterson or a business combination with
Patterson to negotiate terms acceptable to the Board of Directors. The Patterson
Charter can be changed or amended only by the affirmative vote of the holders of
at least a majority of Patterson's then outstanding stock entitled to vote.
INDEMNIFICATION
The Patterson Bylaws provide to the extent a director or officer of
Patterson is successful on the merits in defense of a suit or proceeding brought
against him by reason of the fact that he is or was a director or officer of
Patterson, he shall be indemnified against expenses (including attorneys' fees)
reasonably incurred in connection with such action. In other circumstances, a
director or officer of Patterson may be indemnified
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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 Patterson,
and, with respect to a criminal action or proceeding, had no reasonably cause to
believe his conduct was unlawful; however, in an action or suit by or in the
right of Patterson to procure a judgment in its favor, such person will not be
indemnified if he has been adjudged to be liable to Patterson 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
Patterson's Board of Directors, by independent legal counsel, or by the
stockholders of Patterson. In addition, Patterson maintains directors and
officers liability insurance.
LIMITED LIABILITY PROVISIONS
The Patterson Charter contains a provision which eliminates, to the fullest
extent permitted by the DGCL, the liability of directors of Patterson for
monetary damages arising for any breach of fiduciary duties as a member of
Patterson's Board of Directors. (The Tucker Certificate of Incorporation
contains similar provisions.) This provision will not eliminate liability for,
among other matters, breaches of duty of loyalty, acts or omissions not in good
faith or knowing violations of law. In addition, this provision will not
eliminate or limit the liability of a director for any act or omission occurring
prior to Patterson's reincorporation in the State of Delaware in October 1993.
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COMPARISON OF RIGHTS OF HOLDERS OF
TUCKER COMMON STOCK AND PATTERSON COMMON STOCK
GENERAL
The rights of the holders of Tucker Common Stock are currently governed by
the Certificate of Incorporation of Tucker (the "Tucker Charter"), the By-Laws
of Tucker (the "Tucker By-Laws") and the laws of Delaware, including the DGCL.
If the Merger is consummated, holders of Tucker Common Stock will become
stockholders of Patterson, and the rights of such former Tucker stockholders
will thereafter be governed by the Patterson Charter, the Patterson Bylaws and
the laws of Delaware, including the DGCL. The following summary, which does not
purport to be a complete statement of the differences between the rights of the
stockholders of Patterson and the stockholders of Tucker, sets forth certain
differences between the Patterson Charter and the Tucker Charter and the
Patterson Bylaws and the Tucker By-Laws. This summary is qualified in its
entirety by reference to the full text of each of such documents and the
applicable Delaware statutes.
NUMBER OF DIRECTORS
The number of directors of a Delaware corporation is fixed by, or in the
manner provided in, the by-laws unless the certificate of incorporation fixes
the number. Neither the Tucker Charter nor the Patterson Charter fixes the
number of directors. Under Section 141(b) of the DGCL, a director need not be a
stockholder to be qualified unless so required by the charter or by-laws.
The Tucker By-Laws provide that the number of directors of Tucker may be
determined by resolution of the Board of Directors of Tucker or by the
stockholders of Tucker. The number of directors of Tucker is currently fixed at
six. The Tucker By-Laws also provide that directors are elected at the annual
meeting of stockholders by written ballot. The Patterson Bylaws provide that the
number of directors may be fixed or changed by amendment to the Bylaws or by
resolution of the Board of Directors of Patterson. The number of directors of
Patterson is currently fixed at four. The Patterson Charter states that
elections of directors are not required to be by written ballot unless the
Patterson Bylaws otherwise provide. The Patterson Bylaws provide that elections
of directors will be by ballot whenever requested by any stockholder entitled to
vote at the election, but unless the request is made, the election may be
conducted in any manner approved at the meeting.
BOARD OF DIRECTOR VACANCIES
The Tucker By-Laws provide that any vacancies (including newly created
directorships resulting from any increase in the authorized number of directors)
may be filled by a majority vote of the directors then in office even though
less than a quorum, or by a sole remaining director, and the directors chosen to
fill the vacancies shall hold office until the next annual meeting. The
Patterson Bylaws provide that vacancies in the Board of Directors may be filled
by a majority vote of the remaining directors until an election to fill such
vacancies is held. In addition, the Patterson Bylaws provide that stockholders
entitled to elect directors shall have the right to fill any vacancy in the
board at any meeting of stockholders called for that purpose, and any directors
elected at any such meeting of stockholders shall serve until the next annual
election of directors.
NOMINATION OF DIRECTOR CANDIDATES
The Patterson Bylaws provide that nominations of persons for election to
the Board of Directors of Patterson may be made only at a meeting of
stockholders and only by or at the direction of the Board of Directors or a
stockholder entitled to vote for the election of directors at a meeting who
complies with certain notice procedures set forth in the Patterson Bylaws. Under
those procedures, the stockholder's notice must be delivered to, or mailed and
received at, the principal executive offices of Patterson not less than 30 days
nor more than 60 days prior to the meeting; provided that in the event less than
40 days' written notice is given to stockholders, notice by the stockholder to
be timely must be received not later than the close of business on the 10th day
following the day on which the notice of the date of the meeting was mailed. The
Patterson Bylaws also require that the notice by the stockholders contain
certain information specified in the Patterson
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Bylaws and provide that the presiding officer at the meeting may declare that
the stockholder nomination was not made in accordance with the procedures set
forth in the Patterson Bylaws (as summarized above) and the defective nomination
will be disregarded. The Tucker By-Laws do not contain a comparable provision.
STOCKHOLDER PROPOSALS
The Patterson Bylaws provide that a stockholder may propose business to be
brought before a meeting only upon timely notice in writing to the Secretary of
Patterson. To be timely, the notice must be delivered to or mailed and received
at the principal executive offices of Patterson not less than 30 days nor more
than 60 days prior to the meeting as originally scheduled; provided that in the
event that less than 40 days' notice is given to the stockholders, the notice to
be timely must be so received not later than the close of business on the 10th
day following the day on which the notice of the date of the annual meeting was
mailed. The Patterson Bylaws also require that the notice by the stockholders
contain certain information specified in the Patterson Bylaws and provide that
the presiding officer at the meeting shall, if the facts warrant, declare that
the stockholder business was not properly brought before the meeting in
accordance with the procedures set forth in the Patterson Bylaws (as summarized
above) and that the business not properly brought before the meeting will not be
transacted. The Tucker By-Laws do not contain a comparable provision.
CALL OF SPECIAL STOCKHOLDER MEETINGS
Under Section 211(d) of the DGCL, special meetings of stockholders may be
called by the board of directors or by such other person or persons authorized
to do so by the corporation's certificate of incorporation or by-laws.
The Tucker By-Laws provide that special meetings of stockholders shall be
called by the Chairman of the Board, the President, or the Secretary at the
request in writing of a majority of the Board of Directors. The Patterson
Charter provides that special meetings of stockholders may be called by the
Board of Directors (or a majority of the members thereof) by action at a meeting
or acting without a meeting, the Chief Executive Officer, the President, or the
holders of a majority of the issued and outstanding stock of Patterson entitled
to vote at such special meeting.
STOCKHOLDERS' ACTION WITHOUT A MEETING
Section 228 of the DGCL provides that, unless the certificate of
incorporation provides otherwise, stockholders may take any action without a
meeting by written consent signed by the holders of outstanding stock having not
less than a minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of any action by less than
unanimous consent must be given to stockholders who did not consent to such
action.
The Patterson Charter provides that action required or permitted to be
taken by stockholders must be taken at an annual or special meeting of
stockholders and may not be effected by any written consent of the stockholders.
The Tucker Charter does not contain a comparable provision.
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THE CHARTER AMENDMENT
The Charter Amendment, if adopted by the stockholders of Patterson at the
Patterson Special Meeting, would increase the number of authorized shares of
Patterson Common Stock from 5,000,000 shares to 9,000,000 shares. Currently,
Patterson does not have a sufficient number of authorized, but unissued and
unreserved, shares of Patterson Common Stock to effect the Merger. Accordingly,
approval of the Charter Amendment is necessary for consummation of the Merger.
The following table sets forth the number of issued and outstanding and reserved
shares of Patterson Common Stock on the Patterson Record Date and the number of
shares of Patterson Common Stock that will be issued and outstanding and
reserved if the Charter Amendment is approved and the Merger is consummated:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------
BEFORE AFTER
MERGER MERGER
-------- --------
<S> <C> <C>
Authorized.......................................................... 5,000,000 9,000,000
Issued and outstanding.............................................. 3,194,951 4,751,967
Reserved:
Patterson stock options and warrants.............................. 480,315 480,315
Tucker Stock Options (Substituted Options)........................ 95,090
--------- ---------
Unissued and unreserved............................................. 1,324,734 3,672,628
========= =========
</TABLE>
If the stockholders of Patterson approve the Charter Amendment and the
Stock Issuance and the Merger is consummated, Patterson, immediately following
the Merger, would have 3,672,628 unissued and unreserved shares of Patterson
Common Stock of the then authorized 9,000,000 shares. The Charter Amendment, if
approved by the Patterson stockholders at the Patterson Special Meeting, will be
effected whether or not the Merger is consummated. Accordingly, if the Merger is
not consummated, but the Charter Amendment is approved, the number of unissued
and unreserved shares of Patterson Common Stock would be 5,324,734 shares. The
unissued and unreserved shares of Patterson Common Stock would be available for
issuance from time to time as may be necessary in connection with future
financings, acquisitions of other companies, stock dividends, stock splits,
other distributions, stock option plans and other employee benefit plans or
other corporate purposes. Patterson currently has no firm plans to issue any of
these unissued and unreserved shares, but, depending upon market conditions and
other factors, Patterson is considering a possible offering of Patterson Common
Stock in the fourth quarter of 1996.
Under Delaware law, the Board of Directors of Patterson generally may issue
authorized but unissued shares of Common Stock without stockholder approval. The
Patterson Board of Directors does not currently intend to seek stockholder
approval prior to any future issuance of the shares, except to the extent
otherwise required by Patterson's Certification of Incorporation, by law or by
the Nasdaq National Market or any securities exchange on which the Patterson
Common Stock may be listed at that time. The authorization of additional shares
of Patterson Common Stock will enable Patterson, as the need may arise, to take
timely advantage of market conditions and the availability of favorable
opportunities without the delay and expense associated with the holding of a
special meeting of its stockholders or of waiting for the regularly scheduled
annual meeting of stockholders in order to increase the authorized shares of
Patterson Common Stock. The Patterson Board of Directors does not intend to
issue any shares of Patterson Common Stock except on terms which the Board deems
to be in the best interest of Patterson and its stockholders. Existing
stockholders of Patterson will have no preemptive rights to purchase any shares
of Patterson Common Stock issued in connection with the Merger or in the future.
See "Description of Patterson Capital Stock--Patterson Common Stock."
The issuance in acquisitions or other transactions following the Merger of
the unissued and unreserved shares may dilute the present equity ownership
position of current holders of Patterson Common Stock and Tucker Common Stock,
could have a dilutive effect on the book value and earnings per share of
Patterson Common Stock, and could affect the relative voting rights of those
stockholders. See "Comparative Per Common Share Data of Patterson Energy, Inc.
and Tucker Drilling Company, Inc.," regarding the impact of the Merger on the
Patterson Common Stock on an unaudited historical basis.
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Although the increase in the authorized but unissued shares of Patterson
Common Stock pursuant to the Charter Amendment could, under certain
circumstances, have the effect of deterring attempts to acquire control of
Patterson, Patterson believes that the increase in the number of authorized
shares is essential to the achievement of corporate objectives. The proposed
amendment is not being presented as, nor is it part of, a plan to adopt a series
of anti-takeover measures. Patterson is not currently aware of any pending or
proposed takeover attempt. See "Description of Patterson Capital Stock--Certain
Provisions Affecting Patterson Stockholders."
INDEPENDENT ACCOUNTANTS
It is expected that representatives of Coopers & Lybrand L.L.P. will be
present at the Patterson Special Meeting and representatives of Arthur Andersen
LLP will be present at the Tucker Special Meeting to respond to appropriate
questions of stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the Patterson Common Stock offered hereby has been passed
upon for Patterson by Baker & Hostetler, Denver, Colorado. Certain tax
consequences of the Merger will be passed upon for Tucker by Gardere & Wynne,
L.L.P., Dallas, Texas.
EXPERTS
The consolidated balance sheets of Patterson as of December 31, 1994 and
1995 and the consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995,
included in the Patterson 1995 Form 10-KSB, incorporated by reference in this
Prospectus/Joint Proxy Statement and included as Annex IV herein, 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, 1995 and 1996, and for
each of the two years then ended included in the Tucker 1996 Form 10-KSB,
incorporated by reference in this Prospectus/Joint Proxy Statement and included
as Annex VII herein, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
STOCKHOLDERS' PROPOSALS
Any proposals of holders of Patterson Common Stock intended to be presented
at the Annual Meeting of Stockholders of Patterson to be held in 1997 must be
received by Patterson at its principal executive offices no later than December
31, 1996, to be considered for inclusion in the proxy statement and form of
proxy relating to that meeting.
If the Merger is not consummated, any proposals of stockholders of Tucker
intended to be presented at the Annual Meeting of Stockholders of Tucker to be
held in 1997 must have been received by Tucker at is principal executive offices
no later than March 1, 1997, to be considered for inclusion in the proxy
statement and form of proxy relating to that meeting.
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GLOSSARY OF INDUSTRY TERMS
The following are definitions of certain industry terms used in this
Prospectus/Joint Proxy Statement:
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 rates of six Mcf of natural
gas (including natural gas liquids) to one Bbl of
crude oil or condensate.
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.
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.
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 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
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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.
Prospect................... A lease or group of leases containing possible
reserves, capable of producing crude oil, natural
gas or natural gas liquids in commercial
quantities, either at the time of acquisition, or
after vertical or horizontal drilling, completion
of workovers, recompletions or operational
modifications.
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.
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.
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ANNEX I
CONFORMED COPY
AGREEMENT AND PLAN OF MERGER
AMONG
PATTERSON ENERGY, INC.
PATTERSON DRILLING COMPANY
AND
TUCKER DRILLING COMPANY, INC.
<PAGE> 79
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
THE MERGER............................................................................ 1
SECTION 1.1 The Merger......................................................... 1
SECTION 1.2 Effective Time..................................................... 1
SECTION 1.3 Effects of the Merger.............................................. 1
SECTION 1.4 Certificate of Incorporation, By-laws and Directors................ 1
SECTION 1.5 Conversion of Securities........................................... 2
SECTION 1.6 Parent to Make Certificates Available.............................. 2
SECTION 1.7 Dividends; Transfer Taxes.......................................... 2
SECTION 1.8 No Fractional Securities........................................... 3
SECTION 1.9 Return of Exchange Fund............................................ 3
SECTION 1.10 Adjustment of Exchange Ratio....................................... 3
SECTION 1.11 No Further Ownership Rights in Company Common Stock................ 3
SECTION 1.12 Closing of Company Transfer Books.................................. 4
SECTION 1.13 Further Assurances................................................. 4
SECTION 1.14 Closing............................................................ 4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT.............................................. 4
SECTION 2.1 Organization, Standing and Power................................... 4
SECTION 2.2 Capital Structure.................................................. 4
SECTION 2.3 Authority; Non-Contravention....................................... 5
SECTION 2.4 SEC Documents...................................................... 6
SECTION 2.5 Engineering Reports................................................ 6
SECTION 2.6 S-4 Registration Statement and Joint Proxy Statement............... 7
SECTION 2.7 Absence of Material Adverse Change................................. 7
SECTION 2.8 Pooling of Interests; Reorganization............................... 7
SECTION 2.9 Taxes.............................................................. 8
SECTION 2.10 Title to Property.................................................. 8
SECTION 2.11 Employee Benefit Plans............................................. 9
SECTION 2.12 Labor Matters...................................................... 9
SECTION 2.13 Environmental Matters.............................................. 9
SECTION 2.14 Agreements......................................................... 10
SECTION 2.15 Litigation......................................................... 10
SECTION 2.16 Governmental Licenses and Permits; Compliance with Law............. 11
SECTION 2.17 Required Vote of Parent Stockholders............................... 11
SECTION 2.18 Parent Action...................................................... 11
SECTION 2.19 Opinion of Financial Advisors...................................... 11
SECTION 2.20 Brokers............................................................ 11
</TABLE>
-i-
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................... 11
SECTION 3.1 Organization, Standing and Power................................... 11
SECTION 3.2 Capital Structure.................................................. 11
SECTION 3.3 Authority; Non-Contravention....................................... 12
SECTION 3.4 SEC Documents...................................................... 13
SECTION 3.5 Engineering Reports................................................ 13
SECTION 3.6 S-4 Registration Statement and Joint Proxy Statement............... 13
SECTION 3.7 Absence of Material Adverse Change................................. 13
SECTION 3.8 Pooling of Interests; Reorganization............................... 14
SECTION 3.9 Taxes.............................................................. 14
SECTION 3.10 Title to Property.................................................. 14
SECTION 3.11 Employee Benefit Plans; Employment Agreements...................... 14
SECTION 3.12 Labor Matters...................................................... 15
SECTION 3.13 Environmental Matters.............................................. 15
SECTION 3.14 Agreements......................................................... 16
SECTION 3.15 Litigation......................................................... 16
SECTION 3.16 Governmental Licenses and Permits; Compliance with Law............. 16
SECTION 3.17 Required Vote of the Company Stockholders.......................... 16
SECTION 3.18 Company Action..................................................... 16
SECTION 3.19 Section 203 of the DGCL Not Applicable............................. 16
SECTION 3.20 Opinion of Financial Advisor....................................... 16
SECTION 3.21 Brokers............................................................ 17
SECTION 3.22 Amended and Restated Severance Pay Agreement....................... 17
SECTION 3.23 Retirement Plan Settlement Agreement............................... 17
ARTICLE IV
REPRESENTATIONS AND WARRANTIES REGARDING SUB.......................................... 17
SECTION 4.1 Organization and Standing.......................................... 17
SECTION 4.2 Capital Structure.................................................. 17
SECTION 4.3 Authority; Non-Contravention....................................... 17
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS............................................. 18
SECTION 5.1 Conduct of Business Pending the Merger............................. 18
SECTION 5.2 No Solicitation.................................................... 19
SECTION 5.3 Pooling of Interests; Reorganization............................... 20
SECTION 5.4 Conduct of Business of Sub Pending the Merger...................... 20
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VI
ADDITIONAL AGREEMENTS................................................................. 20
SECTION 6.1 Stockholder Approval............................................... 20
SECTION 6.2 S-4 Registration Statement and Joint Proxy Statement; S-8
Registration Statement............................................. 21
SECTION 6.3 Access to Information.............................................. 21
SECTION 6.4 Compliance with the Securities Act; Pooling........................ 22
SECTION 6.5 Nasdaq National Market............................................. 22
SECTION 6.6 Fees and Expenses.................................................. 22
SECTION 6.7 Company Stock Options.............................................. 24
SECTION 6.8 Reasonable Efforts................................................. 24
SECTION 6.9 Public Announcements............................................... 25
SECTION 6.10 Indemnification.................................................... 25
SECTION 6.11 Employee Benefits.................................................. 25
SECTION 6.12 Tax Matters........................................................ 25
SECTION 6.13 Restrictions on Registration of Parent Common Stock................ 25
ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER.................................................... 26
SECTION 7.1 Conditions to Each Party's Obligation to Effect the Merger......... 26
SECTION 7.2 Conditions to Obligation of the Company to Effect the Merger....... 26
SECTION 7.3 Conditions to Obligations of Parent and Sub to Effect the Merger... 28
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER..................................................... 31
SECTION 8.1 Termination........................................................ 31
SECTION 8.2 Effect of Termination.............................................. 32
SECTION 8.3 Amendment.......................................................... 32
SECTION 8.4 Waiver............................................................. 32
ARTICLE IX
GENERAL PROVISIONS.................................................................... 32
SECTION 9.1 Non-Survival of Representations and Warranties..................... 32
SECTION 9.2 Non-Survival of Covenants Relating to Conduct of Business or
Additional Agreements.............................................. 32
SECTION 9.3 Notices............................................................ 32
SECTION 9.4 Interpretation..................................................... 33
SECTION 9.5 Counterparts....................................................... 33
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries..................... 33
SECTION 9.7 Governing Law...................................................... 33
SECTION 9.8 Assignment......................................................... 34
SECTION 9.9 Severability....................................................... 34
SECTION 9.10 Enforcement of This Agreement...................................... 34
SECTION 9.11 Jurisdiction and Venue............................................. 34
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 22, 1996 (this
"Agreement"), among Patterson Energy, Inc., a Delaware corporation ("Parent"),
Patterson Drilling Company, a Delaware corporation and a wholly-owned subsidiary
of Parent ("Sub"), and Tucker Drilling Company, Inc., a Delaware corporation
(the "Company") (Sub and the Company being hereinafter collectively referred to
as the "Constituent Corporations").
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved and declared fair to and advisable and in the best interests of
their respective stockholders the merger of Sub with and into the Company (the
"Merger"), upon the terms and subject to the conditions set forth herein,
whereby each issued and outstanding share of Common Stock, par value $.01 per
share, of the Company ("Company Common Stock") not owned directly or indirectly
by Parent or the Company, will be converted into shares of Common Stock, par
value $.01 per share, of Parent ("Parent Common Stock");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a pooling of interests; and
WHEREAS, Parent, Sub and the Company desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the General Corporation Law of the State of
Delaware (the "DGCL"), Sub shall be merged with and into the Company at the
Effective Time (as hereinafter defined). Following the Merger, the separate
corporate existence of Sub shall cease and the Company shall continue as the
surviving corporation (the "Surviving Corporation") under the name "Patterson
Drilling Company" and shall succeed to and assume all the rights and obligations
of Sub in accordance with the DGCL.
SECTION 1.2 Effective Time. The Merger shall become effective when the
Certificate of Merger (the "Certificate of Merger"), executed in accordance with
the relevant provisions of the DGCL, is filed with the Secretary of State of the
State of Delaware; provided, however, that, upon mutual consent of the
Constituent Corporations, the Certificate of Merger may provide for a later date
of effectiveness of the Merger not more than 30 days after the date the
Certificate of Merger is filed. When used in this Agreement, the term "Effective
Time" shall mean the later of the date and time at which the Certificate of
Merger is accepted for record or such later time established by the Certificate
of Merger. The filing of the Certificate of Merger shall be made as soon as
practicable after the satisfaction or waiver of the conditions to the Merger set
forth herein.
SECTION 1.3 Effects of the Merger. The Merger shall have the effects set
forth in Section 259 of the DGCL.
SECTION 1.4 Certificate of Incorporation, By-laws and Directors. The
Certificate of Incorporation and By-laws of Sub, as in effect immediately prior
to the Effective Time, shall be the Certificate of Incorporation and By-laws of
the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law. The directors of Sub at the Effective Time shall
be the directors of the Surviving
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Corporation until their respective successors have been duly elected or
appointed in accordance with the Certificate of Incorporation and By-laws of the
Surviving Corporation or by applicable law.
SECTION 1.5 Conversion of Securities. As of the Effective Time, by virtue
of the Merger and without any action on the part of any stockholder of the
Company:
(a) All shares of Company Common Stock that are held in the treasury
of the Company and any shares of Company Common Stock owned by Parent, Sub
or any other wholly-owned Subsidiary (as hereinafter defined) of Parent
shall be cancelled and no capital stock of Parent or other consideration
shall be delivered in exchange therefor.
(b) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, par value $.01 per share, of the Surviving Corporation.
(c) Subject to the provisions of Sections 1.8 and 1.10 hereof, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Time (other than shares to be cancelled in accordance with
Section 1.5(a)) shall be converted into 0.74 of a share (the "Exchange
Ratio") of validly issued, fully paid and nonassessable shares of Parent
Common Stock. All such shares of Company Common Stock, when so converted,
shall no longer be outstanding and shall automatically be cancelled and
retired and each holder of a Certificate (as defined in Section 1.6(a))
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive certain dividends and other
distributions as contemplated by Section 1.7 and shares of Parent Common
Stock and any cash, without interest, in lieu of fractional shares to be
issued or paid in consideration therefor upon the surrender of such
Certificate in accordance with Section 1.6.
SECTION 1.6 Parent to Make Certificates Available.
(a) Exchange of Certificates. Parent and the Company shall authorize
Continental Stock Transfer & Trust Company, New York, New York (or such
other person or persons as shall be reasonably acceptable to Parent and the
Company) to act as Exchange Agent hereunder (the "Exchange Agent"). As of
the Effective Time, Parent shall deposit with the Exchange Agent for the
benefit of the holders of certificates which immediately prior to the
Effective Time represented shares of Company Common Stock (the
"Certificates") certificates representing the shares of Parent Common Stock
(such shares of Parent Common Stock, together with any dividends or other
distributions with respect thereto referenced in Section 1.7, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to
Section 1.5(c) in exchange for outstanding shares of Company Common Stock.
(b) Exchange Procedures. Promptly after the Effective Time, the
Exchange Agent shall mail to each holder of record of a Certificate whose
shares were converted pursuant to Section 1.5 into shares of Parent Common
Stock a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificate shall pass, only
upon actual and proper delivery of the Certificate to the Exchange Agent
and shall contain instructions for use in effecting the surrender of the
Certificate in exchange for certificates representing shares of Parent
Common Stock and shall be in such form and contain such other provisions as
Parent and the Company may reasonably specify). Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with such
letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor a certificate representing that
number of whole shares of Parent Common Stock which such holder has the
right to receive pursuant to this Article 1, and the Certificate so
surrendered shall forthwith be cancelled. Until surrendered as contemplated
by this Section 1.6, each Certificate shall, at and after the Effective
Time, be deemed to represent only the right to receive, upon surrender of
such Certificate, the certificate representing the appropriate number of
shares of Parent Common Stock, cash in lieu of fractional shares, if any,
as provided in Section 1.8 and any dividends or other distributions
referenced in Section 1.7.
SECTION 1.7 Dividends; Transfer Taxes. No dividends or other
distributions that may be declared on or after the Effective Time on Parent
Common Stock or are payable to the holders of record thereof on or after the
Effective Time will be paid to persons entitled by reason of the Merger to
receive certificates
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representing Parent Common Stock until such persons surrender their
Certificates, as provided in Section 1.6, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 1.8 until
such holder of such Certificate shall so surrender such Certificate. Subject to
the effect of applicable law, there shall be paid to the record holder of the
certificates representing such Parent Common Stock (i) at the time of such
surrender or as promptly as practicable thereafter, the amount of any dividends
or other distributions theretofore paid with respect to whole shares of such
Parent Common Stock and having a record date on or after the Effective Time and
a payment date prior to such surrender and (ii) at the appropriate payment date
or as promptly as practicable thereafter, the amount of dividends or other
distributions payable with respect to whole shares of Parent Common Stock and
having a record date on or after the Effective Time but prior to surrender and a
payment date subsequent to surrender. In no event shall the person entitled to
receive such dividends or other distributions be entitled to receive interest on
such dividends or other distributions. If any cash or certificate representing
shares of Parent Common Stock is to be paid to or issued in a name other than
that in which the Certificate surrendered in exchange therefor is registered, it
shall be a condition of such exchange that the Certificate so surrendered shall
be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange shall pay to the Exchange Agent any transfer or
other taxes required by reason of the issuance of certificates for such shares
of Parent Common Stock in a name other than that of the registered holder of the
Certificate surrendered, or shall establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable.
SECTION 1.8 No Fractional Securities. No certificates or scrip
representing fractional shares of Parent Common Stock shall be issued upon the
surrender for exchange of Certificates pursuant to this Article 1, and no Parent
dividend or other distribution or stock split or combination shall relate to any
fractional security, and such fractional interests shall not entitle the owner
thereof to vote or to any rights of a security holder of Parent. In lieu of any
such fractional securities, each holder of shares of Company Common Stock who
would otherwise have been entitled to receive a fraction of a share of Parent
Common Stock (after taking into account all shares of Company Common Stock then
held of record by such holder) shall receive cash (without interest) in an
amount equal to the product of such fractional part of a share of Company Common
Stock multiplied by the Closing Price. As used in this Agreement, (i) "Closing
Price" means the average of the daily closing price of Parent Common Stock,
rounded to four decimal places, as reported under Nasdaq National Market Issues
Reports in The Wall Street Journal for each of the first 20 consecutive Trading
Days in the period commencing 25 Trading Days prior to the date of the Closing
and (ii) "Trading Day" means a day on which the National Association of
Securities Dealers, Inc., National Market ("Nasdaq National Market") is open for
trading.
SECTION 1.9 Return of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the former stockholders of the Company for one
year after the Effective Time shall be delivered to Parent, upon demand of
Parent, and any former stockholders of the Company who have not theretofore
complied with this Article I shall thereafter look only to Parent for payment of
their claim for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock. None of Parent, the Company or the Surviving Corporation shall be
liable to any holder of shares of Company Common Stock for shares (or any
dividends or other distributions with respect thereto) or cash in lieu of
fractional shares of Parent Common Stock delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.
SECTION 1.10 Adjustment of Exchange Ratio. Subject to Section 5.1(a), in
the event of any reclassification, recapitalization, stock split, stock
combination, stock dividend or share exchange with respect to Parent Common
Stock or Company Common Stock, as the case may be, (or if a record date with
respect to any of the foregoing should occur) prior to the Effective Time,
appropriate and proportionate adjustments, if any, shall be made to the Exchange
Ratio, and all references to the Exchange Ratio in this Agreement shall be
deemed to be to the Exchange Ratio as so adjusted.
SECTION 1.11 No Further Ownership Rights in Company Common Stock. All
shares of Parent Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms hereof (including any cash paid
pursuant to Sections 1.7 or 1.8) shall be deemed to have been issued in full
satisfaction of all rights pertaining to the shares of Company Common Stock.
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SECTION 1.12 Closing of Company Transfer Books. At the Effective Time,
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall thereafter be made. If, after the Effective
Time, Certificates are presented to the Surviving Corporation, they shall be
cancelled and exchanged as provided in this Article 1.
SECTION 1.13 Further Assurances. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation, its right, title or interest in, to or
under any of the rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (b) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of either of the Constituent Corporations in the Merger,
all such deeds, bills of sale, assignments and assurances and do, in the name
and on behalf of such Constituent Corporations, all such other acts and things
necessary, desirable or proper to vest, perfect or confirm its right, title or
interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of such Constituent Corporation and otherwise to carry out
the purposes of this Agreement.
SECTION 1.14 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Gardere &
Wynne, L.L.P., 3000 Thanksgiving Tower, Dallas, Texas at 10:00 a.m. local time,
on the second business day after the day on which the last of the conditions set
forth in Article VII hereof shall have been fulfilled or waived or at such other
time and place as Parent and the Company shall agree.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company as follows:
SECTION 2.1 Organization, Standing and Power. Parent is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted. Parent and each of its Subsidiaries (as
hereinafter defined) is duly qualified to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Parent. For purposes of this
Agreement (a) "Material Adverse Change" or "Material Adverse Effect" means, when
used with respect to Parent or the Company, as the case may be, any change or
effect that is or, so far as can reasonably be determined, is likely to be
materially adverse to the assets, properties, condition (financial or
otherwise), business or results of operations of Parent and its Subsidiaries
taken as a whole or the Company, as the case may be, and (b) "Subsidiary" means
any corporation, partnership, joint venture or other legal entity of which
Parent or the Company, as the case may be (either alone or through or together
with any other Subsidiary), owns, directly or indirectly, 50% or more of the
stock or other equity interests the holders of which are generally entitled to
vote for the election of the board of directors or other governing body of such
corporation or other legal entity.
SECTION 2.2 Capital Structure. As of the date hereof, the authorized
capital stock of Parent consists of 5,000,000 shares of Parent Common Stock and
1,000,000 shares of Preferred Stock, par value $0.01 per share ("Parent
Preferred Stock"). At the close of business on April 19, 1996, (i) 3,194,951
shares of Parent Common Stock were validly issued and outstanding, fully paid
and nonassessable and free of preemptive rights, (ii) 451,315 shares of Parent
Common Stock were reserved for issuance upon the exercise of then outstanding
options and warrants for Parent Common Stock, including options granted under
the Parent's 1993 Stock Incentive Plan and Non-Employee Directors' Stock Option
Plan to purchase 176,000 shares of Parent Common Stock, (iii) 29,000 additional
shares of Parent Common Stock were reserved for issuance under Parent's 1993
Stock Incentive Plan and the Non-Employee Directors' Stock Option Plan, (iv) no
shares of Parent Common Stock are held by Parent in its treasury or owned by any
of
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Parent's Subsidiaries and (v) no shares of Parent Preferred Stock are issued and
outstanding or reserved for issuance. There are no outstanding stock
appreciation rights ("SARs"). Parent Common Stock is designated as a national
market security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. All of the shares of Parent Common Stock issuable in
exchange for Company Common Stock at the Effective Time in accordance with this
Agreement and issuable upon exercise of Substituted Options (as defined in
Section 6.7) will be, when so issued, duly authorized, validly issued, fully
paid and nonassessable and free of preemptive rights. Except for (a) options
granted pursuant to Parent's 1993 Stock Incentive Plan and the Non-Employee
Directors' Stock Option Plan, (b) as set forth in Section 2.2. of the disclosure
schedule of Parent dated as of the date hereof, previously delivered to the
Company (the "Parent Disclosure Schedule"), and (c) any Substituted Options (as
hereinafter defined), there are no options, warrants, rights, commitments,
agreements, arrangements or undertakings of any kind to which Parent or any of
its Subsidiaries is a party or by which any of them is bound obligating Parent
or any of its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of Parent or of any of its Subsidiaries. True and correct copies of all
agreements, instruments and other governing documents relating to the Parent's
1993 Stock Incentive Plan, Non-Employee Directors' Stock Option Plan and the
other options and warrants outstanding to purchase Parent Common Stock as set
forth in Section 2.2. of the Parent Disclosure Schedule have been furnished to
the Company.
SECTION 2.3 Authority; Non-Contravention. The Board of Directors of
Parent has declared fair to and advisable and in the best interests of the
stockholders of Parent an amendment to Parent's Certificate of Incorporation to
increase the number of authorized shares of Parent Common Stock to 9,000,000
shares (the "Charter Amendment") and the issuance of shares of Parent Common
Stock pursuant to the Merger and any Substituted Options (the "Share Issuance").
Parent has all requisite power and authority to enter into this Agreement and,
subject to the approval of the Charter Amendment and the Share Issuance by the
stockholders of Parent, to consummate the Merger and the other transactions
contemplated hereby. The execution and delivery by Parent of this Agreement and
any Stock Option Assumption Agreements (as defined in Section 6.7) and the
consummation by Parent of the transactions contemplated hereby and thereby have
been duly authorized by all necessary corporate action on the part of Parent,
subject to such approval of the Charter Amendment and the Share Issuance by the
stockholders of Parent. This Agreement has been duly executed and delivered by
Parent and (assuming the valid authorization, execution and delivery of this
Agreement by the Company) constitutes a valid and binding obligation of Parent
enforceable against Parent in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the effect
of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). The Charter Amendment, the
Share Issuance, the filing of a registration statement with the United States
Securities and Exchange Commission (the "SEC") by Parent on Form S-4 under the
Securities Act of 1933, as amended (together with the rules and regulations
promulgated thereunder, the "Securities Act"), for the purpose of registering
the shares of Parent Common Stock to be issued in the Merger (together with any
amendments or supplements thereto, the "S-4 Registration Statement"), and the
filing of a registration statement with the SEC by Parent on Form S-8 under the
Securities Act for the purpose of registering the shares of Parent Common Stock
issuable upon exercise of the Substituted Options (as hereinafter defined in
Section 6.7) have been duly authorized by Parent's Board of Directors. Except as
set forth in Section 2.3 of the Parent Disclosure Schedule, the execution and
delivery of this Agreement or any Stock Option Assumption Agreements or any
Amended and Restated Severance Pay Agreement to which the Company and Parent are
parties (the "Restated Severance Agreements") do not or will not, as the case
may be, and the consummation of the transactions contemplated hereby and thereby
and compliance with the provisions hereof and thereof will not, conflict with,
or result in any violation of, or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Parent or any of its Subsidiaries under,
any provision of (i) the Certificate of Incorporation or By-laws (true and
complete copies of which as of the date hereof have been delivered to the
Company) of Parent or any provision of the comparable charter or organization
documents of any of its Subsidiaries, (ii) any loan or
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credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Parent or any
of its Subsidiaries or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Parent or any of its Subsidiaries or
any of their respective properties or assets, other than, in the case of clauses
(ii) or (iii), any such conflicts, violations, defaults, rights, losses, liens,
security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on Parent, materially impair
the ability of Parent to perform its obligations hereunder or under the Stock
Option Assumption Agreements or the Restated Severance Agreements or prevent the
consummation of any of the transactions contemplated hereby or thereby. Except
as set forth on Section 2.3 of the Parent Disclosure Schedule, no filing or
registration with, or authorization, consent or approval of, any domestic
(federal and state), foreign or supranational court, commission, governmental
body, regulatory agency, authority or tribunal (a "Governmental Entity") is
required by or with respect to Parent or any of its Subsidiaries in connection
with the execution and delivery of this Agreement by Parent or is necessary for
the consummation by Parent or Sub of the Merger and the other transactions
contemplated by this Agreement and the issuance of Parent Common Stock pursuant
to the Stock Option Assumption Agreements, except for (i) in connection, or in
compliance, with the provisions of the Securities Act and the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder, the "Exchange Act"), (ii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware and recording of
the Certificate of Merger in the appropriate county in Delaware after the filing
thereof with the Secretary of State of the State of Delaware and the filing or
recording of appropriate documents with the relevant authorities of other states
in which the Company is qualified to do business, (iii) such filings and
consents as may be required under any environmental, health or safety law or
regulation pertaining to any notification, disclosure or required approval
triggered by the Merger or the transactions contemplated by this Agreement, (iv)
such filings as may be required in connection with applicable taxes, (v) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under the corporation, takeover or "Blue Sky" laws of
various states, and (vi) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse Effect
on Parent, materially impair the ability of Parent or Sub to perform its
obligations hereunder or prevent the consummation of any of the transactions
contemplated hereby.
SECTION 2.4 SEC Documents. Parent has filed all required documents with
the SEC since January 1, 1994 (the "Parent SEC Documents"). As of their
respective dates, the Parent SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and none of the Parent SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The consolidated financial statements of
Parent included in the Parent SEC Documents comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles (except, in the case of the
unaudited statements, as permitted by Form 10-QSB of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated therein
or in the notes thereto) and fairly present the consolidated financial position
of Parent and its consolidated Subsidiaries as at the dates thereof and the
consolidated results of their operations and statements of cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and to any other adjustments described therein).
There is no liability or obligation of any kind, whether accrued, absolute,
fixed or contingent, of Parent or any Subsidiary of Parent of which the
executive officers of Parent have knowledge and which is required by generally
accepted accounting principles to be reflected or reserved against or otherwise
disclosed in the most recent financial statements of Parent included in the
Parent SEC Documents which is not so reflected or reserved against that
individually or in the aggregate would have a Material Adverse Effect on Parent.
SECTION 2.5 Engineering Reports. All information supplied to M. Brian
Wallace, an independent petroleum engineer, by or on behalf of Parent and its
Subsidiaries that was material to such engineer's review of Parent's estimates
of oil and gas reserves attributable to the Oil and Gas Interests (as defined)
of Parent and its Subsidiaries in connection with the preparation of the oil and
gas reserve engineering report concerning
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the Oil and Gas Interests of Parent and its Subsidiaries as of December 31, 1995
reviewed by M. Brian Wallace (the "Parent Engineering Report") was (at the time
supplied or as modified or amended prior to the issuance of the Parent
Engineering Report) true and correct in all material respects. For purposes of
this Agreement "Oil and Gas Interests" means, when used with respect to Parent
and each of its Subsidiaries or the Company, as the case may be, direct and
indirect interests in and rights with respect to oil, gas, helium, carbon
dioxide, mineral, and related properties and assets of any kind and nature,
direct or indirect, including working, royalty and overriding royalty interests,
production payments, operating rights, net profit interests, other nonworking
interests, and nonoperating interests; all interests in and rights with respect
to oil, condensate, gas, casinghead gas, helium, carbon dioxide and other liquid
or gaseous hydrocarbons (collectively, "Hydrocarbons") and other minerals or
revenues therefrom and all contracts in connection therewith and claims and
rights thereto (including all oil and gas leases, operating agreements,
unitization and pooling agreements and orders, division orders, transfer orders,
mineral deeds, royalty deeds, oil and gas sales, exchange and processing
contracts and agreements, and in each case, interests thereunder), surface
interests, fee interests, reversionary interests, reservations, and concessions;
all easements, rights of way, licenses, permits, leases, and other interests
associated with, appurtenant to, or necessary for the operation of any of the
foregoing; and all interests in equipment and machinery (including well
equipment and machinery), oil and gas production, gathering, transmissions,
treating, processing, and storage facilities (including tanks, tank batteries,
pipelines, and gathering systems), pumps, water plants, electric plants,
gasoline and gas processing plants, refineries, and other tangible personal
property and fixtures associated with, appurtenant to, or necessary for the
operation of any of the foregoing. Except for changes in classification or
values of oil and gas reserve or property interests that occurred in the
ordinary course of business since December 31, 1995, and except for changes
(including changes in commodity prices) generally affecting the oil and gas
industry on a nationwide basis, there has been no Material Adverse Change in
respect of Parent regarding the matters addressed in the Parent Engineering
Report.
SECTION 2.6 S-4 Registration Statement and Joint Proxy Statement. None of
the information to be supplied by Parent for inclusion or incorporation by
reference in the S-4 Registration Statement or the joint proxy statement
(together with any amendments or supplements thereto, the "Joint Proxy
Statement") relating to the Stockholder Meetings (as defined in Section 6.1)
will (i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading or (ii) in the
case of the Joint Proxy Statement, at the time of the mailing of the Joint Proxy
Statement and at the time of the Stockholder Meetings, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Effective Time any event with respect to Parent, its officers and
directors or any of its Subsidiaries shall occur which is required to be
described in the Joint Proxy Statement or the S-4 Registration Statement, such
event shall be so described, and an amendment or supplement shall be promptly
filed with the SEC and, as required by law, disseminated to the stockholders of
the Company and Parent. The S-4 Registration Statement will comply (with respect
to Parent and its Subsidiaries) as to form in all material respects with the
provisions of the Securities Act, and the Joint Proxy Statement will comply
(with respect to Parent and its Subsidiaries) as to form in all material
respects with the provisions of the Exchange Act.
SECTION 2.7 Absence of Material Adverse Change. Except as disclosed in
the Parent SEC Documents filed with the SEC prior to the date hereof and except
for expenses incurred in connection with the transactions contemplated by this
Agreement, there has not been any Material Adverse Change with respect to Parent
(other than changes in generally accepted accounting principles or
interpretations thereof that affect the oil and gas contract drilling industry
or the oil and gas industry generally or changes in general economic conditions
that affect either of those industries on a nationwide basis).
SECTION 2.8 Pooling of Interests; Reorganization. To the knowledge of
Parent, neither Parent nor Sub has (i) taken any action or failed to take any
action which action or failure to take action would jeopardize the treatment of
Sub's combination with the Company in the Merger as a pooling of interests for
accounting purposes or (ii) taken any action or failed to take any action which
action or failure to take action
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would jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code. Without limiting the foregoing: (i) Sub
is wholly owned directly by Parent, and Sub has never owned or held any assets
and has never incurred any liabilities, except for assets transferred to Sub in
connection with its incorporation, all of which assets will be held by the
Surviving Corporation immediately following the Merger, (ii) Parent has no plan
or intention: to cause the Surviving Corporation to issue any shares of stock
following the Merger, to reacquire any of the Parent Common Stock issued in the
Merger, to liquidate the Surviving Corporation, to merge the Surviving
Corporation with or into another corporation, to sell or otherwise dispose of
any stock of the Surviving Corporation, or to cause the Surviving Corporation to
sell or otherwise dispose of (except in the ordinary course of business) any of
its assets, (iii) following the Merger, the Surviving Corporation will continue
at least one significant historic business line of the Company, or use at least
a significant portion of the Company's historic business assets in a business,
in each case within the meaning of Treas. Reg. Section 1.368-1(d), (iv) neither
Parent nor any of its Subsidiaries own, nor have any of them owned during the
past five years, any capital stock of the Company, (v) Parent and Sub are not
investment companies as defined in Section 368(a)(2)(F)(iii) and (iv) of the
Code; (vi) Sub will have no liabilities assumed by the Company and will not
transfer to the Company any assets subject to liabilities in the Merger; and
(vii) there is no intercorporate indebtedness between the Company and Parent.
SECTION 2.9 Taxes. Except as otherwise set forth in Section 2.9 of the
Parent Disclosure Schedule, (i) all material Tax Returns required to be filed by
Parent and each of its Subsidiaries have been filed or extensions have been duly
obtained; (ii) Tax Returns referred to in clause (i) are true and correct in all
material respects and have been completed in all material respects in accordance
with applicable law; (iii) all Taxes shown to be due on the Tax Returns referred
to in clause (i) have been timely paid or extensions have been duly obtained or
such taxes have been adequately provided for on the applicable entity's balance
sheet or are being timely and properly contested; (iv) neither Parent nor any
Subsidiary has waived any statute of limitations in respect of Taxes of Parent
or such Subsidiary; (v) the Tax Returns referred to in clause (i) relating to
federal and state income Taxes have been examined by the Internal Revenue
Service or the appropriate state taxing authority or the period for assessment
of the Taxes in respect of which such Tax Returns were required to be filed has
expired; (vi) no issues that have been raised in writing by the relevant taxing
authority in connection with the examination of the Tax Returns referred to in
clause (i) are currently pending; (vii) all deficiencies asserted or assessments
made as a result of any examination of the Tax Returns referred to in clause (i)
by a taxing authority have been paid in full or adequately provided for on the
applicable entity's balance sheet or are being timely and properly contested;
and (viii) neither Parent nor any Subsidiary of Parent is a party to an income
Tax allocation or sharing agreement with respect to a group of corporations
filing tax returns on a combined, consolidated or unitary basis. For purposes of
this Agreement, (a) "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
means any federal, state, local or foreign income, gross receipts, property,
sales, use, license, excise, franchise, employment, payroll, withholding,
alternative or added minimum, ad valorem, transfer, severance or excise tax, or
any other tax, custom, duty, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest or penalty, imposed by any
governmental authority and (b) "Tax Return" means any return, report or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
SECTION 2.10 Title to Property. Except as set forth in Section 2.10 of
the Parent Disclosure Schedule, Parent or its Subsidiaries has good and, with
respect to real property, valid title to all of the material assets reflected on
the consolidated financial statements of Parent included in the Parent SEC
Documents as being owned by it or its Subsidiaries and all of the material
assets thereafter acquired by it or its Subsidiaries (except to the extent that
such assets have thereafter been disposed of in the ordinary course of business
consistent with past practice), subject to no liens, mortgages, pledges,
security interests, encumbrances, claims or charges of any kind (collectively,
"Liens") except for (i) Liens for taxes not yet delinquent or the validity of
which is being contested in good faith and (ii) any Liens arising by operation
of law securing obligations not yet overdue. Notwithstanding the foregoing,
title to the Oil and Gas Interests of Parent and its Subsidiaries is of the type
customarily acceptable to prudent investors in Oil and Gas Interests in the area
where such Oil and Gas Interests of Parent and its Subsidiaries are located.
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SECTION 2.11 Employee Benefit Plans. With respect to all the employee
benefit plans and arrangements maintained for the benefit of any current or
former employee, officer or director of Parent or any Subsidiary of Parent
(collectively, the "Parent Plans"), except as set forth in the Parent SEC
Documents and except as would not, individually or in the aggregate, have a
Material Adverse Effect on Parent: (i) none of the Parent Plans is a
multiemployer plan within the meaning of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"); (ii) none of the Parent Plans promises or
provides retiree medical or life insurance benefits to any person, except as
otherwise required by law; (iii) each Parent Plan intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service that it is so qualified and nothing has occurred
since the date of such letter that could reasonably be expected to affect the
qualified status of such Parent Plan; (iv) each Parent Plan has been operated in
all respects in accordance with its terms and the requirements of applicable
law; and (v) neither Parent nor any Subsidiary of Parent has incurred any direct
or indirect liability under, arising out of or by operation of Title IV of ERISA
in connection with the termination of, or withdrawal from, any Parent Plan or
other retirement plan or arrangement, and no fact or event exists that could
reasonably be expected to give rise to any such liability. The aggregate
accumulated benefit obligations of any Parent Plan subject to Title IV of ERISA
do not exceed the fair market value of the assets of such Parent Plan. Except as
set forth in Schedule 2.11 of the Parent Disclosure Schedule, neither Parent nor
any of its Subsidiaries has any Parent Plans or any employment or severance
agreements with any of its employees.
SECTION 2.12 Labor Matters. (i) Neither Parent nor any of its
Subsidiaries is a party to any collective bargaining agreement or other material
contract or agreement with any labor organization or other representative of
employees nor is any such contract being negotiated; (ii) there is no material
unfair labor practice charge or complaint pending nor, to the knowledge of the
executive officers of Parent, threatened, with regard to employees of Parent or
any Subsidiary; (iii) there is no labor strike, material slowdown, material work
stoppage or other material labor controversy in effect, or, to the knowledge of
the executive officers of Parent, threatened against Parent or any of its
Subsidiaries; (iv) as of the date hereof, no representation question exists, nor
to the knowledge of the executive officers of Parent are there any campaigns
being conducted to solicit cards from the employees of Parent or any Subsidiary
of Parent to authorize representation by any labor organization; (v) neither
Parent nor any Subsidiary of Parent is a party to, or is otherwise bound by, any
consent decree with any governmental authority relating to employees or
employment practices of Parent or any Subsidiary of Parent; (vi) Parent and its
Subsidiaries have not incurred any liability under, and have complied in all
respects with, the Worker Adjustment Retraining Notification Act, and no fact or
event exists that could give rise to liability under such Act; and (vii) Parent
and each Subsidiary of Parent are in compliance with all applicable agreements,
contracts and policies relating to employment, employment practices, wages,
hours and terms and conditions of employment of the employees, except where the
failure to be in compliance with each such agreement, contract and policy would
not, either singly or in the aggregate, have a Material Adverse Effect on
Parent.
SECTION 2.13 Environmental Matters. (a) Except as set forth on Section
2.13 of the Parent Disclosure Schedule and except to the extent that the
inaccuracy of any of the following, individually or in the aggregate, would not
have a Material Adverse Effect on Parent, to the knowledge of the executive
officers of Parent:
(i) Parent and its Subsidiaries hold, and are in compliance with and
have been in compliance with for the last three years, all Environmental
Permits, and are otherwise in substantial compliance and have been in
substantial compliance for the last three years with, all applicable
Environmental Laws and there is no condition that is reasonably likely to
prevent or materially interfere prior to the Effective Time with compliance
by Parent and its Subsidiaries with Environmental Laws;
(ii) no modification, revocation, reissuance, alteration, transfer or
amendment of any Environmental Permit, or any review by, or approval of,
any third party of any Environmental Permit is required in connection with
the execution or delivery of this Agreement or the consummation by Parent
of the transactions contemplated hereby or the operation of the business of
Parent or any of its Subsidiaries on the date of the Closing;
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(iii) neither Parent nor any of its Subsidiaries has received any
Environmental Claim, nor has any Environmental Claim been threatened
against Parent or any of its Subsidiaries;
(iv) neither Parent nor any of its Subsidiaries has entered into,
agreed to or is subject to any outstanding judgment, decree, order or
consent arrangement with any governmental authority under any Environmental
Laws, including without limitation those relating to compliance with any
Environmental Laws or to the investigation, cleanup, remediation or removal
of Hazardous Materials;
(v) there are no circumstances that are reasonably likely to give rise
to liability under any agreements with any person pursuant to which Parent
or any Subsidiary of Parent would be required to defend, indemnify, hold
harmless, or otherwise be responsible for any violation by or other
liability or expense of such person, or alleged violation by or other
liability or expense of such person, arising out of any Environmental Law;
and
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability of Parent or any of its
Subsidiaries under any Environmental Laws.
(b) For purposes of this Agreement, the terms below shall have the
following meanings:
"Environmental Claim" means any written complaint, notice, claim,
demand, action, suit or judicial, administrative or arbitral proceeding by
any person to Parent or any of its Subsidiaries (or, for purposes of
Section 3.13, the Company) asserting liability or potential liability
(including without limitation, liability or potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resource damages, property damage, personal injury, fines or penalties)
arising out of, relating to, based on or resulting from (i) the presence,
discharge, emission, release or threatened release of any Hazardous
Materials at any location, (ii) circumstances forming the basis of any
violation or alleged violation of any Environmental Laws or Environmental
Permits, or (iii) otherwise relating to obligations or liabilities of
Parent or any of its Subsidiaries (or, for purposes of Section 3.13, the
Company) under any Environmental Law.
"Environmental Permits" means all permits, licenses, registrations,
exemptions and other governmental authorizations required under
Environmental Laws for Parent or any of its Subsidiaries (or, for purposes
of Section 3.13, the Company) to conduct its operations as presently
conducted.
"Environmental Laws" means all applicable foreign, federal, state and
local statutes, rules, regulations, ordinances, orders, decrees and common
law relating in any manner to pollution or protection of the environment,
to the extent and in the form that such exist at the date hereof.
"Hazardous Materials" means all hazardous or toxic substances, wastes,
materials or chemicals, petroleum (including crude oil or any fraction
thereof) and petroleum products, asbestos and asbestos-containing
materials, pollutants, contaminants and all other materials and substances,
including but not limited to radioactive materials, regulated pursuant to
any Environmental Laws.
SECTION 2.14 Agreements. Except agreements and arrangements made in the
ordinary course of business, neither Parent nor any of its Subsidiaries is bound
by any material contract (as defined in Item 601(b)(10) of SEC Regulation S-K)
to be performed after the date hereof that has not been filed with or
incorporated by reference in the Parent's SEC Documents filed with the SEC prior
to the date of this Agreement.
SECTION 2.15 Litigation. Except as set forth in Section 2.15 of the
Parent Disclosure Schedule and except as disclosed prior to the date hereof in
the Parent SEC Documents, there is no suit, action, investigation or proceeding
pending or, to the knowledge of the executive officers of Parent, threatened
against Parent or any of its Subsidiaries at law or in equity before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or before any arbitrator
of any kind, that would have a Material Adverse Effect on Parent or, with
respect to such matters that are pending or threatened, materially impair the
ability of Parent to perform its obligations hereunder or to consummate the
transactions contemplated hereby, and there is no judgment, decree, injunction,
rule or order of any court, governmental department, commission, board, bureau,
agency,
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instrumentality or arbitrator to which Parent or any of its Subsidiaries is
subject that would have a Material Adverse Effect on Parent or, with respect to
such items that are outstanding and applicable as of the date hereof, materially
impair the ability of Parent to perform its obligations hereunder or to
consummate the transactions contemplated hereby.
SECTION 2.16 Governmental Licenses and Permits; Compliance with
Law. Neither Parent nor any of its Subsidiaries has received notice of any
revocation or modification of any federal, state, local or foreign governmental
license, certification, tariff, permit, authorization or approval, the
revocation or modification of which would have a Material Adverse Effect on
Parent. To the knowledge of the executive officers of Parent, the conduct of the
business of each of Parent and its Subsidiaries complies with all statutes,
laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration
awards applicable thereto, except for violations or failures to comply, if any,
that, individually or in the aggregate, would not have a Material Adverse Effect
on Parent.
SECTION 2.17 Required Vote of Parent Stockholders. The affirmative vote
of the holders of not less than a majority of the outstanding shares of Parent
Common Stock is required to approve the Charter Amendment and the Share
Issuance. No other vote of the stockholders of Parent is required by law, the
Certificate of Incorporation or By-laws of Parent or otherwise in order for
Parent to consummate the Merger and the other transactions contemplated hereby.
SECTION 2.18 Parent Action. The Board of Directors of the Parent (at a
meeting duly called and held) unanimously (1) determined that the Merger is fair
to and advisable and in the best interests of Parent and its stockholders, (b)
approved this Agreement, the Charter Amendment and the Share Issuance, (c)
resolved to recommend adoption of the Charter Amendment and approve the Share
Issuance by Parent's stockholders and (d) directed that the Charter Amendment
and the Share Issuance be submitted to Parent's stockholders.
SECTION 2.19 Opinion of Financial Advisors. On the date hereof, Parent
has received the respective written opinions of TM Capital Corp. and Gilford
Securities Incorporated to the effect that the consideration to be paid by
Parent pursuant to this Agreement and the Exchange Ratio are fair to the
stockholders of Parent from a financial point of view.
SECTION 2.20 Brokers. No broker, investment banker or other person, other
than TM Capital Corp. and Gilford Securities Incorporated, the fees and expenses
of which will be paid by Parent, is entitled to any broker's, finder's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent or Sub.
Parent has previously delivered to the Company a true, correct and complete copy
of any engagement or fee agreement between Parent and its Subsidiaries, on the
one hand, and TM Capital Corp. and Gilford Securities Incorporated on the other.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
SECTION 3.1 Organization, Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to carry on its business as now being conducted. The Company has no
subsidiaries. The Company is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on the Company.
SECTION 3.2 Capital Structure. The authorized capital stock of the
Company consists of 5,000,000 shares of Company Common Stock and 500,000 shares
of Preferred Stock (the "Preferred Stock"), par value $0.01 per share. At the
close of business on April 19, 1996, (i) 2,097,476 shares of Company Common
Stock were issued and outstanding, (ii) 135,100 shares of Company Common Stock
were reserved for issuance upon
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the exercise of then outstanding Company Stock Options (as defined in Section
6.7), (iii) no additional shares of Company Common Stock were reserved for
issuance under Company Stock Options, (iv) no shares of Company Common Stock
were held by the Company in its treasury, and (v) no shares of Preferred Stock
were issued and outstanding or reserved for issuance. There are no outstanding
SARs. All outstanding shares of capital stock of the Company are validly issued,
fully paid and nonassessable and not subject to preemptive rights. Except for
the Company Stock Options outstanding as of the date of this Agreement, there
are no options, warrants, rights, commitments, agreements, arrangements or
undertakings of any kind to which the Company is a party or by which it is bound
obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of the Company. True and correct copies of all agreements, instruments and other
governing documents relating to the Company Stock Options have been furnished to
Parent.
SECTION 3.3 Authority; Non-Contravention. The Board of Directors of the
Company has declared the Merger fair to and advisable and in the best interest
of the stockholders of the Company, and the Company has all requisite power and
authority to enter into this Agreement and, subject to approval of the Merger by
the stockholders of the Company, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of the Company,
subject to such approval of the Merger by the stockholders of the Company. This
Agreement has been duly executed and delivered by the Company and (assuming the
valid authorization, execution and delivery of this Agreement by Parent and Sub)
constitutes a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws of general applicability relating to or affecting
the enforcement of creditors' rights and by the effect of general principles of
equity (regardless of whether enforceability is considered in a proceeding in
equity or at law). Except as set forth in Section 3.3 of the disclosure
statement of the Company dated as of the date hereof, previously delivered to
Parent (the "Company Disclosure Schedule"), the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
and compliance with the provisions hereof will not, conflict with, or result in
any violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company under, any provision of (i) the Certificate
of Incorporation or By-laws of the Company (true and complete copies of which as
of the date hereof have been delivered to Parent), (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its respective properties or
assets, other than, in the case of clauses (ii) or (iii), any such conflicts,
violations, defaults, rights, liens, losses, security interests, charges or
encumbrances that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company, materially impair the ability of the Company to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby. Except as set forth on Schedule 3.3 of the
Company Disclosure Schedule, no filing or registration with, or authorization,
consent or approval of, any Governmental Entity is required by or with respect
to the Company in connection with the execution and delivery of this Agreement
by the Company or is necessary for the consummation by the Company of the Merger
and the other transactions contemplated by this Agreement, except for (i) in
connection, or in compliance, with the provisions of the Securities Act and the
Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and recording of the Certificate of Merger in the
appropriate county in Delaware after the filing thereof with the Secretary of
State of the State of Delaware and the filing or recording of appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business, (iii) such filings and consents as may be required
under any environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or the
transactions contemplated by this Agreement, (iv) such filings as may be
required in connection with applicable taxes, (v) such other consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the
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corporation, takeover or "Blue Sky" laws of various states, and (vi) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings the failure of which to be obtained or made would not, individually or
in the aggregate, have a Material Adverse Effect on the Company, materially
impair the ability of the Company to perform its obligations hereunder or
prevent the consummation of any of the transactions contemplated hereby.
SECTION 3.4 SEC Documents. The Company has filed all required documents
with the SEC since January 1, 1994 (the "Company SEC Documents"). As of their
respective dates, the Company SEC Documents complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as the case may
be, and none of the Company SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except, in
the case of unaudited statements, as permitted by Form 10-QSB of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of the Company as at the dates thereof and the results of their
operations and changes in financial position for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments and to any other adjustments described therein). There is no
liability or obligation of any kind, whether accrued, absolute, fixed or
contingent, of the Company of which the executive officers of the Company have
knowledge and which is required by generally accepted accounting principles to
be reflected or reserved against or otherwise disclosed in the most recent
financial statements of the Company included in the Company SEC Documents which
is not so reflected or reserved against that individually or in the aggregate
would have a Material Adverse Effect on the Company.
SECTION 3.5 Engineering Reports. All information supplied to Badgwell &
Haas, an independent petroleum engineering firm, by or on behalf of the Company
that was material to such firm's preparation of its oil and gas reserve
engineering report dated as of March 31, 1996 (the "Company Engineering Report")
regarding the Oil and Gas Interests of the Company, was (at the time supplied or
as modified or amended prior to the issuance of the Company Engineering Report)
true and correct in all material respects. Except for changes in classification
or values of oil and gas reserve or property interests that occurred in the
ordinary course of business since March 31, 1996, and except for changes
(including changes in commodity prices) generally affecting the oil and gas
industry on a nationwide basis, there has been no Material Adverse Change in
respect of the Company regarding the matters addressed in the Company
Engineering Report.
SECTION 3.6 S-4 Registration Statement and Joint Proxy Statement. None of
the information supplied or to be supplied by the Company for inclusion or
incorporation by reference in the S-4 Registration Statement or the Joint Proxy
Statement will (i) in the case of the S-4 Registration Statement, at the time it
becomes effective and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading or (ii) in
the case of the Joint Proxy Statement, at the time of the mailing of the Joint
Proxy Statement and at the time of the Stockholder Meetings, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. If at any
time prior to the Effective Time any event with respect to the Company, its
officers and directors should occur which is required to be described in an
amendment of, or a supplement to, the Joint Proxy Statement or the S-4
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company and Parent. The S-4 Registration
Statement will comply (with respect to the Company) as to form in all material
respects with the provisions of the Securities Act, and the Joint Proxy
Statement will comply (with respect to the Company) as to form in all material
respects with the provisions of the Exchange Act.
SECTION 3.7 Absence of Material Adverse Change. Except as disclosed in
the Company SEC Documents filed with the SEC prior to the date hereof and except
for expenses incurred in connection with the
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transactions contemplated by this Agreement there has not been any Material
Adverse Change with respect to the Company (other than changes in generally
accepted accounting principles or interpretations thereof that affect the oil
and gas contract drilling industry or the oil and gas industry generally or
changes in general economic conditions that affect either of those industries on
a nationwide basis).
SECTION 3.8 Pooling of Interests; Reorganization. To the knowledge of the
Company, the Company has not (i) taken any action or failed to take any action
which action or failure to take action would jeopardize the treatment of Sub's
combination with the Company in the Merger as a pooling of interests for
accounting purposes or (ii) taken any action or failed to take any action which
action or failure to take action would jeopardize the qualification of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.
Without limiting the foregoing: (i) to the knowledge of the executive officers
of the Company, (x) there is no plan or intention on the part of the holders of
Company Common Stock to sell, exchange, or otherwise dispose of a number of
shares of Parent Common Stock that would cause paragraph 2 of Section 7.03 of
Rev. Proc. 77-37 (as amplified) not to be true as applied to the Merger, and (y)
the only Company stockholders beneficially owning more than 5% of the
outstanding Company Common Stock are as set forth in Section 3.8 of the Company
Disclosure Schedule, (ii) as of the Effective Time and immediately following the
Merger, the Surviving Corporation will hold "substantially all" of the Company's
properties within the meaning of Section 368(a)(2)(E) of the Code and Rev. Proc.
77-37 (as amplified), (iii) there is no intercorporate indebtedness between the
Company and Parent, (iv) immediately following the Merger, the Surviving
Corporation will be wholly owned directly by Parent, and the Surviving
Corporation will not have outstanding any type of right or obligation pursuant
to which any person could acquire capital stock of the Surviving Corporation,
and (v) the Company has no plan or intention for the Surviving Corporation to
issue additional shares of its capital stock following the Merger.
SECTION 3.9 Taxes. Except as otherwise set forth in Section 3.9 of the
Company Disclosure Schedule, (i) all material Tax Returns required to be filed
by the Company have been filed or extensions have been obtained, (ii) Tax
Returns referred to in clause (i) are true and correct in all material respects
and have been completed in all material respects in accordance with applicable
laws, (iii) all Taxes shown to be due on the Tax Returns referred in clause (i)
have been timely paid or extensions have been duly obtained or such Taxes have
been adequately provided for on the Company's balance sheet or are being timely
and properly contested; (iv) the Company has not waived any statute of
limitations in respect of Taxes of the Company; (v) the Tax Returns referred to
in clause (i) relating to federal and state income Taxes have been examined by
the Internal Revenue Service or the appropriate state taxing authority or the
period for assessment of the Taxes in respect of which such Tax Returns were
required to be filed has expired; (vi) no issues that have been raised in
writing by the relevant taxing authority in connection with the examination of
the Tax Returns referred to in clause (i) are currently pending; (vii) all
deficiencies asserted or assessments made as a result of any examination of the
Tax Returns referred to in clause (i) by a taxing authority have been paid in
full or adequately provided for on the Company's balance sheet or are being
timely and properly contested; and (viii) the Company is not a party to an
income Tax allocation or sharing agreement with respect to a group of
corporations filing Tax Returns on a combined, consolidated or unitary basis.
SECTION 3.10 Title to Property. Except as set forth in Schedule 3.10 of
the Company Disclosure Schedule, the Company has good and, with respect to real
property, valid title to all of the material assets reflected on the financial
statements of the Company included in the Company SEC Documents as being owned
by it and all of the material assets thereafter acquired by it (except to the
extent that such assets have thereafter been disposed of in the ordinary course
of business consistent with past practice), subject to no Liens, except for (i)
Liens for taxes not yet delinquent or the validity of which is being contested
in good faith and (ii) any Liens arising by operation of law securing
obligations not yet overdue. Notwithstanding the foregoing, title to the Oil and
Gas Interests of the Company is of the type customarily acceptable to prudent
investors in Oil and Gas Interests in the area where such Oil and Gas Interests
of the Company is located.
SECTION 3.11 Employee Benefit Plans; Employment Agreements. With respect
to all the employee benefit plans, programs and arrangements, including, but not
limited to, the Supplemental Executive Retirement Plan of Tucker Drilling
Company, Inc. effective April 1, 1991, and related trust maintained for the
benefit of any current or former employee, officer or director of the Company
(collectively, the "Company
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Plans"), except as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company: (i) none of the Company Plans is a multiemployer
plan within the meaning of ERISA; (ii) none of the Company Plans promises or
provides retiree medical or life insurance benefits to any person, except as
otherwise required by law; (iii) each Company Plan intended to be qualified
under Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service that it is so qualified and nothing has
occurred since the date of such letter that could reasonably be expected to
affect the qualified status of such Company Plan; (iv) each Company Plan has
been operated in all respects in accordance with its terms and the requirements
of applicable law; and (v) the Company has not incurred any direct or indirect
liability under, arising out of or by operation of Title IV of ERISA in
connection with the termination of, or withdrawal from, any Company Plan or
other retirement plan or arrangement, and no fact or event exists that could
reasonably be expected to give rise to any such liability. The aggregate
accumulated benefit obligations of any Company Plan subject to Title IV of ERISA
do not exceed the fair market value of the assets of such Company Plan. Except
as set forth in Schedule 3.11 of the Company Disclosure Schedule, the Company
has no Company Plans or any employment or severance agreements with any of its
employees.
SECTION 3.12 Labor Matters. (i) The Company is not a party to any
collective bargaining agreement or other material contract or agreement with any
labor organization or other representative of employees nor is any such contract
being negotiated; (ii) there is no material unfair labor practice charge or
complaint pending nor, to the knowledge of the executive officers of the
Company, threatened, with regard to employees of the Company; (iii) there is no
labor strike, material slowdown, material work stoppage or other material labor
controversy in effect, or, to the knowledge of the executive officers of the
Company, threatened against the Company or any of its Significant Subsidiaries;
(iv) as of the date hereof, no representation question exists, nor to the
knowledge of the executive officers of the Company are there any campaigns being
conducted to solicit cards from the employees of the Company to authorize
representation by a labor organization; (v) the Company is not party to, or is
not otherwise bound by, any consent decree with any governmental authority
relating to employees or employment practices of the Company; (vi) the Company
has not incurred any liability under, and has complied in all respects with, the
Worker Adjustment Retraining Notification Act, and no fact or event exists that
could give rise to liability under such Act; and (vii) the Company is in
compliance with all applicable agreements, contracts and policies relating to
employment, employment practices, wages, hours and terms and conditions of
employment of the employees, except where the failure to be in compliance with
each such agreement, contract and policy would not, either singly or in the
aggregate, have a Material Adverse Effect on the Company.
SECTION 3.13 Environmental Matters. Except to the extent that the
inaccuracy of any of the following, individually or in the aggregate, would not
have a Material Adverse Effect on the Company, to the knowledge of the executive
officers of the Company:
(i) the Company holds, and is in compliance with and has been in
compliance with for the last three years, all Environmental Permits, and is
otherwise in substantial compliance and has been in substantial compliance
for the last three years with, all applicable Environmental Laws and there
is no condition that is reasonably likely to prevent or materially
interfere prior to the Effective Time with compliance by the Company with
Environmental Laws;
(ii) no modification, revocation, reissuance, alteration, transfer or
amendment of any Environmental Permit, or any review by, or approval of,
any third party of any Environmental Permit is required in connection with
the execution or delivery of this Agreement or the consummation by the
Company of the transactions contemplated hereby or the operation of the
business of the Company on the date of the Closing;
(iii) the Company has not received any Environmental Claim, nor has
any Environmental Claim been threatened against the Company;
(iv) the Company has not entered into, agreed to or is not subject to
any outstanding judgment, decree, order or consent arrangement with any
governmental authority under any Environmental Laws, including without
limitation those relating to compliance with any Environmental Laws or to
the investigation, cleanup, remediation or removal of Hazardous Materials;
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(v) there are no circumstances that are reasonably likely to give rise
to liability under any agreements with any person pursuant to which the
Company would be required to defend, indemnify, hold harmless, or otherwise
be responsible for any violation by or other liability or expense of such
person, or alleged violation by or other liability or expense of such
person, arising out of any Environmental Law; and
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability of the Company under any
Environmental Laws.
SECTION 3.14 Agreements. Except agreements and arrangements made in the
ordinary course of business, the Company is not bound by any material contract
(as defined in Item 601(b)(1) of SEC Regulation S-K) to be performed after the
date hereof that has not been filed with or incorporated by referenced in the
Company SEC Documents filed with the SEC prior to the date of this Agreement.
SECTION 3.15 Litigation. Except as set forth on Schedule 3.15 of the
Company Disclosure Schedule and except as disclosed prior to the date hereof in
the Company SEC Documents, there is no suit, action, investigation or proceeding
pending or, to the knowledge of the executive officers of the Company,
threatened against the Company at law or in equity before or by any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or before any arbitrator of any
kind, that would have a Material Adverse Effect on the Company or, with respect
to such matters that are pending or threatened as of the date hereof, materially
impair the ability of the Company to perform its obligations hereunder or to
consummate the transactions contemplated hereby, and there is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, board, bureau, agency, instrumentality or arbitrator to which the
Company or any of its Subsidiaries is subject that would have a Material Adverse
Effect on the Company or, with respect to such items that are outstanding and
applicable as of the date hereof, materially impair the ability of the Company
to perform its obligations hereunder or to consummate the transactions
contemplated hereby.
SECTION 3.16 Governmental Licenses and Permits; Compliance with Law. The
Company has not received notice of any revocation or modification of any
federal, state, local or foreign governmental license, certification, tariff,
permit, authorization or approval, the revocation or modification of which would
have a Material Adverse Effect on the Company. To the knowledge of the executive
officers of the Company, the conduct of the business of the Company complies
with all statutes, laws, regulations, ordinances, rules, judgments, orders,
decrees or arbitration awards applicable thereto, except for violations or
failures to comply, if any, that, individually or in the aggregate, would not
have a Material Adverse Effect on the Company.
SECTION 3.17 Required Vote of the Company Stockholders. The affirmative
vote of the holders of not less than a majority of the outstanding shares of the
Company Common Stock is required to adopt this Agreement. No other vote of the
stockholders of the Company is required by law, the Restated Certificate of
Incorporation or By-laws of the Company or otherwise to adopt this Agreement and
approve the Merger and the other transactions contemplated hereby.
SECTION 3.18 Company Action. The Board of Directors of the Company (at a
meeting duly called and held) unanimously (a) determined that the Merger is fair
to and advisable and in the best interests of the Company and its stockholders,
(b) approved this Agreement and the Merger in accordance with the DGCL, (c)
resolved to recommend adoption of this Agreement and approval of the Merger by
the Company's stockholders and (d) directed that this Agreement be submitted to
the Company's stockholders.
SECTION 3.19 Section 203 of the DGCL Not Applicable. The Board of
Directors of the Company has approved the Merger and this Agreement and such
approval is sufficient to render inapplicable to the Merger and the other
transactions contemplated hereby the restrictions contained in Section 203 of
the DGCL.
SECTION 3.20 Opinion of Financial Advisor. On the date hereof the Company
has received the written opinion of Rauscher Pierce Refsnes, Inc. to the effect
that the terms of the Merger are fair to the holders of the Company Common Stock
from a financial point of view.
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SECTION 3.21 Brokers. No broker, investment banker or other person, other
than Rauscher Pierce Refsnes, Inc., the fees and expenses of each which will be
paid by the Company, is entitled to any broker's, finder's or other similar fee
or commission in connection with the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of the Company. The Company has
previously delivered to Parent a true, correct and complete copy of any
engagement or fee agreement between the Company and Rauscher Pierce Refsnes,
Inc.
SECTION 3.22 Amended and Restated Severance Pay Agreement. On or before
the date hereof, each of the persons listed on Schedule 3.22 of the Company
Disclosure Schedule has executed and delivered to the Company an Amended and
Restated Severance Pay Agreement in the form previously delivered to, and
approved by, Parent.
SECTION 3.23 Retirement Plan Settlement Agreement. On or before the date
hereof, each of the persons listed on Section 3.23 of the Company Disclosure
Schedule has executed and delivered the Settlement Agreement Relating to
Payments Under the Supplemental Executive Retirement Plan of Tucker Drilling
Company, Inc. (the "Retirement Plan Settlement Agreement"), in the form
previously delivered to, and approved by, Parent.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES REGARDING SUB
Parent and Sub jointly and severally represent and warrant to the Company
as follows:
SECTION 4.1 Organization and Standing. Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware. Sub was organized solely for the purpose of acquiring the Company
and engaging in the transactions contemplated by this Agreement and has not
engaged in any business since it was incorporated which is not in connection
with the Merger and this Agreement.
SECTION 4.2 Capital Structure. The authorized capital stock of Sub
consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are validly issued and outstanding, fully paid and nonassessable and are
owned by Parent free and clear of all liens, claims and encumbrances.
SECTION 4.3 Authority; Non-Contravention. Sub has the requisite power and
authority to enter into this Agreement and to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement by Sub, the performance by Sub of its obligations hereunder and the
consummation of the transactions contemplated hereby have been duly authorized
by its Board of Directors and Parent as its sole stockholder, and, except for
the corporate filings required by state law, no other corporate proceedings on
the part of Sub are necessary to authorize this Agreement and the Merger and the
other transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Sub and (assuming the due authorization, execution and
delivery hereof by the Company) constitutes a valid and binding obligation of
Sub enforceable against Sub in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the effect
of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). The execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby and compliance with the provisions hereof will not, conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of Sub under, any provision of (i) the
Certificate of Incorporation or By-laws (true and complete copies of which as of
the date hereof have been delivered to the Company) of Sub, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to Sub or (iii)
any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Sub or any of its properties or assets, other than, in the case of
clauses (ii) or (iii), any such conflicts, violations, defaults, rights, losses,
liens, security interests, charges or encumbrances that, individually or in the
aggregate, would
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not have a Material Adverse Effect on Sub, materially impair the ability of Sub
to perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 5.1 Conduct of Business Pending the Merger.
(a) Actions. During the period from the date of this Agreement through the
Effective Time, unless Parent or the Company, as the case may be, shall consent
thereto in writing (which consent will not be unreasonably withheld), each of
the Company and Parent shall, and Parent shall cause its respective Subsidiaries
to, in all material respects carry on its respective businesses in the ordinary
course and consistent with past practice (including with respect to the contract
drilling segment of their operations, drilling rates and length and types of
contracts) and, to the extent consistent therewith and with the terms of this
Agreement, use all reasonable efforts to preserve intact its current business
organizations, keep available the services of its current officers and employees
and preserve its relationships with customers, suppliers and others having
business dealings with it to the end that its goodwill and ongoing businesses
shall be unimpaired at the Effective Time. Without limiting the generality of
the foregoing, prior to the Effective Time, except as otherwise expressly
contemplated by this Agreement (including, but not limited to, Section 5.2 or
Section 5.1 of the Company Disclosure Schedule), each of the Company and Parent
shall not, and Parent shall cause its Subsidiaries not to, without the prior
written consent of the other parties to this Agreement:
(i) (x) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its
respective capital stock, or otherwise make any payments to its respective
stockholders in their capacity as such, (y) split, combine or reclassify
any of its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (z) purchase, redeem or otherwise acquire any shares of
capital stock of each of the Company or Parent, or any of Parent's
Subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities, except in
connection with the terms of their respective stock option plans in
existence on December 31, 1995;
(ii) issue, deliver, sell, pledge, dispose of or otherwise encumber
any shares of its or, in the case of Parent, its Subsidiaries' capital
stock, any other voting securities or equity equivalent or any securities
convertible into, or grant any rights, warrants or options to acquire, any
such shares, voting securities or convertible securities or equity
equivalent (other than, in the case of the Company or Parent, the issuance
of Company Common Stock or Parent Common Stock, as the case may be, during
the period from the date of this Agreement through the Effective Time upon
the exercise of Company Stock Options or Parent stock options or warrants,
as the case may be, outstanding as of the date of this Agreement in
accordance with their current terms);
(iii) amend its Certificate of Incorporation or amend in any material
respects its By-laws, other than the Charter Amendment;
(iv) acquire, merge or consolidate with, or purchase a portion of the
assets of or equity in, any corporation, partnership, association or other
business organization or division thereof or otherwise acquire any assets,
in each case that involves a transaction exceeding $50,000 in the
aggregate, or commence any proceedings with respect thereto, or engage in
any negotiations with any person or entity concerning any such transaction,
except as previously disclosed in writing to Parent or the Company, as the
case may be; provided, however, that the Company and Parent may acquire Oil
and Gas Interests and land drilling rigs and related equipment in the
ordinary course of business consistent with past practice;
(v) except in the ordinary course of business, sell, lease or
otherwise dispose of or agree to sell, lease or otherwise dispose of, any
business or line of business or any of its assets, in each case that are
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material, individually or in the aggregate, to the Company, or to Parent
and its Subsidiaries taken as a whole, respectively;
(vi) make any capital expenditures, except in the ordinary course of
business and as previously disclosed in writing to Parent or the Company,
as the case may be;
(vii) (A) pay, discharge, or satisfy any material claims, liabilities,
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of its
liabilities or its obligations in the ordinary course of business or in
accordance with their terms as in effect on the date hereof, (B) adopt a
plan of complete or partial liquidation or resolutions providing for or
authorizing such a liquidation or a dissolution, restructuring,
recapitalization or reorganization; (C) enter into any collective
bargaining agreement, successor collective bargaining agreement or amended
collective bargaining agreement; (D) change any accounting principle used
by it, except for such changes required to be implemented prior to the
Effective Time pursuant to generally accepted accounting principles or
rules of the SEC; or (E) settle or compromise any litigation brought
against it, other than settlements or compromises of any litigation where
the amount paid in settlement or compromise (including without limitation
the cost to Parent and its Subsidiaries or the Company as the case may be,
of complying with any provision of such settlement or compromise other than
cash payments) does not exceed $100,000, exclusive of amounts covered by
insurance;
(viii) (A) enter into any new, or amend any existing, severance
agreement or arrangement, deferred compensation arrangement or employment
agreement with any officer, director or employee, except that, Parent and
the Company may hire additional employees to the extent deemed by their
respective managements to be in the best interests of Parent or the
Company, as the case may be, provided, that neither the Company nor Parent
may enter into any employment or severance agreement or any deferred
compensation arrangement with any such additional employees, (B) adopt any
new, or amend any existing, incentive, retirement or welfare benefit
arrangements, plans or programs for the benefit of current, former or
retired employees (other than amendments required by law or to maintain the
tax qualified status of such plans under the Code), or (C) grant any
increases in employee compensation, other than in the ordinary course or
pursuant to promotions, in each case consistent with past practice (which
shall include normal individual periodic performance reviews and related
compensation and benefit increases);
(ix) (y) incur any indebtedness for borrowed money or guarantee any
such indebtedness in excess of $4,000,000 or issue or sell any debt
securities or guarantee any debt securities of others or (z) make any
loans, advances (other than joint interest billings) or capital
contributions to, or investments in, any other person, other than to the
Company, to Parent or any wholly-owned Subsidiary of Parent, respectively;
or
(x) authorize or enter into any agreement to do any of the foregoing.
(b) Advice of Changes. Each of the Company and Parent shall promptly
advise the other such party orally and in writing of any change or event which
would have a Material Adverse Effect on the Company or Parent, respectively, or
would prohibit the Merger or the other transactions contemplated hereby.
SECTION 5.2 No Solicitation. From and after the date hereof, the Company
will not, and will cause its officers, directors, employees, agents and other
representatives not to, directly or indirectly, solicit or initiate any takeover
proposal or offer for the Company, and not to solicit or initiate, directly or
indirectly, discussions, negotiations, considerations or inquiries concerning a
takeover proposal or offer for the Company, from any person, or engage in
discussions or negotiations relating thereto, or provide to any other person any
information or data relating to the Company for the purpose of, or have any
substantive discussions with any person relating to, or otherwise cooperate with
or assist or participate in, or facilitate, any takeover proposal or offer or
any inquiry or proposal which would reasonably be expected to lead to any effort
or attempt by any other person to seek to effect a takeover proposal or offer,
or agree to or endorse any such inquiry, takeover proposal or offer; provided,
however, that (i) the Company may engage in discussions or negotiations with a
third party who, without the Company taking any action which is proscribed as
provided above in this Section 5.2, seeks
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to initiate such discussions or negotiations or may furnish such third party
information concerning the Company and its business, properties or assets
(provided that such third party executes a confidentiality agreement with the
Company) and (ii) the Company's Board of Directors may take and disclose to the
Company's stockholders a position contemplated by Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act, but in each case referred to in the
foregoing clauses (i) and (ii) only to the extent that a majority of the Board
of Directors of the Company shall conclude in good faith, after consultation
with and based upon the written advice of Gardere & Wynne, L.L.P. (which advice
need not constitute an opinion), that such action is necessary in order for the
Board of Directors of the Company not to breach its fiduciary obligations under
applicable law. The Company will promptly (but in no case later than 24 hours)
notify Parent of any inquiry relating to a takeover proposal or offer for the
Company, including the material terms and conditions thereof, but shall not be
required to indicate the identity of the person or group making such takeover
proposal or offer. It is agreed and understood that any termination of this
Agreement shall be solely pursuant to Section 8.1 and that, prior to any such
termination, the Company shall not enter into any written agreement with any
person that provides for, or in any way facilitates, a takeover proposal or
offer, other than a confidentiality agreement. Except as permitted by this
Section 5.2, the Company and its officers, directors, employees, agents and
other representatives will immediately cease the Company's existing discussions,
negotiations and other activities with any parties (other than Parent and Sub)
relating to any possible takeover proposal or offer. As used in this Agreement,
"takeover proposal" or "offer" shall mean any proposal or offer (other than a
proposal or offer by Parent or any of its affiliates) for a tender or exchange
offer, a merger, consolidation or other business combination involving the
Company, or any proposal to acquire in any manner a substantial equity interest
in, or a substantial portion of the assets of, the Company. Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
this Section 5.2 by any officer or director or authorized employee, agent or
representative of the Company shall be deemed to be a breach of this Section 5.2
by the Company.
SECTION 5.3 Pooling of Interests; Reorganization. During the period from
the date of this Agreement through the Effective Time, unless the other parties
shall otherwise agree in writing, none of Parent, Sub, any other Subsidiary of
Parent, nor the Company shall (a) knowingly take or fail to take any action
which action or failure to act would jeopardize the treatment of Sub's
combination with the Company as a pooling of interests for accounting purposes
or (b) knowingly take or fail to take any action which action or failure to act
would jeopardize qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code or (c), except as expressly permitted by
this Agreement, knowingly take or fail to take any action which would cause any
conditions precedent to the obligations of the Company, Parent or Sub not to be
fully satisfied as soon as possible.
SECTION 5.4 Conduct of Business of Sub Pending the Merger. During the
period from the date of this Agreement through the Effective Time, Sub shall not
engage in any activities of any nature except as expressly provided in or
contemplated by this Agreement or incident thereto.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 Stockholder Approval. (a) The Company shall promptly call a
meeting of its stockholders (the "Company Stockholder Meeting") for the purpose
of voting upon the Merger and shall use its reasonable best efforts to obtain
stockholder approval of the Merger. The Company Stockholder Meeting shall be
held as soon as practicable following the date upon which the S-4 Registration
Statement becomes effective, and the Company will, through its Board of
Directors (unless the Board of Directors shall conclude in good faith, after
consultation with and based upon the written advice of Gardere & Wynne, L.L.P.
(which advice need not constitute an opinion), that not recommending the Merger,
or withdrawing or modifying any such recommendation, is necessary in order for
the Board of Directors not to breach its fiduciary obligations under applicable
law), recommend to its stockholders the approval of the Merger and not rescind
its declaration that the Merger is fair to and advisable and in the best
interest of the Company and its stockholders; provided, however, that any
failure of the Board of Directors of the Company to recommend the
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approval of the Merger, or any withdrawal or modification of such a
recommendation, shall not be deemed a violation of Section 5.2.
(b) Parent shall promptly call a meeting of its stockholders (the "Parent
Stockholder Meeting" and, together with the Company Stockholder Meeting, the
"Stockholder Meetings") for the purpose of voting upon the Charter Amendment and
the Share Issuance and shall use its reasonable best efforts to obtain
stockholder approval of such matters. Parent will, through its Board of
Directors (unless the Board of Directors shall conclude in good faith, after
consultation with and based upon the written advice of Baker & Hostetler (which
advice need not constitute an opinion), that not recommending the Charter
Amendment and Share Issuance, or withdrawing or modifying any such
recommendation, is necessary in order for the Board of Directors not to breach
its fiduciary obligations under applicable law), recommend to its stockholders
the approval of the Charter Amendment and the Share Issuance and not rescind its
declaration that such transactions are fair to and advisable and in the best
interest of Parent and its stockholders. The Parent Stockholder Meeting shall be
on the date of the Company Stockholder Meeting or, if such date is not
practicable, on the closest date practicable.
SECTION 6.2 S-4 Registration Statement and Joint Proxy Statement; S-8
Registration Statement. (a) Parent and the Company shall prepare and file with
the SEC as soon as practicable a proxy statement for use at the Stockholder
Meetings (the "Joint Proxy Statement"), and Parent shall prepare and file with
the SEC as soon as practicable the S-4 Registration Statement (including the
Joint Proxy Statement as a prospectus therein) and shall use all reasonable
efforts to have the S-4 Registration Statement declared effective by the SEC as
soon as practicable. Parent shall also take any action required to be taken
under state securities or "Blue Sky" laws in connection with the issuance of the
Parent Common Stock pursuant to the Merger and the exercise of the Substituted
Options (as defined in Section 6.7) after the Effective Time. The Company and
Parent shall furnish each other all information concerning the Company and the
holders of Company Common Stock or Parent and the holders of Parent Common
Stock, as the case may be, required for use in the S-4 Registration Statement
and the Joint Proxy Statement, and the Company and Parent each shall take such
other actions as the other may reasonably request in connection with the
preparation of the S-4 Registration Statement and the Joint Proxy Statement and
the actions to be taken pursuant to this Section 6.2.
(b) Promptly after the Effective Time, Parent shall prepare and file with
the SEC a Registration Statement on Form S-8 (the "S-8 Registration Statement")
covering the Substituted Options (as defined in Section 6.7). If necessary to
permit reoffers and resales by optionees, Parent shall also prepare a "reoffer
prospectus" (as that term is used in General Instruction C-1 of Form S-8) and
file the reoffer prospectus with a post-effective amendment to the S-8
Registration Statement and cause any such post-effective amendment to become
effective and remain effective for such period as is necessary to permit such
reoffers and resales.
SECTION 6.3 Access to Information. (a) The Company shall afford to
Parent, and to Parent's accountants, counsel, financial advisers and other
representatives, reasonable access and permit them to make such inspections as
they may reasonably require during the period from the date of this Agreement
through the Effective Time to all their respective properties, books, contracts,
commitments and records and, during such period, the Company shall furnish
promptly to Parent (i) access to each report, schedule, registration statement
and other document filed by it during such period pursuant to the requirements
of federal or state laws and (ii) all other information concerning the Company,
its business, properties and personnel as Parent may reasonably request. In no
event shall the Company be required to supply to Parent, or to Parent's
accountants, counsel, financial advisors or other representatives, any
information relating to indications of interest from, or discussions with, any
other potential acquirers of the Company which were received or conducted prior
to the date hereof except to the extent necessary for use in the Registration
Statement. Except as required by law, Parent will hold, and will cause its
affiliates, associates and representatives to hold, any nonpublic information in
confidence until such time as such information otherwise becomes publicly
available and shall use its reasonable best efforts to ensure that such
affiliates, associates and representatives do not disclose such information to
others without the prior written consent of the Company. In the event of
termination of this Agreement for any reason, Parent shall promptly return or
destroy all nonpublic documents so obtained from the Company and any copies made
of such documents for Parent. Parent shall not, and shall
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cause its affiliates, associates and representatives not to, use any nonpublic
information regarding the Company in any way detrimental to the Company.
(b) Parent shall, and shall cause each of its Subsidiaries to, afford to
the Company, and to Company's accountants, counsel, financial advisers and other
representatives, reasonable access and permit them to make such inspections as
they may reasonably require during the period from the date of this Agreement
through the Effective Time to all their respective properties, books, contracts,
commitments and records and, during such period, Parent shall, and shall cause
each of its Subsidiaries to, furnish promptly to the Company (i) access to each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state laws and (ii) all
other information concerning Parent, its business, properties and personnel as
the Company may reasonably request. Except as required by law, the Company will
hold, and will cause its affiliates, associates and representatives to hold, any
nonpublic information in confidence until such time as such information
otherwise becomes publicly available and shall use its reasonable best efforts
to ensure that such affiliates, associates and representatives do not disclose
such information to others without the prior written consent of Parent. In the
event of termination of this Agreement for any reason, the Company shall
promptly return or destroy all nonpublic documents so obtained from Parent and
any copies made of such documents for the Company. The Company shall not, and
shall cause its affiliates, associates and representatives not to, use any
nonpublic information regarding Parent in any way detrimental to Parent.
(c) No investigation pursuant to this Section 6.3 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
SECTION 6.4 Compliance with the Securities Act; Pooling. Each of Parent
and the Company shall deliver to the other party, no later than 20 days after
the date of this Agreement, a letter identifying each person whom it reasonably
believes is an "affiliate" of such party for purposes of Rule 145 under the
Securities Act. Thereafter and until the date of the Company Stockholder Meeting
or the Parent Stockholder Meeting, as the case may be, each of Parent and the
Company shall identify to the other party each additional person whom it
reasonably believes to have thereafter become an "affiliate." Each of Parent and
the Company shall use its reasonable best efforts to cause each person who is
identified as an "affiliate" pursuant to the two immediately preceding sentences
to deliver to Parent and the Company (for itself and as the Surviving
Corporation), not later than the date 30 days prior to the expected Effective
Time, a written agreement, substantially in the form of Exhibit I(A) or (B) to
this Agreement, as applicable.
SECTION 6.5 Nasdaq National Market. Parent shall use its reasonable best
efforts to list on the Nasdaq National Market, upon official notice of issuance,
the shares of Parent Common Stock to be issued in connection with the Merger and
pursuant to the Substituted Options (as defined in Section 6.7).
SECTION 6.6 Fees and Expenses. (a) Whether or not the Merger is
consummated, except as provided in Section 6.6(b), all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such costs and expenses.
(b) (i) Notwithstanding any provision in this Agreement to the contrary, if
Parent terminates this Agreement pursuant to Section 8.1(b)(i) or 8.1(e), then
the Company shall pay to Parent, within five business days following such
termination, an amount in cash equal to all out-of-pocket expenses actually and
reasonably incurred by Parent and its Subsidiaries in connection with this
Agreement and the transactions contemplated hereby, provided, however, that the
Company shall not be obligated to pay to Parent fees and expenses of Parent's
financial advisor in excess of $60,000. In addition, but subject to the
provisions of Section 6.6(b)(iii) below, if within nine months after such
termination the Company enters into an agreement with respect to a Third Party
Acquisition of the Company (the "Company Acquisition Agreement") or there shall
have occurred, or the Board of Directors shall have recommended to the
stockholders of the Company or resolved to do so, a Third Party Acquisition,
then upon the earliest of such events, the Company shall immediately pay to
Parent an amount in cash equal to $2,000,000 less the amount paid by the Company
to Parent pursuant to the immediately preceding sentence in respect of Parent's
expenses.
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(ii) Notwithstanding any provisions of this Agreement to the contrary, but
subject to the provisions of Section 6.6(b)(iii) below, if a More Than 25%
Stockholder (hereinafter defined) votes against the Merger, abstains from voting
on the Merger or does not vote, and if Parent terminates this Agreement pursuant
to Section 8.1(b)(ii) or if the Company terminates this Agreement pursuant to
Section 8.1(c)(ii), and, in addition, within 24 months after such termination
the Company enters into a Company Acquisition Agreement or there shall have
occurred, or the Board of Directors shall have recommended to the stockholders
of the Company or resolved to do so, a Third Party Acquisition, then, upon the
earliest of such events, the Company shall immediately pay to Parent cash in the
amount of $2,000,000. "More Than 25% Stockholder" shall mean a Person or Group
(as defined in Section 6.6(d)) who acquires beneficial ownership of more than
25%, but less than 50%, of the outstanding shares of Company Common Stock after
the date of this Agreement and prior to the Company Stockholder Meeting.
(iii) Notwithstanding any provisions of this Agreement to the contrary, if
a More Than 25% Stockholder votes in favor of the Merger and if Parent
terminates this Agreement pursuant to Section 8.1(b)(ii) or the Company
terminates this Agreement pursuant to Section 8.1(c)(ii), then the Company shall
have no obligation to pay Parent or the Sub any sum of money.
(iv) Notwithstanding any provision in this Agreement to the contrary, if
Parent terminates this Agreement pursuant to Section 8.1(f)(i), then the Company
shall immediately pay to Parent cash in the amount of $250,000. In addition, if
within nine months thereafter the Company enters into a Company Acquisition
Agreement or there shall have occurred, or the Board of Directors shall have
recommended to the stockholders of the Company or resolved to do so, a Third
Party Acquisition, then upon the earliest of such events, the Company shall
immediately pay to Parent cash in the amount of $2,000,000.
(v) Notwithstanding any provision in this Agreement to the contrary, if the
Company terminates this Agreement pursuant to Section 8.1 (h) or Parent
terminates this Agreement pursuant to Sections 8. 1 (f)(ii) or 8.1(i), then the
Company shall immediately pay to Parent cash in the amount of $2,000,000.
(vi) The Company shall in no event be obligated to make payments under this
Section 6.6(b) exceeding, in the aggregate, $2,000,000.
(vii) Notwithstanding any provision in this Agreement to the contrary, if
Parent terminates this Agreement pursuant to Section 8.1(b)(ii) or if the
Company terminates this Agreement pursuant to Section 8.1(c)(ii), the Company
shall pay to Parent, within five business days following such termination, an
amount in cash equal to all out-of-pocket expenses actually and reasonably
incurred by Parent in connection with this Agreement and the transactions
contemplated thereby, provided, however, that the Company shall not be obligated
to pay to Parent fees and expenses of Parent's financial advisor in excess of
$60,000.
(c) Notwithstanding any provision of this Agreement to the contrary, if
Company terminates this Agreement pursuant to Section 8.1(c)(i) or 8.1(c)(iii)
or 8.1(e), or, if Parent terminates this Agreement pursuant to Section
8.1(b)(iii), Parent shall pay to the Company, within five business days,
following such termination, an amount in cash equal to all out-of-pocket
expenses actually and reasonably incurred by the Company in connection with this
Agreement and the transactions contemplated hereby, provided, however, that
Parent shall not be obligated to pay to the Company fees and expenses of
Company's financial advisor in excess of $60,000.
(d) For purposes of this Agreement, the term "Third Party Acquisition"
means the occurrence of any of the following events: (i) the acquisition of the
Company by merger, tender offer or otherwise, other than by Parent or any of its
affiliates, (ii) the acquisition of more than 50% of the outstanding shares of
Company Common Stock (measured after such issuance), or securities exercisable,
convertible or exchangeable into more than 50% of the outstanding shares of
Company Common Stock (assuming the exercise, conversion or exchange of such
securities), or any other securities which represent, or are exercisable,
convertible or exchangeable into securities which represent, more than 50% of
the voting power of the outstanding securities of the Company (assuming the
exercise, conversion or exchange of such securities) ordinarily (absent the
occurrence of any contingency) having the right to vote in the election of
directors of the Company, by any person within the meaning of Section 3(a)(9) of
the Exchange Act ("Person") or any syndicate or group
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deemed to be a Person within the meaning of Section 13(d)(3) of the Exchange Act
("Group"), other than Parent or its affiliates or (iii) the issuance to any
person (other than Parent or its affiliates) of more than 30% of the outstanding
shares of Company Common Stock (measured after such issuance), or securities
exercisable, convertible or exchangeable into more than 30% of the outstanding
shares of Company Common Stock (assuming the exercise, conversion or exchange of
such securities), or any other securities which represent, or are exercisable,
convertible or exchangeable into securities which represent, more than 30% of
the voting power of the outstanding securities of the Company (assuming the
exercise, conversion or exchange of such securities) ordinarily (absent the
occurrence of any contingency) having the right to vote in the election of
directors of the Company, in connection with an acquisition by the Company of
any other person or entity.
SECTION 6.7 Company Stock Options. No later than the Effective Time, each
option to purchase shares of Company Common Stock (a "Company Stock Option")
which is outstanding immediately prior to the Effective Time pursuant to the
Company's stock option plans in effect on the date of this Agreement (the
"Company Stock Plans") shall become and represent at the Effective Time a fully
vested, immediately exercisable option to purchase the number of shares of
Parent Common Stock (a "Substituted Option") (decreased to the nearest full
share) determined by multiplying (i) the number of shares of Company Common
Stock subject to such Company Stock Option immediately prior to the Effective
Time by (ii) the Exchange Ratio, at an exercise price per share of Parent Common
Stock (rounded down to the nearest whole cent) equal to the exercise price per
share of Company Common Stock immediately prior to the Effective Time divided by
the Exchange Ratio. Parent shall pay cash to holders of Company Stock Options in
lieu of issuing fractional shares of Parent Common Stock upon the exercise of
Substituted Options for shares of Parent Common Stock. After the Effective Time,
except as provided above in this Section 6.7, each Substituted Option shall be
exercisable upon the same terms and conditions as were applicable under the
related Company Stock Option simultaneously with the Effective Time. As of the
Effective Time, Parent will reserve for issuance shares of Parent Common Stock
purchasable upon exercise of the Substituted Options. It is intended that the
assumption by Parent of Company Stock Options pursuant to this Section 6.7 shall
be undertaken in a manner that will not constitute a "modification" as defined
in Section 4.24(h) of the Code as to any stock option which is an "incentive
stock option." Parent agrees to take such action as may be required under the
Company Stock Plans to effectuate the foregoing, including execution and
delivery, prior to or at the Effective Time, of the Tucker Drilling Company,
Inc. Stock Option Assumption Agreement (the "Stock Option Assumption
Agreement"), in the form attached hereto as Exhibit II(A) or (B), to each holder
of Company Stock Options.
SECTION 6.8 Reasonable Efforts. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties in doing,
all things necessary, proper or advisable to consummate and make effective, in
the most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement and the prompt satisfaction of the conditions
hereto, including (a) the obtaining of all necessary actions or non-actions,
waivers, consents and approvals from Governmental Entities and the making of all
necessary registrations and filings and the taking of all reasonable steps as
may be necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Entity, (b) the obtaining of all necessary
consents, approvals or waivers from third parties, (c) the defending of any
lawsuits or other legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the Transactions contemplated
hereby, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed, and (d)
the execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by this Agreement; provided, however, that neither
of the parties shall be under any obligation to take any action to the extent
that the Board of Directors of such party shall conclude in good faith, after
consultation with and based upon the written advice of Gardere & Wynne, L.L.P.
in the case of the Company, and Baker & Hostetler, in the case of Parent, (which
advice in each case need not constitute an opinion), that such action would
cause a breach of that board of directors' fiduciary obligations under
applicable law.
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SECTION 6.9 Public Announcements. Before issuing any press release or
otherwise making any public statements with respect to the transactions
contemplated by this Agreement, Parent and Sub, on the one hand, and the
Company, on the other hand, will consult with each other, and will undertake
reasonable efforts to agree upon the terms of such press release, and shall not
issue any such press release or make any such public statement prior to such
consultation, except as may be required by applicable law or by obligations
pursuant to any listing agreement with the Nasdaq National Market.
SECTION 6.10 Indemnification. From and after the Effective Time, Parent
agrees to indemnify and hold harmless all past and present officers and
directors of the Company to the full extent such persons may be indemnified by
the Company pursuant to the Company's Certificate of Incorporation and By-Laws
for acts or omissions occurring at or prior to the Effective Time and shall
promptly advance reasonable litigation expenses incurred by such officers and
directors in connection with investigating, preparing and defending any action
arising out of such acts or omissions.
SECTION 6.11 Employee Benefits. (a) At the Effective Time, all employee
benefits plans and programs of the Company, other than the Tucker Drilling
Company, Inc. Supplemental Executive Retirement Plan (the "Supplemental
Retirement Plan") and the Company Stock Plans, shall terminate, and subject to
all applicable laws, and all vested rights and benefits of such benefit plans
and programs shall be distributed to the eligible recipients in accordance with
the terms of such plans of the Company; provided, however, that with respect to
the qualified benefit plans, the parties may elect prior to the Effective Time
to freeze benefit accruals in lieu of terminating the plans as of the Effective
Time. The officers and employees of the Company who continue as employees of the
Parent or any of Parent's Subsidiaries, including Surviving Corporation, shall
be provided with employee benefits under plans and programs which, in the
aggregate, are no less favorable than those provided pursuant to the plans and
programs of Parent and its Subsidiaries in effect on the date hereof for the
benefit of all officers and employees of Parent or any of its Subsidiaries
(including but not limited to stock option, life insurance, medical, profit
sharing (including 401(k)), severance, salary continuation and fringe benefits).
For purposes of eligibility to participate in and vesting in benefits provided
to officers and employees, individuals who are officers and employees of the
Company at the Effective Time who continue as employees of the Surviving
Corporation, will be credited with their years of service with the Company and
years of service with prior employers to the extent service with prior employers
is taken into account under analogous plans of the Company.
(b) Parent shall maintain the accounting records of the Supplemental
Retirement Plan and Trust following the Effective Time.
(c) Any employees of the Company listed on Schedule 6.11 to the Company
Disclosure Schedule, who continue as an employee of the Parent or the Surviving
Corporation after the Effective Time, shall receive a "severance payment" in the
event of termination of such employment, either voluntarily or involuntarily, on
or before the expiration of six months following the Effective Time. For
purposes of this Section 6.11(c) "severance payment" means an amount equal to
one week's salary for each year of employment with the Company. Any portion of a
year over six months shall be treated as a full year.
SECTION 6.12 Tax Matters. (a) Each of Parent and the Company shall use
its best efforts to cause the Merger to be treated as a reorganization within
the meaning of Section 368(a) of the Code and to furnish such certificates as
may be reasonably requested by legal counsel to Parent and Company.
(b) To the extent permissible under applicable tax laws, the Merger shall
be reported by Parent and its Subsidiaries as a reorganization within the
meaning of Section 368(a)(1)(A) and Section 378(a)2(E) of the Code in all
federal, state and local tax returns on and after the Effective Time.
SECTION 6.13 Restrictions on Registration of Parent Common Stock. Except
with respect to registration rights existing as of the date hereof, between the
date hereof and the date of publication of financial results covering at least
30 days of post-closing operations of Parent and Surviving Corporation as
further provided in Exhibits I(A) and (B) to this Agreement, Parent agrees that
it will not file any registration statements with the SEC covering the reoffer
or resale of outstanding shares of Parent Common Stock other than the S-8
Registration Statement.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE MERGER
SECTION 7.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment or waiver (where permissible) at or prior to the
Effective Time of each of the following conditions:
(a) Stockholder Approval. The Agreement shall have been adopted by
the affirmative vote of the holders not less than a majority of the
outstanding shares of Company Common Stock, and the Charter Amendment and
Share Issuance shall have been adopted by the affirmative vote of the
holders of not less than a majority of the outstanding shares of Parent
Common Stock.
(b) Nasdaq National Market Listing. The Parent Common Stock issuable
in the Merger and pursuant to the Substituted Options shall have been
authorized for listing on the Nasdaq National Market, upon official notice
of issuance.
(c) S-4 Registration Statement. The S-4 Registration Statement shall
have become effective in accordance with the provisions of the Securities
Act. No stop order suspending the effectiveness of the S-4 Registration
Statement shall have been issued by the SEC and remain in effect. All
necessary state securities or "Blue Sky" authorizations shall have been
received.
(d) No Order. No Governmental Entity or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any law, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is then in effect
and has the effect of prohibiting the Merger or the transactions
contemplated hereby; provided that, in the case of any such decree,
injunction or other order, each of the parties shall have used reasonable
best efforts to prevent the entry of any such injunction or other order and
to appeal as promptly as practicable any decree, injunction or other order
that may be entered.
(e) Other Approvals. All authorizations, consents, orders,
declarations or approvals of, or filings with, or terminations or
expirations of waiting periods imposed by, any Governmental Entity, the
failure to obtain, occur or file which would have a Material Adverse Effect
on Parent (assuming the Merger had taken place) shall have been obtained,
shall have occurred or shall have been filed.
(f) Pooling of Interests Letter. Parent and the Company shall each
have received a letter from Coopers & Lybrand L.L.P. dated on or prior to
May 15, 1996, dated the same date as the Joint Proxy Statement, and dated
at the Effective Time to the effect that the Merger will qualify for
pooling of interests accounting treatment under Accounting Principles Board
Opinion No. 16 if closed and consummated in accordance with this Agreement.
(g) Comfort Letters. Parent and the Company shall each have received
a "cold comfort" letter dated the same date as the Joint Proxy Statement
and at the Closing from Coopers & Lybrand L.L.P., Parent's independent
accountants, with respect to such financial information regarding Parent
and its Subsidiaries, and from Arthur Andersen LLP, the Company's
independent auditors, with respect to such financial information regarding
the Company, all as may be mutually agreed to by Parent and the Company.
SECTION 7.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following additional
conditions; provided that the Company may waive any of such conditions in its
sole discretion:
(a) Performance of Obligations; Representations and
Warranties. Parent and Sub shall have performed in all material respects
each of their agreements contained in this Agreement required to be
performed on or prior to the Effective Time, each of the representations
and warranties of Parent and Sub contained in this Agreement that is
qualified by materiality shall be true and correct on and as of the
Effective Time as if made on and as of such date and each of the
representations and warranties that is
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not so qualified shall be true and correct in all material respects on and
as of the Effective Time as if made on and as of such date, in each case
except as contemplated or permitted by this Agreement.
(b) Officers' Certificate. Parent shall have furnished to the Company
a certificate, dated the Effective Time, signed by the appropriate officers
of Parent, certifying to the effect that to the best of the knowledge and
belief of each of them, the conditions set forth in Section 7.1 and this
Section 7.2(a) have been satisfied in full.
(c) The Stock Option Assumption Agreements referred to in Section 6.7
shall have been executed and delivered by the Parent.
(d) Tax Opinion of Gardere & Wynne, L.L.P. The Company shall have
received the opinion of Gardere & Wynne, L.L.P., counsel to the Company,
dated the Effective Time, to the effect that the Merger will be treated for
federal income tax purposes as a reorganization transaction described in
Section 368(a) of the Code.
(e) Opinion of Baker & Hostetler. The Company shall have received an
opinion from Baker & Hostetler, counsel to Parent, dated the Effective
Time, substantially to the effect that:
(i) The incorporation, existence and good standing of Parent and
Sub are as stated in this Agreement; the authorized shares of Parent and
Sub are as stated in this Agreement; all outstanding shares of Parent
Common Stock are duly and validly authorized and issued, fully paid and
nonassessable and have not been issued in violation of any preemptive
right of any stockholders.
(ii) Each of Parent and Sub has full corporate power and authority
to execute, deliver and perform this Agreement and this Agreement has
been duly authorized, executed and delivered by Parent or Sub, as the
case may be, and (assuming due and valid authorization, execution and
delivery by the Company) constitutes the legal, valid and binding
agreement of Parent or Sub.
(iii) Parent has full corporate power and authority to execute,
deliver and perform each of the Stock Option Assumption Agreement and
each of the Restated Severance Agreements and each such Stock Option
Assumption Agreement and each of such Restated Severance Agreement has
been duly authorized, executed and delivered by Parent and (assuming due
and valid execution and delivery by the other party to such Stock Option
Assumption Agreement and Restated Severance Agreement) each constitutes
the legal, valid and binding agreement of Parent, enforceable against
Parent in accordance with its terms, except to the extent enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the
effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(iv) The execution and performance by Parent and Sub of this
Agreement and the various Stock Option Assumption Agreements and each of
the Restated Severance Agreements will not violate the Certificates of
Incorporation or By-Laws of Parent and Sub, respectively, and, to the
knowledge of such counsel, will not violate, result in a breach of or
constitute a default under any material lease, mortgage, contract,
agreement, instrument, law, rule, regulation, judgment, order or decree
to which Parent and Sub is a party or by which they or any of their
properties or assets may be bound.
(v) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body which
has not been obtained is required on behalf of Parent and Sub for the
consummation of the transactions contemplated by this Agreement or the
Stock Option Assumption Agreements or the Restated Severance Agreements.
(vi) To the knowledge of such counsel, there are no actions, suits
or proceedings, pending or threatened against or affecting Parent, its
Significant Subsidiaries or Sub, by any Governmental Entity which seek
to restrain, prohibit or invalidate the transactions contemplated by
this Agreement.
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(vii) (A) At the time the S-4 Registration Statement became
effective, the S-4 Registration Statement and the Joint Proxy Statement
(other than the financial statements and related notes, financial data,
statistical data and supporting schedules included therein, and
information relating to or supplied by the Company as to which such
counsel expresses no opinion) complied as to form in all material
respects with the requirements of the Securities Act and the Exchange
Act.
(B) In the course of the preparation of the S-4 Registration
Statement and the Joint Proxy Statement such counsel has considered the
information set forth therein in light of the matters required to be set
forth therein, and has participated in conferences with officers and
representatives of the Company and Parent, including their respective
counsel and independent public accountants, during the course of which
the contents of the S-4 Registration Statement and the Joint Proxy
Statement and related matters were discussed. Such counsel has not
independently checked the accuracy or completeness of, or otherwise
verified, and accordingly is not passing upon, and does not assume
responsibility for, the accuracy, completeness or fairness of the
statements contained in the S-4 Registration Statement or the Joint
Proxy Statement; and such counsel has relied as to materiality, to a
large extent, upon the judgment of officers and representatives of the
Company and Parent. However, as a result of such consideration and
participation, nothing has come to such counsel's attention which causes
such counsel to believe that the S-4 Registration Statement (other than
the financial statements and related notes, financial data, statistical
data and supporting schedules included therein, and information relating
to or supplied by the Company as to which such counsel expresses no
belief), at the time it became effective, contained any untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Joint Proxy Statement (other than the financial
statements and related notes, financial data, statistical data and
supporting schedules included therein, and information relating to or
supplied by the Company, as to which such counsel expresses no belief),
at the time the S-4 Registration Statement became effective, at the time
of mailing or at the time of the Stockholder Meetings, included any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(viii) The shares of Parent Common Stock to be issued pursuant to
this Agreement, and any shares of Parent Common Stock issuable upon
exercise of the Substituted Options will be, when so issued, duly
authorized, validly issued and outstanding, fully paid and
nonassessable.
(ix) The shares of Parent Common Stock included in the S-4
Registration Statement and the shares of Parent Common Stock issuable
upon exercise of the Substituted Options have been listed on the Nasdaq
National Market subject to official notice of issuance.
In rendering such opinion, counsel for Parent may rely as to matters of
fact upon the representations of officers of Parent or Sub contained in
any certificate delivered to such counsel and certificates of public
officials. Such opinion shall be limited to the General Corporation Law
of the State of Delaware and the laws of the United States of America
and the State of Texas.
(f) The opinion of Rauscher Pierce Refsnes, Inc. referred to in
Section 3.20 shall not have been withdrawn.
SECTION 7.3 Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Time of the following additional
conditions, provided that Parent may waive any such conditions in its sole
discretion:
(a) Performance of Obligations; Representations and Warranties. The
Company shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed on or prior
to the Effective Time, each of the representations and warranties of the
Company contained in this Agreement that is qualified by materiality shall
be true and correct on and as of the Effective Time as if made on and as of
such date and each of the representations and warranties that is
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<PAGE> 110
not so qualified shall be true in all material respects on and as of the
Effective Time as if made on and as of such date, in each case except as
contemplated or permitted by this Agreement.
(b) Third Party Consents. All required authorizations, consents or
approvals of any third party (other than a Governmental Entity), the
failure to obtain which would have a Material Adverse Effect on Parent
(assuming the Merger had taken place), shall have been obtained.
(c) Officers' Certificate. The Company shall have furnished to
Parent a certificate, dated the Effective Time, signed by the appropriate
officers of the Company, certifying to the effect that to the best of the
knowledge and belief of each of them, the conditions set forth in Section
7.1 and this Section 7.3(a) have been satisfied.
(d) Tax Opinion of Baker & Hostetler. Parent shall have received the
opinion of Baker & Hostetler, counsel to the Parent, dated the Effective
Time, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization transaction described in Section 368(a) of the
Code.
(e) Opinion of Gardere & Wynne, L.L.P. Parent shall have received an
opinion of counsel from Gardere & Wynne, L.L.P., counsel to the Company,
dated the Effective Time, substantially to the effect that:
(i) The incorporation, existence, good standing and capitalization
of the Company are as stated in this Agreement; the authorized shares of
Company Common Stock are as stated in this Agreement; all outstanding
shares of Company Common Stock are duly and validly authorized and
issued, fully paid and non-assessable and have not been issued in
violation of any preemptive right of stockholders; and, to the knowledge
of such counsel, there is no existing option, warrant, right, call,
subscription or other agreement or commitment obligating the Company to
issue or sell, or to purchase or redeem, any shares of its capital stock
other than as stated in this Agreement.
(ii) The Company has full corporate power and authority to execute,
deliver and perform this Agreement and this Agreement has been duly
authorized, executed and delivered by the Company, and (assuming the due
and valid authorization, execution and delivery by Parent and Sub)
constitutes the legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, except to
the extent enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws of
general applicability relating to or affecting the enforcement of
creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law).
(iii) The execution and performance by the Company of this
Agreement will not violate the Certificate of Incorporation or By-laws
of the Company and will not violate, result in a breach of, or
constitute a default under, any material lease, mortgage, contract,
agreement, instrument, law, rule, regulation, judgment, order or decree
known to such counsel to which the Company is a party or to which they
or any of their properties or assets may be bound.
(iv) To the knowledge of such counsel, there are no actions, suits
or proceedings, pending or threatened against or affecting the Company,
by any Governmental Entity which seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement.
(v) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body which
has not been obtained is required on behalf of the Company for
consummation of the transactions contemplated by this Agreement.
(vi) The Settlement Agreement Relating to Payments Under the
Supplemental Executive Retirement Plan of Tucker Drilling Company, Inc.
dated April 19, 1996 among the Company and Larry J. Tucker, Donald A.
Elms, J.M. Burkett, Jr., Ronald L. Scandolari, T. Mark Tucker and
Charles B. Middlekauf (collectively the "Participants") has been duly
executed and delivered by each of the Participants and constitutes the
legal, valid and binding agreement of each Participant, enforceable
against such Participant in accordance with its terms, except to the
extent enforceability
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may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the
effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(vii) Each of the respective Restated Severance Agreements dated
April 22, 1996, between the Company, the Parent and each of Larry J.
Tucker, T. Mark Tucker and Charles B. Middlekauf constitutes the legal,
valid and binding agreement of him, enforceable against the Company in
accordance with its terms, except to the extent enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the
effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(viii) (A) At the time the S-4 Registration Statement became
effective, the S-4 Registration Statement and the Joint Proxy Statement
(other than the financial statements and related notes, financial data,
statistical data and supporting schedules included therein, and
information relating to or supplied by Parent or Sub as to which such
counsel expresses no opinion) complied as to form in all material
respects with the requirements of the Securities Act and the Exchange
Act.
(B) In the course of the preparation of the S-4 Registration
Statement and the Joint Proxy Statement such counsel has considered the
information set forth therein in light of the matters required to be set
forth therein, and has participated in conferences with officers and
representatives of the Company and Parent, including their respective
counsel and independent public accountants, during the course of which
the contents of the S-4 Registration Statement and the Joint Proxy
Statement and related matters were discussed. Such counsel has not
independently checked the accuracy or completeness of, or otherwise
verified, and accordingly is not passing upon, and does not assume
responsibility for, the accuracy, completeness or fairness of the
statements contained in the S-4 Registration Statement or the Joint
Proxy Statement; and such counsel has relied as to materiality, to a
large extent, upon the judgment of officers and representatives of the
Company and Parent. However, as a result of such consideration and
participation, nothing has come to such counsel's attention which causes
such counsel to believe that the S-4 Registration Statement (other than
the financial statements and related notes, financial data, statistical
data and supporting schedules included therein, and information relating
to or supplied by or Parent or Sub, as to which such counsel expresses
no belief, at the time it became effective, contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the Joint Proxy Statement (other than the
financial statements and related notes, financial data, statistical data
and supporting schedules included therein, and information relating to
or supplied by Parent or Sub, as to which such counsel expresses no
belief), at the time the S-4 Registration Statement became effective, at
the time of mailing or at the time of the Stockholder Meetings, included
any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
In rendering such opinion, counsel for the Company may rely as to
matters of fact upon the representations of officers of the Company
contained in any certificate delivered to such counsel and certificates
of public officials. Such reliance will include reliance as to matters
of fact and law exclusively on a certificate from the President of the
Company that the shares of Company Common Stock outstanding prior to
March 31, 1981 were duly and validly authorized and issued, fully paid
and non-assessable and were not issued in violation of any preemptive
right of stockholders.
Such opinion shall be limited to the General Corporation Law of the
State of Delaware and the laws of the United States of America and the
State of Texas.
(f) The respective opinions of T.M. Capital Corp. and Gilford
Securities, Inc. referred to in Section 2.18 shall not have been withdrawn.
30
<PAGE> 112
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after any approval by the
stockholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by Parent if (i) the Company shall have failed to comply in any
material respect with any of its covenants or agreements contained in this
Agreement required to be complied with by the Company prior to the date of
such termination, which failure to comply has not been cured within ten
business days following receipt by the Company of notice of such failure to
comply, (ii) the stockholders of the Company shall have failed to approve
the Merger at the Company Stockholder Meeting, or (iii) the stockholders of
Parent shall have failed to approve the Charter Amendment or the Share
Issuance at the Parent Stockholder Meeting;
(c) by the Company if (i) Parent or Sub shall have failed to comply in
any material respect with any of its covenants or agreements contained in
this Agreement required to be complied with by Parent or Sub prior to the
date of such termination, which failure to comply has not been cured within
ten business days following receipt by Parent of notice of such failure to
comply, (ii) the stockholders of the Company shall have failed to approve
the Merger at the Company Stockholder Meeting, or (iii) the stockholders of
Parent shall have failed to approve the Charter Amendment or the Share
Issuance at the Parent Stockholder Meeting;
(d) by either Parent or the Company if (i) the Merger has not been
effected on or prior to the close of business on November 30, 1996;
provided, however, that the right to terminate this Agreement pursuant to
this clause shall not be available to any party whose failure to fulfill
any obligation of this Agreement has been the cause of, or resulted in, the
failure of the Merger to have occurred on or prior to the aforesaid date,
or (ii) any court of competent jurisdiction or any governmental,
administrative or regulatory authority, agency or body shall have issued an
order, decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have become
final and nonappealable;
(e) by either Parent or the Company if there has been (i) a material
breach by the other of any representation or warranty that is not qualified
as to materiality or (ii) a breach by the other of any representation or
warranty that is qualified as to materiality, in each case which breach has
not been cured within five business days following receipt by the breaching
party of notice of the breach;
(f) by Parent, (i) if the Board of Directors of the Company shall not
have recommended, or shall have resolved not to recommend, or shall have
modified or withdrawn its recommendation of the Merger or declaration that
the Merger is fair to and advisable and in the best interest of the Company
and its stockholders, or shall have resolved to do so, or (ii) if the Board
of Directors of the Company shall have recommended, or shall have resolved
to recommend, to the stockholders of the Company any takeover proposal or
offer for the Company;
(g) by the Company if the Board of Directors of Parent shall not have
recommended, or shall have resolved not to recommend, or shall have
modified or withdrawn its recommendation of this Agreement, the Charter
Amendment and the Share Issuance or declaration that such transactions are
fair to and advisable and in the best interest of Parent and its
stockholders, or shall have resolved to do so;
(h) by the Company if there is an offer to acquire all of the
outstanding shares of Company Common Stock or substantially all of the
assets of the Company for consideration that provides stockholders of the
Company a value per share of Company Common Stock which, in the good faith
judgment of the Board of Directors of the Company, provides a higher value
per share than the consideration per share pursuant to the Merger; or
(i) by Parent, if a Third Party Acquisition occurs.
31
<PAGE> 113
SECTION 8.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or the Company, as provided in Section 8.1, this
Agreement shall forthwith become void and there shall be no liability hereunder
on the part of the Company, Parent or Sub or their respective officers or
directors (except as set forth in the last three sentences of Section 6.3(a) and
(b), which shall survive the termination); provided, however, that nothing
contained in this Section 8.2 shall relieve any party hereto from any liability
for any breach of this Agreement; and provided, further, that, (i) any
termination under Section 8.1 (h) shall not become effective until the fee
required to be paid pursuant to Section 6.6(b)(v) shall have been paid to
Parent, (ii) if this Agreement is terminated pursuant to Sections 8.1(b)(i) or
8.1(e), the provisions of Section 6.6(b)(i) shall survive until any payments
required to be made thereunder are made, (iii) if this Agreement is terminated
pursuant to Section 8.1(b)(ii) or Section 8.1(c)(ii), the provisions of Section
6.6(b)(ii) shall survive until any payments required to be made thereunder are
made, (iv) if this Agreement is terminated pursuant to Section 8.1(f)(i), the
provisions of Section 6.6(b)(iv) shall survive until any payments required to be
made thereunder are made, (v) if this Agreement is terminated pursuant to
Sections 8.1(f)(ii) or 8.1(i), the provisions of Section 6.6(b)(v) shall survive
until any payments required to be made thereunder are made, and (vi) if this
Agreement is terminated pursuant to Section 8.1(c)(i) or 8.1(e) or 8.1(c)(iii)
or 8.1(b)(iii), the provisions of Section 6.6(c) shall survive until any
payments required to be made thereunder are made, and (vii) if this Agreement is
terminated pursuant to Section 8.1(b)(ii) or 8.1(c)(ii), the provisions of
Section 6.6(b)(vii) shall survive until any payments required to be made
thereunder are made.
SECTION 8.3 Amendment. This Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of Directors,
at any time before or after approval of the Merger by the stockholders of the
Company but, after any such approval by stockholders of the Company, no
amendment shall be made which changes the Exchange Ratio as provided in Section
1.5 or which in any way materially adversely affects the rights of such
stockholders, without the further approval of such stockholders. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
SECTION 8.4 Waiver. At any time prior to the Effective Time, the parties
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein which may legally be waived. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Non-Survival of Representations and Warranties. Except for
the representations and warranties contained in Section 2.2 to the extent it
relates to the Stock Option Assumption Agreements, clauses (ii) and (iii) of
Section 2.8 and clause (ii) of Section 3.8, none of the representations and
warranties in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Effective Time.
SECTION 9.2 Non-Survival of Covenants Relating to Conduct of Business or
Additional Agreements. Except for the covenants and agreements contained in
Sections 6.2(b), 6.7, 6.11 and 6.12(b) and 6.13, none of the covenants and
agreements in this Agreement shall survive the Effective Time.
SECTION 9.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent by
overnight courier or telecopied (with a confirmatory copy sent by overnight
courier) to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
32
<PAGE> 114
(a) if to Parent or Sub, to
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1416
Snyder, TX 79549
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
with copies to:
Thomas H. Maxfield, Esq.
Baker & Hostetler
303 East 17th Avenue
Suite 1100
Denver, CO 80203-1264
(b) if to the Company, to
Tucker Drilling Company, Inc.
Petroleum Building
14 East Beauregard
San Angelo, TX 76902-1876
Attention: Larry J. Tucker
Chief Executive Officer
with copies to:
John T. Kipp, Esq.
Gardere & Wynne, L.L.P.
3000 Thanksgiving Tower
1601 Elm Street
Suite 2700
Dallas, TX 75201
SECTION 9.4 Interpretation. When a reference is made in this Agreement to
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated, and the words "hereof", "herein" and "hereunder" and
similar terms refer to this Agreement as a whole and not to any particular
provision of this Agreement, unless the context otherwise requires. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
SECTION 9.5 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
SECTION 9.6 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, including the documents and instruments referred to herein, (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (b) except for the provisions of Section 6.2(b), 6.7,
6.12 and 6.13(b), is not intended to confer upon any person other than the
parties any rights or remedies hereunder; provided, however, that attorneys for
the parties hereto may rely upon the representations and warranties contained
herein and in the certificates delivered pursuant to Sections 7.2(b) and 7.3(d).
SECTION 9.7 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
33
<PAGE> 115
SECTION 9.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
without the prior written consent of the other parties, except that Sub may
assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to Parent or to any direct or indirect
wholly-owned subsidiary of Parent, but no such assignment shall relieve Sub of
any of its obligations hereunder. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
SECTION 9.9 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 9.10 Enforcement of This Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
SECTION 9.11 Jurisdiction and Venue. Each party hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court for
the Western District of Texas or any court of the State of Delaware in any
action, suit or proceeding arising from or in connection with this Agreement,
and agrees that any such action, suit or proceeding shall be brought only in
such court (and waives any objection based on forum non conveniens or any other
objection to venue therein).
34
<PAGE> 116
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized all as of
the date first written above.
PATTERSON ENERGY, INC.
By: /s/ CLOYCE A. TALBOTT
---------------------------
Cloyce A. Talbott
Chairman and Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- -------------------------------
James C. Brown, Secretary
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
---------------------------
Cloyce A. Talbott
Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- -------------------------------
James C. Brown, Secretary
TUCKER DRILLING COMPANY, INC.
By: /s/ LARRY J. TUCKER
---------------------------
Larry J. Tucker
Chairman and Chief Executive Officer
Attest:
/s/ CHARLES B. MIDDLEKAUF
- -------------------------------
Charles B. Middlekauf, Secretary
35
<PAGE> 117
EXHIBIT I(A)
Gentlemen:
I have been advised that as of the date hereof I may be deemed to be an
"affiliate" of Tucker Drilling Company, Inc., Delaware corporation ("TDC"), as
the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of
Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (together with the rules and regulations promulgated
hereunder, the "Securities Act"), and/or (ii) used in and for purposes of
Accounting Series, Releases 130 and 135, as amended, of the Commission. Pursuant
to the terms of the Agreement and Plan of Merger, dated as of April 22, 1996
(the "Merger Agreement"), Patterson Drilling Company, a Delaware corporation and
a wholly-owned subsidiary of Patterson Energy, Inc., a Delaware corporation
("PEC") will be merged (the "Merger") with and into TDC, in consideration of PEC
Common Stock (as hereinafter defined) and the name of the surviving corporation
will be Patterson Drilling Company (the "Surviving Corporation").
As used herein, "TDC Common Stock" means the Common Stock, par value $0.01
per share, of TDC and "PEC Common Stock" means the Common Stock, par value $0.01
per share, of PEC.
I represent, warrant, and covenant to PEC that in the event I receive any
PEC Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of any PEC
Common Stock acquired by me in the Merger in violation of the Securities
Act.
B. I have carefully read this letter and the Merger Agreement and
discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of PEC Common Stock, to the
extent I felt necessary, with my counsel or counsel for PEC.
C. I have been advised that the issuance of PEC Common Stock to me
pursuant to the Merger has been or will be registered with the Commission
under the Securities Act on a Registration Statement on Form S-4. However,
I have also been advised that, because at the time the Merger will be
submitted for a vote of the shareholders of TDC, I may be deemed to be an
affiliate of TDC, the distribution by me of any PEC Common Stock acquired
by me in the Merger will not be registered under the Securities Act and
that I may not sell, transfer, or otherwise dispose of any PEC Common Stock
acquired by me in the Merger unless (i) such sale, transfer, or other
disposition has been registered under the Securities Act, (ii) such sale,
transfer, or other disposition is made in conformity with the volume and
other limitations of Rule 145 promulgated by the Commission under the
Securities Act, or (iii) in the opinion of counsel reasonably acceptable to
PEC such sale, transfer, or other disposition is otherwise exempt from
registration under the Securities Act.
D. I understand that PEC is under no obligation to register under the
Securities Act the sale, transfer, or other disposition by me or on my
behalf of any PEC Common Stock acquired by me in the Merger or to take any
other action necessary in order to make an exemption from such registration
available.
E. I also understand that stop transfer instructions will be given to
PEC's transfer agent with respect to PEC Common Stock and that there will
be placed on the certificates for any PEC Common Stock acquired by me in
the Merger, or any substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies. The shares represented by this certificate may only be
transferred in accordance with the terms of an agreement dated as of
April 22, 1996 between the registered holder hereof and the issuer of
this certificate, a copy of which agreement will be mailed to the holder
hereof without charge within five days after receipt of written request
therefore."
<PAGE> 118
F. I also understand that unless the transfer by me of my PEC Common
Stock has been registered under the Securities Act or is a sale made in
conformity with the provisions of Rule 145, PEC reserves the right to put
the following legend on the certificates issued to my transferred:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired from a
person who received such shares in a transaction to which Rule 145
promulgated under the Securities Act of 1933 applies. The shares may not
be sold, pledged, or otherwise transferred except in accordance with an
exemption from the registration requirements of the Securities Act of
1933."
It is understood and agreed that the legends set forth in paragraph E and F
above shall be removed by the delivery of substitute certificates without such
legend if the undersigned shall have delivered to PEC a copy of a letter from
the staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to PEC, to the effect that such legend is not required
for purposes of the Securities Act.
I understand that (a) PEC will supply me with any information necessary to
enable me to make routine sales of any PEC Common Stock acquired by me in the
Merger as may be permitted, by and in accordance with, the provisions of Rule
144 under the Securities Act or any similar rule of the Commission hereafter
applicable, and (b) PEC will comply with all requirements of the Securities
Exchange Act of 1934 rules and regulations promulgated thereunder, (the
"Exchange Act") with respect to the filing by PEC of annual, periodic and other
reports on a timely basis in a manner sufficient to allow sales of any such PEC
Common Stock by me during the three year period following the Effective Time (as
defined in the Merger Agreement) if such sales are otherwise permitted by law or
regulation. Upon my written request, PEC shall furnish me with a written
statement representing that it has complied with the reporting requirements
enumerated in Rule 144(c)(1), or if PEC is not then subject to Section 13 or
15(d) of the Exchange Act, that it has made publicly available the information
concerning PEC required by Rule 144(c)(2).
I further represent to and covenant with PEC and the Surviving Corporation
that I will not, within the 30 days prior to the Effective Time (as defined in
the Agreement), sell, transfer, or otherwise dispose of any shares of PEC Common
Stock and that I will not sell, transfer, or otherwise dispose of any shares of
PEC Common Stock (whether or not acquired by me in the Merger) until after such
time as results covering at least 30 days of post-closing combined operations
have been published by PEC and the Surviving Corporation, in the form of a
quarterly earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q, or 8-K, or any other
public filing or announcement which includes the combined results of operations.
Furthermore, I understand that PEC will give stop transfer instructions to its
transfer agent in order to prevent the breach of the representations,
warranties, and covenants made by me in this paragraph. I also understand that
the Merger is intended to be treated for accounting purposes as a "pooling of
interests," and I agree that, if PEC advises me in writing that additional
2
<PAGE> 119
restrictions apply to my ability to sell, transfer, or otherwise dispose of PEC
Common Stock in order to be entitled to use the pooling of interest accounting
method, I will abide by such restrictions.
Very truly yours,
By
---------------------------
Name:
ACCEPTED THIS DAY OF
MAY, 1996.
Tucker Drilling Company, Inc.
By:
-------------------------------
Its:
------------------------------
Patterson Energy, Inc.
By:
-------------------------------
Its:
------------------------------
3
<PAGE> 120
EXHIBIT I(B)
Gentlemen:
I have been advised that as of the date hereof I may be deemed to be an
"affiliate" of Patterson Energy, Inc., Delaware corporation ("PEC"), as the term
"affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 of
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (together with the rules and regulations promulgated hereunder, the
"Securities Act"), and/or (ii) used in and for purposes of Accounting Series,
Releases 130 and 135, as amended, of the Commission. Pursuant to the terms of
the Agreement and Plan of Merger, dated as of April 22, 1996 (the "Merger
Agreement"), Patterson Drilling Company, a Delaware corporation and a
wholly-owned subsidiary of PEC, will be merged (the "Merger") with and into
Tucker Drilling Company, Inc., a Delaware corporation ("TDC"), in consideration
of PEC Common Stock (as hereinafter defined) and the name of the surviving
corporation will be Patterson Drilling Company (the "Surviving Corporation").
As used herein, "PEC Common Stock" means the Common Stock, par value $0.01
per share, of PEC.
I represent, warrant, and covenant to PEC that in the event I receive any
PEC Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of any PEC
Common Stock acquired by me in the Merger in violation of the Securities
Act.
B. I have carefully read this letter and the Merger Agreement and
discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of PEC Common Stock, to the
extent I felt necessary, with my counsel or counsel for PEC.
C. I have been advised that the issuance of PEC Common Stock to me
pursuant to the Merger has been or will be registered with the Commission
under the Securities Act on a Registration Statement on Form S-4. However,
I have also been advised that, because at the time the Merger will be
submitted for a vote of the shareholders of TDC, I may be deemed to be an
affiliate of PEC, the distribution by me of any PEC Common Stock acquired
by me in the Merger will not be registered under the Securities Act and
that I may not sell, transfer, or otherwise dispose of any PEC Common Stock
acquired by me in the Merger unless (i) such sale, transfer, or other
disposition has been registered under the Securities Act, (ii) such sale,
transfer, or other disposition is made in conformity with the volume and
other limitations of Rule 145 promulgated by the Commission under the
Securities Act, or (iii) in the opinion of counsel reasonably acceptable to
PEC such sale, transfer, or other disposition is otherwise exempt from
registration under the Securities Act.
D. I understand that PEC is under no obligation to register under the
Securities Act the sale, transfer, or other disposition by me or on my
behalf of any PEC Common Stock acquired by me in the Merger or to take any
other action necessary in order to make an exemption from such registration
available.
E. I also understand that stop transfer instructions will be given to
PEC's transfer agent with respect to PEC Common Stock and that there will
be placed on the certificates for any PEC Common Stock acquired by me in
the Merger, or any substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933 applies. The shares represented by this certificate may only be
transferred in accordance with the terms of an agreement dated as of
April 22, 1996 between the registered holder hereof and the issuer of
this certificate, a copy of which agreement will be mailed to the holder
hereof without charge within five days after receipt of written request
therefore."
F. I also understand that unless the transfer by me of my PEC Common
Stock has been registered under the Securities Act or is a sale made in
conformity with the provisions of Rule 145, PEC reserves the right to put
the following legend on the certificates issued to my transferred:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired from a
person who received such shares in a transaction to which Rule 145
promulgated under the Securities Act of 1933 applies. The shares may not
be sold, pledged, or
<PAGE> 121
otherwise transferred except in accordance with an exemption from the
registration requirements of the Securities Act of 1933."
It is understood and agreed that the legends set forth in paragraph E and F
above shall be removed by the delivery of substitute certificates without such
legend if the undersigned shall have delivered to PEC a copy of a letter from
the staff of the Commission, or an opinion of counsel in form and substance
reasonably satisfactory to PEC, to the effect that such legend is not required
for purposes of the Securities Act.
I understand that (a) PEC will supply me with any information necessary to
enable me to make routine sales of any PEC Common Stock acquired by me in the
Merger as may be permitted, by and in accordance with, the provisions of Rule
144 under the Securities Act or any similar rule of the Commission hereafter
applicable, and (b) PEC will comply with all requirements of the Securities
Exchange Act of 1934 rules and regulations promulgated thereunder, (the
"Exchange Act") with respect to the filing by PEC of annual, periodic and other
reports on a timely basis in a manner sufficient to allow sales of any such PEC
Common Stock by me during the three year period following the Effective Time (as
defined in the Merger Agreement) if such sales are otherwise permitted by law or
regulation. Upon my written request, PEC shall furnish me with a written
statement representing that it has complied with the reporting requirements
enumerated in Rule 144(c)(1), or if PEC is not then subject to Section 13 or
15(d) of the Exchange Act, that it has made publicly available the information
concerning PEC required by Rule 144(c)(2).
I further represent to and covenant with PEC and the Surviving Corporation
that I will not, within the 30 days prior to the Effective Time (as defined in
the Agreement), sell, transfer, or otherwise dispose of any shares of PEC Common
Stock and that I will not sell, transfer, or otherwise dispose of any shares of
PEC Common Stock (whether or not acquired by me in the Merger) until after such
time as results covering at least 30 days of post-closing combined operations
have been published by PEC and the Surviving Corporation, in the form of a
quarterly earnings report, an effective registration statement filed with the
Commission, a report to the Commission on Form 10-K, 10-Q, or 8-K, or any other
public filing or announcement which includes the combined results of operations.
Furthermore, I understand that PEC will give stop transfer instructions to its
transfer agent in order to prevent the breach of the representations,
warranties, and covenants made by me in this paragraph. I also understand that
the Merger is intended to be treated for accounting purposes as a "pooling of
interests," and I agree that, if PEC advises me in writing that additional
restrictions apply to my ability to sell, transfer, or otherwise dispose of PEC
Common Stock in order to be entitled to use the pooling of interest accounting
method, I will abide by such restrictions.
Very truly yours,
By
---------------------------
Name:
ACCEPTED THIS DAY OF
MAY, 1996.
Patterson Energy, Inc.
By:
-------------------------------
Its:
------------------------------
2
<PAGE> 122
EXHIBIT II(A)
PATTERSON ENERGY, INC.
TUCKER DRILLING COMPANY, INC. STOCK OPTION ASSUMPTION AGREEMENT
(INCENTIVE STOCK OPTION PLAN)
AGREEMENT dated as of , 1996 (this "Agreement") between Patterson
Energy, Inc., a Delaware corporation ("PEI"), and , an individual
("Participant").
RECITALS
Tucker Drilling Company, Inc. ("TDC") and Participant have entered into one
or more stock option agreements ("TDC Option Agreements") relating to options
("Options") granted to Participant under TDC's Incentive Stock Option Plan (the
"TDC Incentive Plan") pursuant to which Participant is presently entitled to
purchase up to shares of Common Stock of TDC as shown in the schedule
attached to this Agreement.
TDC, PEI and Patterson Drilling Company ("PDC"), a Delaware corporation and
a wholly-owned subsidiary of PEI, have entered into an Agreement and Plan of
Merger dated as of April 22, 1996 (the "Merger Agreement") pursuant to which PDC
will merge with and into TDC in consideration to the TDC stockholders of shares
of PEI Common Stock (the "Merger"). Pursuant to Section 6.7 of the Merger
Agreement, at the Effective Time (as defined in the Merger Agreement) of the
Merger, all options to acquire shares of TDC Common Stock outstanding
immediately before the Effective Time shall be assumed by PEI.
By this Agreement, the parties desire to confirm the assumption
contemplated by Section 6.7 of the Merger Agreement as it relates to Options
granted under the TDC Incentive Plan.
AGREEMENT
PEI and Participant agree as follows:
1. ASSUMPTION OF OPTION. By this Agreement, PEI assumes, and
Participant agrees to the assumption by PEI of, all of the obligations of
TDC to Participant under the TDC Option Agreements except that:
(a) Each reference therein to "shares" shall mean shares of PEI
Common Stock, $0.01 par value per share;
(b) Each reference therein to a number of shares shall be a
reference to a number of shares determined by multiplying such number by
.74 (the "Conversion Ratio");
(c) Each reference therein to a price per share shall be a
reference to a price determined by dividing the price in the TDC Option
Agreement by the Conversion Ratio; and
(d) Each reference therein to the Committee shall mean the
Compensation Committee of the Board of Directors of PEI.
(The results of the computations in (b) and (c) above as applied to the
Participant's Options presently outstanding under the TDC Incentive Plan
appear in the Schedule to this Agreement.)
2. TDC INCENTIVE PLAN. By this Agreement, PEI assumes the TDC
Incentive Plan subject to the provisions of Section 1 above.
3. RECOGNITION OF VESTING, EXERCISES AND LAPSES. PEI acknowledges
that Participant's rights to exercise the Options covered by the TDC Option
Agreements have fully vested and Participant acknowledges that any lapses
or exercises of Options thereunder to date shall be recognized.
<PAGE> 123
4. REGISTRATION. Promptly following the date hereof, PEI will file a
Registration Statement on Form S-8 under the Securities Act of 1933 with
the Securities and Exchange Commission covering the Options being assumed
hereunder by PEI and agrees to thereafter file a "reoffer prospectus"
within the meaning of Instruction C-1 to Form S-8 with a Post-Effective
Amendment to such Registration Statement if necessary in order to permit
the reoffer or resale by Participant of PEI Common Stock acquired upon
exercise of the Options.
5. MISCELLANEOUS. This Agreement shall be construed in accordance
with the laws of the State of Texas. Except as required to give effect to
this Agreement, PEI and Participant confirm the terms of the TDC Option
Agreements.
IN WITNESS WHEREOF, PEI and Participant have caused this Agreement to be
signed as of the date first above written.
PATTERSON ENERGY, INC.
By:
-----------------------------
-----------------------------
Participant
2
<PAGE> 124
INCENTIVE STOCK OPTION PLAN
SCHEDULE TO
TUCKER DRILLING COMPANY, INC. STOCK OPTION
ASSUMPTION AGREEMENT DATED , 1996,
BETWEEN PEI AND
<TABLE>
<CAPTION>
OPTIONS ON
OPTIONS ON TDC COMMON STOCK PEI COMMON STOCK
- ------------------------------------------------------------------------------------ ----------------------
NO. OF NO. OF
SHARES NO. OF SHARES
UNDERLYING PRICE AT SHARES UNDERLYING
TERM OF OPTIONS WHICH AVAILABLE AS OPTIONS
DATE GRANTED OPTION GRANTED GRANTED OF 4/ /96 ASSUMED PRICE
- -------------------------------- ------- ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
$ $
-------- --------
</TABLE>
3
<PAGE> 125
EXHIBIT II(B)
PATTERSON ENERGY, INC.
TUCKER DRILLING COMPANY, INC. STOCK OPTION ASSUMPTION AGREEMENT
(1994 NON-QUALIFIED STOCK OPTION PLAN)
AGREEMENT dated as of , 1996 (this "Agreement") between Patterson
Energy, Inc., a Delaware corporation ("PEI"), and an individual
("Participant").
RECITALS
Tucker Drilling Company, Inc. ("TDC") and Participant have entered into one
or more stock option agreements ("TDC Option Agreements") relating to options
("Options") granted to Participant under TDC's 1994 Non-Qualified Stock Option
Plan (the "TDC Non-Qualified Plan") pursuant to which Participant is presently
entitled to purchase up to shares of Common Stock of TDC as shown in
the schedule attached to this Agreement.
TDC, PEI and Patterson Drilling Company ("PDC"), a Delaware corporation and
a wholly-owned subsidiary of PEI, have entered into an Agreement and Plan of
Merger dated as of April , 1996 (the "Merger Agreement") pursuant to which PDC
will merge with and into TDC in consideration to the TDC stockholders of shares
of PEI Common Stock (the "Merger"). Pursuant to Section 6.7 of the Merger
Agreement, at the Effective Time (as defined in the Merger Agreement) of the
Merger, all options to acquire shares of TDC Common Stock outstanding
immediately before the Effective Time shall be assumed by PEI.
By this Agreement, the parties desire to confirm the assumption
contemplated by Section 6.7 of the Merger Agreement as it relates to Options
granted under the TDC Non-Qualified Plan.
AGREEMENT
PEI and Participant agree as follows:
1. ASSUMPTION OF OPTION. By this Agreement, PEI assumes, and
Participant agrees to the assumption by PEI of, all of the obligations of
TDC to Participant under the TDC Option Agreements except that:
(a) Each reference therein to "shares" shall mean shares of PEI
Common Stock, $0.01 par value per share;
(b) Each reference therein to a number of shares shall be a
reference to a number of shares determined by multiplying such number by
.74 (the "Conversion Ratio");
(c) Each reference therein to a price per share shall be a
reference to a price determined by dividing the price in the TDC Option
Agreement by the Conversion Ratio; and
(d) Each reference therein to the Committee shall mean the
Compensation Committee of the Board of Directors of PEI.
(The results of the computations in (b) and (c) above as applied to the
Participant's Options presently outstanding under the TDC Non-Qualified
Plan appear in the Schedule to this Agreement.)
2. TDC NON-QUALIFIED PLAN. By this Agreement, PEI assumes the TDC
Non-Qualified Plan subject to the provisions of Section 1 above.
3. RECOGNITION OF VESTING, EXERCISES AND LAPSES. PEI acknowledges
that Participant's rights to exercise the Options covered by the TDC Option
Agreements have fully vested and Participant acknowledges that any lapses
or exercises of Options thereunder to date shall be recognized.
<PAGE> 126
4. REGISTRATION. Promptly following the date hereof, PEI will file a
Registration Statement on Form S-8 under the Securities Act of 1933 with
the Securities and Exchange Commission covering the Options being assumed
hereunder by PEI and agrees to thereafter file a "reoffer prospectus"
within the meaning of Instruction C-1 to Form S-8 with a Post-Effective
Amendment to such Registration Statement if necessary in order to permit
the reoffer or resale by Participant of PEI Common Stock acquired upon
exercise of the Options.
5. MISCELLANEOUS. This Agreement shall be construed in accordance
with the laws of the State of Texas. Except as required to give effect to
this Agreement, PEI and Participant confirm the terms of the TDC Option
Agreements.
IN WITNESS WHEREOF, PEI and Participant have caused this Agreement to be
signed as of the date first above written.
PATTERSON ENERGY, INC.
By:
---------------------------
---------------------------
Participant
2
<PAGE> 127
NON-QUALIFIED STOCK OPTION PLAN
SCHEDULE TO
TUCKER DRILLING COMPANY, INC. STOCK OPTION
ASSUMPTION AGREEMENT DATED , 1996,
BETWEEN PEI AND
<TABLE>
<CAPTION>
OPTIONS ON
OPTIONS ON TDC COMMON STOCK PEI COMMON STOCK
- ------------------------------------------------------------------------------------ ----------------------
NO. OF NO. OF
SHARES NO. OF SHARES
UNDERLYING PRICE AT SHARES UNDERLYING
TERM OF OPTIONS WHICH AVAILABLE AS OPTIONS
DATE GRANTED OPTION GRANTED GRANTED OF 4/ /96 ASSUMED PRICE
- -------------------------------- ------- ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
$ $
-------- --------
</TABLE>
3
<PAGE> 128
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AMENDMENT TO AGREEMENT AND PLAN OF MERGER dated May 16, 1996 ("Amendment to
Agreement") among Patterson Energy, Inc., a Delaware corporation ("Parent"),
Patterson Drilling Company, a Delaware corporation and a wholly-owned subsidiary
of Parent ("Sub"), and Tucker Drilling Company, Inc., a Delaware corporation
("the Company").
WITNESSETH:
WHEREAS, Parent, Sub and the Company entered into an Agreement and Plan of
Merger dated as of April 22, 1996 ("the Agreement"); and
WHEREAS, the parties to the Agreement desire to enter into this Amendment
to Agreement to amend the Agreement in certain respects.
NOW, THEREFORE, in consideration of the premises and agreements contained
herein and in the Agreement, the parties agree as follows:
1. Section 6.7 of the Agreement is hereby amended by deleting the first
sentence thereof and substituting the following sentence therefor:
"No later than the Effective Time, each option to purchase shares of
Company Common Stock (a "Company Stock Option") which is outstanding immediately
prior to the Effective Time pursuant to the Company's stock option plans in
effect on the date of this Agreement ("the Company Stock Plans") shall represent
at the Effective Time an option to purchase the number of shares of Parent
Common Stock (a "Substituted Option") (decreased to the nearest full share)
determined by multiplying (i) the number of shares of Company Common Stock
subject to such Company Stock Option immediately prior to the Effective Time by
(ii) the Exchange Ratio, at an exercise price per share of Parent Common Stock
(rounded down to the nearest whole cent) equal to the exercise price per share
of Company Common Stock immediately prior to the Effective Time divided by the
Exchange Ratio."
2. Section 6.11 shall be amended by adding to the first sentence after
"("the Supplemental Retirement Plan")" the following: ", the severance payment
agreements of the Company set forth in Section 3.11 of the Company Disclosure
Schedule . . ."
3. Section 7.1(f) shall be amended by deleting "May 15, 1996" appearing in
the second line thereof and substituting "May 20, 1996" therefor.
4. The forms of Stock Option Assumption Agreement attached to the Agreement
as Exhibit II(A) and II(B) are hereby deleted in their entirety and replaced
with the forms of Stock Option Assumption Agreement attached hereto as Exhibit
II(A) and (B).
5. This Amendment to Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when one or more counterparts shall have been signed by each of the parties and
delivered to the other parties.
6. The Agreement, as amended by this Amendment to Agreement, shall remain
in full force and effect.
<PAGE> 129
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Amendment
to Agreement to be signed by their respective officers thereunto duly authorized
as of the date first above written.
PATTERSON ENERGY, INC.
By: /s/ CLOYCE A. TALBOTT
-----------------------------------
Cloyce A. Talbott
Chairman and Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- ------------------------------
James C. Brown, Secretary
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
-----------------------------------
Cloyce A. Talbott
Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- ------------------------------
James C. Brown, Secretary
TUCKER DRILLING COMPANY, INC.
By: /s/ T. MARK TUCKER
-----------------------------------
T. Mark Tucker
Acting Chairman and Chief Executive
Officer
Attest:
/s/ CHARLES B. MIDDLEKAUF
- ------------------------------
Charles B. Middlekauf, Secretary
2
<PAGE> 130
EXHIBIT II(A)
PATTERSON ENERGY, INC.
TUCKER DRILLING COMPANY, INC. STOCK OPTION ASSUMPTION AGREEMENT
(INCENTIVE STOCK OPTION PLAN)
AGREEMENT dated as of , 1996 (this "Agreement") between Patterson
Energy, Inc., a Delaware corporation ("PEI"), and , an individual
("Participant").
RECITALS
Tucker Drilling Company, Inc. ("TDC") and Participant have entered into one
or more stock option agreements ("TDC Option Agreements") relating to options
("Options") granted to Participant under TDC's Incentive Stock Option Plan (the
"TDC Incentive Plan") pursuant to which Participant is presently entitled to
purchase up to shares of Common Stock of TDC as shown in the schedule
attached to this Agreement.
TDC, PEI and Patterson Drilling Company ("PDC"), a Delaware corporation and
a wholly-owned subsidiary of PEI, have entered into an Agreement and Plan of
Merger dated as of April , 1996 (the "Merger Agreement"), pursuant to which
PDC will merge with and into TDC in consideration to the TDC stockholders of
shares of PEI Common Stock (the "Merger"). Pursuant to Section 6.7 of the Merger
Agreement, at the Effective Time (as defined in the Merger Agreement) of the
Merger, all options to acquire shares of TDC Common Stock outstanding
immediately before the Effective Time shall be assumed by PEI.
By this Agreement, the parties desire to confirm the assumption
contemplated by Section 6.7 of the Merger Agreement as it relates to Options
granted under the TDC Incentive Plan.
AGREEMENT
PEI and Participant agree as follows:
1. ASSUMPTION OF OPTION. By this Agreement, PEI assumes, and
Participant agrees to the assumption by PEI of, all of the obligations of
TDC to Participant under the TDC Option Agreements except that:
(a) Each reference therein to "shares" shall mean shares of PEI
Common Stock, $0.01 par value per share;
(b) Each reference therein to a number of shares shall be a
reference to a number of shares determined by multiplying such number by
.74 (the "Conversion Ratio");
(c) Each reference therein to a price per share shall be a
reference to a price determined by dividing the price in the TDC Option
Agreement by the Conversion Ratio; and
(d) Each reference therein to the Committee shall mean the
Compensation Committee of the Board of Directors of PEI.
(The results of the computations in (b) and (c) above as applied to the
Participant's Options presently outstanding under the TDC Incentive Plan
appear in the Schedule to this Agreement.)
2. TDC INCENTIVE PLAN. By this Agreement, PEI assumes the TDC
Incentive Plan subject to the provisions of Section 1 above.
3. RECOGNITION OF VESTING, EXERCISES AND LAPSES. PEI acknowledges
that Participant's rights to exercise the Options covered by the TDC Option
Agreements have fully vested prior to the date hereof
<PAGE> 131
and Participant acknowledges that any lapses or exercises of Options
thereunder to date shall be recognized.
4. REGISTRATION. Promptly following the date hereof, PEI will file a
Registration Statement on Form S-8 under the Securities Act of 1933 with
the Securities and Exchange Commission covering the Options being assumed
hereunder by PEI and agrees to thereafter file a "reoffer prospectus"
within the meaning of Instruction C-1 to Form S-8 with a Post-Effective
Amendment to such Registration Statement if necessary in order to permit
the reoffer or resale by Participant of PEI Common Stock acquired upon
exercise of the Options.
5. MISCELLANEOUS. This Agreement shall be construed in accordance
with the laws of the State of Texas. Except as required to give effect to
this Agreement, PEI and Participant confirm the terms of the TDC Option
Agreements.
IN WITNESS WHEREOF, PEI and Participant have caused this Agreement to be
signed as of the date first above written.
PATTERSON ENERGY, INC.
By:
-------------------------------
-------------------------------
Participant
2
<PAGE> 132
INCENTIVE STOCK OPTION PLAN
SCHEDULE TO
TUCKER DRILLING COMPANY, INC. STOCK OPTION
ASSUMPTION AGREEMENT DATED , 1996,
BETWEEN PEI AND
<TABLE>
<CAPTION>
OPTIONS ON
OPTIONS ON TDC COMMON STOCK PEI COMMON STOCK
- ------------------------------------------------------------------------------------ ----------------------
NO. OF NO. OF
SHARES NO. OF SHARES
UNDERLYING PRICE AT SHARES UNDERLYING
TERM OF OPTIONS WHICH AVAILABLE AS OPTIONS
DATE GRANTED OPTION GRANTED GRANTED OF 4/ /96 ASSUMED PRICE
- -------------------------------- ------- ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
$ $
-------- --------
</TABLE>
3
<PAGE> 133
EXHIBIT II(B)
PATTERSON ENERGY, INC.
TUCKER DRILLING COMPANY, INC. STOCK OPTION ASSUMPTION AGREEMENT
(1994 NON-QUALIFIED STOCK OPTION PLAN)
AGREEMENT dated as of , 1996 (this "Agreement") between Patterson
Energy, Inc., a Delaware corporation ("PEI"), and , an individual
("Participant").
RECITALS
Tucker Drilling Company, Inc. ("TDC") and Participant have entered into one
or more stock option agreements ("TDC Option Agreements") relating to options
("Options") granted to Participant under TDC's 1994 Non-Qualified Stock Option
Plan (the "TDC Non-Qualified Plan") pursuant to which Participant is presently
entitled to purchase up to shares of Common Stock of TDC as shown in
the schedule attached to this Agreement.
TDC, PEI and Patterson Drilling Company ("PDC"), a Delaware corporation and
a wholly-owned subsidiary of PEI, have entered into an Agreement and Plan of
Merger dated as of April , 1996 (the "Merger Agreement") pursuant to which
PDC will merge with and into TDC in consideration to the TDC stockholders of
shares of PEI Common Stock (the "Merger"). Pursuant to Section 6.7 of the Merger
Agreement, at the Effective Time (as defined in the Merger Agreement) of the
Merger, all options to acquire shares of TDC Common Stock outstanding
immediately before the Effective Time shall be assumed by PEI.
By this Agreement, the parties desire to confirm the assumption
contemplated by Section 6.7 of the Merger Agreement as it relates to Options
granted under the TDC Non-Qualified Plan.
AGREEMENT
PEI and Participant agree as follows:
1. ASSUMPTION OF OPTION. By this Agreement, PEI assumes, and
Participant agrees to the assumption by PEI of, all of the obligations of
TDC to Participant under the TDC Option Agreements except that:
(a) Each reference therein to "'shares" shall mean shares of PEI
Common Stock, $0.01 par value per share;
(b) Each reference therein to a number of shares shall be a
reference to a number of shares determined by multiplying such number by
.74 (the "Conversion Ratio");
(c) Each reference therein to a price per share shall be a
reference to a price determined by dividing the price in the TDC Option
Agreement by the Conversion Ratio; and
(d) Each reference therein to the Committee shall mean the
Compensation Committee of the Board of Directors of PEI.
(The results of the computations in (b) and (c) above as applied to the
Participant's Options presently outstanding under the TDC Non-Qualified
Plan appear in the Schedule to this Agreement.)
2. TDC NON-QUALIFIED PLAN. By this Agreement, PEI assumes the TDC
Non-Qualified Plan subject to the provisions of Section 1 above.
3. RECOGNITION OF EXERCISES AND LAPSES. Participant acknowledges that
any lapses or exercises of Options thereunder to date shall be recognized.
<PAGE> 134
4. REGISTRATION. Promptly following the date hereof, PEI will file a
Registration Statement on Form S-8 under the Securities Act of 1933 with
the Securities and Exchange Commission covering the Options being assumed
hereunder by PEI and agrees to thereafter file a "reoffer prospectus"
within the meaning of Instruction C-1 to Form S-8 with a Post-Effective
Amendment to such Registration Statement if necessary in order to permit
the reoffer or resale by Participant of PEI Common Stock acquired upon
exercise of the Options.
5. MISCELLANEOUS. This Agreement shall be construed in accordance
with the laws of the State of Texas. Except as required to give effect to
this Agreement, PEI and Participant confirm the terms of the TDC Option
Agreements.
IN WITNESS WHEREOF, PEI and Participant have caused this Agreement to be
signed as of the date first above written.
PATTERSON ENERGY, INC.
By:
-------------------------------
-------------------------------
Participant
2
<PAGE> 135
NON-QUALIFIED STOCK OPTION PLAN
SCHEDULE TO
TUCKER DRILLING COMPANY, INC. STOCK OPTION
ASSUMPTION AGREEMENT DATED , 1996,
BETWEEN PEI AND
<TABLE>
<CAPTION>
OPTIONS ON
OPTIONS ON TDC COMMON STOCK PEI COMMON STOCK
- ------------------------------------------------------------------------------------ ----------------------
NO. OF NO. OF
SHARES NO. OF SHARES
UNDERLYING PRICE AT SHARES UNDERLYING
TERM OF OPTIONS WHICH AVAILABLE AS OPTIONS
DATE GRANTED OPTION GRANTED GRANTED OF 4/ /96 ASSUMED PRICE
- -------------------------------- ------- ---------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
$ $
-------- --------
</TABLE>
3
<PAGE> 136
ANNEX II(A)
[TM CAPITAL CORP. LETTERHEAD]
June 20, 1996
Board of Directors
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, TX 79549
Gentlemen:
We understand that Patterson Energy, Inc. ("Patterson") and Tucker Drilling
Company, Inc. ("Tucker") are proposing a merger (the "Merger") whereby a
wholly-owned subsidiary of Patterson shall be merged with and into Tucker,
pursuant to the terms and conditions of an Agreement and Plan of Merger dated
April 22, 1996, as amended on May 16, 1996 (the "Merger Agreement"). Under the
terms of the Merger, each outstanding share of Tucker Common Stock shall be
converted into 0.74 shares of Patterson Common Stock (the "Exchange Ratio"). You
have requested our opinion as to the fairness, from a financial point of view,
to Patterson and its stockholders, of the consideration to be paid by Patterson
pursuant to the Merger Agreement and the Exchange Ratio.
You have furnished us with the Prospectus/Joint Proxy Statement of
Patterson and Tucker for the Special Meeting of Stockholders of Patterson to be
held in connection with the Merger in substantially the form to be sent to
stockholders. The Merger Agreement appears as Annex I to the Prospectus/Joint
Proxy Statement.
For the purpose of this opinion, we have undertaken certain reviews,
analyses and inquiries as we have deemed relevant and have, among other things:
(i) reviewed the Prospectus/Joint Proxy Statement;
(ii) reviewed publicly available information relating to both Patterson
and Tucker, including Patterson's annual reports on Form 10-KSB and
annual reports to shareholders for the three fiscal years ended
December 31, 1995, Patterson's quarterly report on Form 10-Q for the
quarter ended March 31, 1996 and the prospectus for the initial
public offering of Patterson dated November 2, 1993, and Tucker's
annual reports on Form 10-KSB and annual reports to shareholders for
the five fiscal years ended March 31, 1996;
(iii) discussed with senior management of both Patterson and Tucker the
companies' historical and current operations, financial condition
and future prospects and reviewed certain internal financial
information, business plans and forecasts prepared by their
respective managements;
(iv) visited the headquarters, as well as certain rig sites, of both
Patterson and Tucker;
(v) reviewed the historical prices and trading volumes of the Common
Stock of both Patterson and Tucker;
(vi) reviewed certain financial and market data for both Patterson and
Tucker and compared such information with similar information for
certain publicly traded companies which we deemed comparable;
(vii) reviewed the financial terms of certain mergers and acquisitions of
businesses which we deemed comparable;
(viii) analyzed the pro forma contributions of Patterson and Tucker to the
combined business; and
<PAGE> 137
(ix) performed such other analyses and investigations and considered such
other factors as we deemed appropriate.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the financial and other information provided to us
regarding both Patterson and Tucker, and we have not assumed any responsibility
for the independent verification of such information. We have further relied
upon the assurance of management of both Patterson and Tucker that they are
unaware of any facts that would make such information incomplete or misleading.
In arriving at our opinion, we have not performed any independent evaluation or
appraisal of the assets of Patterson and Tucker. In rendering our opinion, we
have assumed and relied upon Patterson's ability to use the pooling of interests
accounting method in connection with the Merger. Our opinion is necessarily
based on the economic, market and other conditions existing on the date of our
opinion.
Based upon the foregoing, it is our opinion as of the date hereof that the
consideration to be paid by Patterson pursuant to the Merger Agreement and the
Exchange Ratio are fair to Patterson and its stockholders from a financial point
of view.
Very truly yours,
/s/ TM CAPITAL CORP.
---------------------------
TM CAPITAL CORP.
<PAGE> 138
ANNEX II(B)
[GILFORD SECURITIES INCORPORATED LETTERHEAD]
June 20, 1996
Board of Directors
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, TX 79549
Gentlemen:
You have requested our opinion, as investment bankers, as to the fairness,
from a financial point of view, to Patterson Energy, Inc. ("Patterson"), as of
the date hereof, of the consideration to be paid by Patterson (the "Merger
Consideration") pursuant to the Agreement and Plan of Merger dated April 22,
1996, as amended on May 16, 1996 (the "Merger Agreement") by and between
Patterson, Tucker Drilling Company, Inc. ("Tucker"). As more fully described in
the Agreement, each share of Common Stock of Tucker will be exchanged (the
"Exchange Ratio") for 0.74 shares of Common Stock, par value $0.01 per share
Patterson Energy, Inc.
In preparing this opinion, we have relied on and assumed the accuracy and
completeness of all the financial and other information provided to us or
publicly available and have not assumed any responsibility for independent
verification of any such information. We have not conducted a physical
inspection of all of the facilities or assets of Tucker, nor have we made or
obtained any independent appraisals of any such facilities or assets. In
rendering this opinion, we have assumed Patterson's ability to use a "pooling of
interest" accounting method in connection with the merger.
You have furnished us with the Prospectus/Joint Proxy Statement of
Patterson and Tucker for the Special Meeting of Stockholders of Patterson to be
held in connection with the Merger in substantially the form to be sent to
stockholders. The Merger Agreement appears as Annex I to the Prospectus/Joint
Proxy Statement.
In connection with rendering our opinion we have reviewed and analyzed,
among other things, the following:
(i) The Prospectus/Joint Proxy Statement.
(ii) The Agreement and Plan of Merger among Patterson Energy, Inc.,
Patterson Drilling Company and Tucker Drilling Company, Inc., dated
April 22, 1996, as amended on May 16, 1996.
(iii) Certain public information concerning Patterson and Tucker, including
their Annual Reports on Form 10-KSB for the year ended December 31,
1995; and March 31, 1996, respectively; and Patterson's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
(iv) Certain internal information, primarily historical in nature,
concerning the business and operations of Tucker, which was
furnished to us by Tucker for use in our analysis.
(v) Certain publicly available information concerning certain other
companies and transactions we deemed relevant.
<PAGE> 139
We have also held discussions and interviewed members of the senior
management, officers and other employees of both Tucker and Patterson, regarding
the past and current business operations, financial condition, and future
prospects of their respective companies.
We have assumed that the financial projections prepared by the managements
of Patterson and Tucker represent the best current judgment of these managements
as to the future financial condition and results of operations of Patterson and
Tucker, and have assumed that the projections have been reasonably prepared
based on such current judgment. Further we have assumed that the managements of
Patterson and Tucker are unaware of any facts that would make such information
incomplete or misleading. We have also taken into account our assessment of
general economic, market, and financial conditions and our experience in similar
transactions.
Our opinion, necessarily is based upon regulatory, economic, market and
other conditions as they exist, and the information made available to us, which
we relied upon without independent verification, as of the date of this letter.
Subsequent developments may affect this opinion, and we do not have any
obligation to update, revise or reaffirm this opinion.
As you are aware, Gilford Securities Incorporated ("Gilford") has acted as
financial advisor to Patterson in the past and will receive a fee for its
services in connection with rendering this opinion to Patterson. In addition,
Patterson has agreed to reimburse Gilford for certain out of pocket expenses,
and to indemnify Gilford for certain liabilities which may arise from, among
other things, the delivery of this opinion.
This letter does not constitute a recommendation to any holder of Patterson
Common Stock as to whether to vote in favor of the proposed merger contemplated
by the Merger Agreement and does not address the underlying business decision of
the Board of Directors of Patterson to proceed with or effect such proposed
merger.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Merger Consideration (including the
Exchange Ratio) is fair to Patterson, from a financial point of view.
Very Truly Yours,
/s/ RONALD W. WEISS
GILFORD SECURITIES INCORPORATED
<PAGE> 140
ANNEX III
[RAUSCHER PIERCE REFSNES, INC. LETTERHEAD]
June 20, 1996
Board of Directors
Tucker Drilling Company, Inc.
Petroleum Building
14 East Beauregard
San Angelo, Texas 76902
Gentlemen:
You have requested our opinion, as investment bankers, as to the fairness
from a financial point of view to the stockholders of Tucker Drilling Company,
Inc., a Delaware corporation ("Tucker"), of the terms of the proposed merger as
set forth in the Agreement and Plan of Merger dated April 22, 1996 (the
"Agreement") by and among Tucker, Patterson Energy, Inc., a Delaware corporation
("Patterson"), and Patterson Drilling Company ("Acquisition"), a newly formed,
wholly-owned subsidiary of Patterson. Pursuant to the Agreement, Acquisition
will be merged with and into Tucker, with Tucker to become a wholly-owned
subsidiary of Patterson (the "Merger"), and each outstanding share of Tucker
common stock, $.01 par value ("Tucker Common"), will be converted into the right
to receive 0.74 shares of Patterson common stock, $.01 par value ("Patterson
Common"). We understand that the Merger will be accounted for as a pooling of
interests transaction in accordance with generally accepted accounting
principles as described in Accounting Principles Board Opinion Number 16.
In arriving at our opinion, we have reviewed the Agreement and certain
publicly available business and financial information concerning Tucker and
Patterson. We have also met with the managements of Tucker and Patterson to
discuss the businesses and prospects of Tucker and Patterson. In addition, we
have considered certain long-term strategic benefits, both operational and
financial, that were described to us by the senior managements of Tucker and
Patterson.
We have reviewed the terms of the Merger in relation to, among other
things: current and historical market prices and trading volume of the Tucker
Common and the Patterson Common; the respective companies' earnings and cash
flow; the capitalization and financial condition of Tucker and Patterson; the
pro forma financial impact of the Merger on Tucker and Patterson, including the
relative ownership of Patterson Common after the Merger by the current
shareholders of Tucker and Patterson; and the terms of recent merger and
acquisition transactions involving comparable public companies. We have also
analyzed certain financial, stock market and other publicly available
information relating to the businesses of other public companies whose
operations we consider comparable to the operations of Tucker and Patterson. In
addition to the foregoing, we have considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
as we deemed relevant in arriving at our opinion.
In connection with our review, we have not independently verified any of
the foregoing information, and we have relied upon it being complete and
accurate in all material respects. In addition, we have not made an independent
evaluation or appraisal of the assets of Tucker or Patterson. In rendering our
opinion, we have assumed that in the course of obtaining the necessary
regulatory and governmental approvals for the proposed Merger, no restriction
will be imposed that will have a material adverse effect on the contemplated
benefits of the proposed Merger. Our opinion is based upon circumstances
existing and disclosed to us as of the date hereof.
We have acted as financial advisor to the Board of Directors of Tucker in
connection with the Merger, have received a fee for such advisory services and
will receive an additional fee if the Merger is consummated. In the ordinary
course of our business, we may trade the securities of Tucker and Patterson for
our own
<PAGE> 141
account and for the accounts of customers and, accordingly, may at any time hold
a long or short position in such securities.
Based upon and subject to the foregoing, our experience as investment
bankers, our work described above and other factors we deemed relevant, we are
of the opinion that the terms of the Merger are fair to the shareholders of
Tucker from a financial point of view.
Very truly yours,
/s/ RAUSCHER PIERCE REFSNES, INC.
RAUSCHER PIERCE REFSNES, INC.
<PAGE> 142
ANNEX IV
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT UNDER 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.
(Name of small business issuer 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)
Issuer's telephone number, including area code: (915) 573-1104
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK $.01 Par Value
-------------------------------
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
The issuer's revenues for the year ended December 31, 1995, were
$46,654,572.
The aggregate market value of the voting stock held by non affiliates of
the issuer as of March 6, 1996 was $28,940,925.
As of March 6, 1996, the issuer had outstanding 3,194,951 shares of Common
Stock, par value $0.01 per share, its only class of Common Stock.
DOCUMENT INCORPORATED BY REFERENCE
The following document is incorporated by reference into Part III of this
Annual Report on Form 10-KSB: Definitive Proxy Statement for the issuer's 1996
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format (Check one):
Yes / / No /X/
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<PAGE> 143
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Patterson Energy, Inc. (the "Company" or "Patterson") was organized as a
Texas corporation in January 1978 and was reincorporated as a Delaware
corporation in October 1993. The Company was organized under the name Patterson
Drilling Company, Inc. In 1984, the Company changed its name to Patterson
Energy, Inc., but continues to conduct business under the assumed name of
Patterson Drilling Company. The Company completed an initial public offering
("IPO") of Common Stock and Redeemable Warrants during December 1993. All of the
Redeemable Warrants have either been exercised, redeemed, or expired. Unless
otherwise indicated, all references herein to the "Company" or "Patterson"
include Patterson Energy, Inc., and its consolidated wholly-owned subsidiaries.
Patterson is engaged in onshore contract drilling for oil and gas, and, to
a lesser extent, in the exploration, development and production of oil and gas.
The Company's operations are conducted in the Permian Basin in West Texas and
Southeastern New Mexico and in South and Southeast Texas, primarily in the
Austin Chalk Trend. The Company has no current plans to operate outside of these
areas, but may do so if favorable opportunities arise.
Contract Drilling Operations. The Company has been engaged in the contract
drilling business since its inception in 1978 and is a leading provider of
contract drilling services in the Austin Chalk Trend and the Permian Basin.
Patterson owns 27 drilling rigs, 26 of which are currently operable. Fourteen of
the 27 rigs and interests in two others owned in part by Patterson were acquired
(or, in the case of one of the rigs, constructed) after the Company's IPO. See
"Recent Rig Acquisitions" below in this Item. The Company's rigs have rated
maximum depth capabilities ranging from 9,000 to 22,000 feet and can be used for
either vertical or horizontal drilling. Wells drilled in the Permian Basin are
primarily vertical wells. Both vertical and horizontal wells are drilled with
Patterson rigs in South and Southeast Texas.
The Company markets its contract drilling services to major oil companies
and independent producers primarily under standard daywork and footage
contracts. During 1995, Patterson contract drilled 215 wells for 68
nonaffiliated customers, as compared to 171 wells drilled for 61 nonaffiliated
customers in 1994. The Company has substantial experience in contract drilling
horizontal wells, primarily in the Austin Chalk Trend. Of the wells drilled in
1995 and 1994, 54 in each year were horizontal wells.
The Company's business strategy for its contract drilling operations is to
build upon its reputation in the market place by, among other matters,
continuing its ongoing program of upgrading and maintaining its drilling rigs in
good operating condition and retaining high quality, experienced drilling
supervisors in the field. In addition, if favorable opportunities arise, the
Company will seek to expand its rig fleet through selected acquisitions and or
mergers.
Oil and Gas Operations. The Company has been engaged in oil and gas
exploration, development and production in the Austin Chalk Trend and Permian
Basin since early 1982. Beginning in the first quarter of 1986, Patterson's
exploration and development effort was severely curtailed due to a steep drop in
the price of oil and gas, a decline in cash flow and a severe liquidity
shortage. Prior to the Company's IPO, the Company's ability to significantly
expand its exploration, development and production activities in the Austin
Chalk Trend and the Permian Basin was impaired due to a continuing liquidity
shortage. Net proceeds from the IPO provided Patterson with initial capital to
expand these activities.
Since the completion of the IPO in December 1993, Patterson has
participated as a working interest owner in the drilling of 68 gross (8.6 net)
development wells and nine gross (2.0 net) exploratory wells in its two areas of
operations, of which 53 gross (6.4 net) development wells and two gross (0.4
net) exploratory wells were completed as productive. Primarily as a result of
these operations, Patterson has increased its proved developed reserves from
approximately 407,000 BOE at December 31, 1993, to approximately 1,267,000 BOE
at December 31, 1995. Over this same period, Patterson's present value of
estimated future net revenues before income taxes discounted at 10% has
increased from approximately $2,603,000 to
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<PAGE> 144
approximately $7,858,000 at December 31, 1995. The Company's average daily
production has increased from approximately 382 BOE in the fourth quarter of
1993 to approximately 900 BOE in the fourth quarter of 1995. As of December 31,
1995, the Company was the operator of 223 wells as compared to approximately 89
Company-operated wells at the time of the IPO. Patterson owns a working interest
in substantially all of the operated wells.
The Company's business strategy for its oil and gas operations is to
increase its oil and gas reserves primarily through development drilling, as
well as selected acquisitions of producing properties for further development.
The development drilling is expected to occur near producing properties.
Although Patterson from time to time will participate through a working interest
in exploratory drilling, the focus of the Company's drilling activities for the
foreseeable future will be exploration and development drilling in South and
Southeast Texas, including the Austin Chalk Trend (horizontal drilling of the
Austin Chalk, Buda, Edwards, Glenrose and Georgetown formations) and three
dimensional ("3-D") seismic prospects in the Permian Basin of West Texas and
Southeastern New Mexico and in South Texas.
Other. The Company is also engaged in the marketing of oil produced from
Company-operated wells through Patterson Petroleum Trading Company, Inc., a
wholly-owned subsidiary ("Patterson Trading"). Patterson believes that this
business is not material to its overall operations.
In October 1994, Patterson incorporated Patterson Drilling Programs, Inc.
("Patterson Programs") as a wholly-owned subsidiary to act as managing partner
of general and/or limited partnerships which may be organized from time to time
for the purpose of exploration, development and production of oil and gas. No
partnerships have been organized to date, and no assurance can be given that any
partnerships will be organized. Patterson Programs is in the process of
attempting to organize a limited partnership through a private placement of from
$1,000,000 to $2,000,000 of limited partnership interests. As of March 4, 1996,
the $1,000,000 minimum had not been sold. The private placement expires June 1,
1995 and if the private placement is unsuccessful the Company will be required
to expense approximately $71,000 of organizational costs. If the private
placement is successfully completed, of which there can be no assurance, the net
funds will be expended on development drilling in the Permian Basin in West
Texas and Southeastern New Mexico and in South and Southeast Texas. Patterson
Programs would serve as the general partner of this partnership, if organized,
and would be allocated 1% of partnership revenues and costs before well payout,
and 25% of partnership revenues and costs after well payout.
INDUSTRY SEGMENTS
The Company's revenues, operating profits and identifiable operating assets
are attributable to two industry segments: (i) contract drilling, and (ii) oil
and gas exploration, development and production. The contract drilling segment
operated at a profit during each of the years in the three-year period ended
December 31, 1995. The oil and gas segment operated at a profit for the year
ended December 31, 1993 and operated at a loss for the years ended December 31,
1994 and 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 11 of Notes to Consolidated Financial
Statements included as a part of Item 7 of this report for financial information
pertaining to these industry segments.
RECENT RIG ACQUISITIONS
Patterson has acquired 13 drilling rigs and interests in two others
previously owned in part by the Company, together with related equipment and a
yard facility, since its IPO. The following subparagraphs set forth certain
information concerning these acquisitions:
(a) During July 1994, the Company acquired certain assets of Questor
Drilling Corp. ("Questor"), a Delaware corporation wholly owned by Phibro
Energy, USA, Inc., pursuant to the terms of an Asset Purchase Agreement, dated
July 8, 1994 (the "Agreement"). The assets acquired consisted of: (a) nine
operable drilling rigs and related equipment consisting primarily of 16 rig
hauling trucks; and (b) a yard facility consisting of approximately 11 acres and
improvements thereon. See "Item 2 -- Description of Properties -- Drilling Rigs
and Related Equipment -- Headquarters and Other Offices." The nine rigs were
added to the
3
<PAGE> 145
Company's drilling fleet in July 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 valued for the purpose of this transaction at $7.50 per share
($1,875,000). The closing sales price of the Common Stock on the Nasdaq National
Market on the last day prior to the closing of the acquisition was $7.00. The
total value of the transaction was $6,375,000. The cash portion of the purchase
price was paid from the proceeds of a $5,000,000 bank loan obtained by the
Company at the time of the transaction and collateralized by the nine rigs. See
Note 4 of Notes to Consolidated Financial Statements included as a part of Item
7 of this report. The remaining $500,000 of loan proceeds was added to the
Company's working capital and used for general corporate purposes. The drilling
rigs, related equipment and yard facility were used by Questor in its contract
drilling operations in South Texas. Patterson hired approximately 148 of the
former employees of Questor consisting of three office personnel and 145 field
personnel.
Pursuant to the terms of the Agreement, Patterson assumed (i) certain
contracts, primarily drilling contracts, to which Questor was a party, and
agreed to pay, perform and discharge the obligations of Questor arising
thereunder after the date of the transaction, and (ii) all liabilities of the
Company arising on or after the date of the transaction, in connection with the
Company's operation of the acquired assets. The Company granted certain
registration rights (at its expense) to Questor with respect to the 250,000
shares pursuant to the terms of a registration rights agreement. Certain of
these rights were transferable to assignees of Questor. The registration rights
consisted of unlimited "piggy back rights" and a one-time demand to cause
Patterson to file a registration statement covering resale of the shares,
provided that the number of shares that could be sold in any month pursuant to
the registration statement could not exceed 50,000 shares. Patterson also agreed
that, in the event Questor and/or an assignee thereof (collectively the
"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 still held by the Holder at
the best available price; provided, however, that any proceeds from such sale in
excess of $9.00 per share (calculated before deduction of any brokerage
commission) would be paid to Patterson. 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.
During September 1995, the 250,000 shares were sold to an affiliate of
Questor and then immediately resold 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 a resale under Rule 144(k) of the Securities Act.
The 50,000 share per month restriction remains in the Amended and Restated
Agreement, but the provisions relating to the $7.50 price guarantee and the
remittance to Patterson of sales proceeds in excess of $9.00 per share were
eliminated.
(b) 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. See "Certain Transactions" and
Note 8 of Notes to Consolidated Financial Statements included as a part of Item
7 of this report. The rigs have been included in the Company's drilling fleet
and operated by Patterson since 1981.
(c) During May 1995, Patterson acquired three rigs and related equipment
from Perry E. Esping, a non-affiliated person. The rigs and related equipment
had been stacked in a yard facility in Oklahoma for several years prior to the
acquisition. The rigs and equipment were moved to the Company's yard facility in
Snyder, Texas in June 1995, for assembly. The assembly of one of the rigs was
completed in September 1995, and the rig was added to the Company's drilling
fleet at that time. The assembly of a second rig was completed in December 1995,
however, the rig has not been utilized at this date. The third rig is still
unassembled in the
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<PAGE> 146
Company's yard facility in Snyder. 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 $7.00 per share ($682,500), and warrants to purchase an
additional 75,000 shares at an exercise price of $9.00 per share valued for
purposes of the transaction at $39,750. The total value of the transaction was
$1,089,750. On May 22, 1995, the last business day prior to the transaction, the
last reported sales price of the Common Stock on the Nasdaq National Market was
$7.625 per share. Patterson has granted certain registration rights to Mr.
Esping 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 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 Nasdaq National Market over the preceding twelve
calendar months, and (b) "piggy-back rights" to join the Registrable Securities
at the Company's expense in any registration statements filed by the Company
with the Commission prior to May 1999.
(d) During May 1995, the Company acquired one operable drilling rig from
Sojourner Drilling Company, Abilene, Texas. The purchase price for this rig was
$360,000 cash. The rig was added to the Company's drilling fleet in May 1995.
CONTRACT DRILLING OPERATIONS
GENERAL
The Company markets its contract drilling services to major oil companies
and independent oil and gas producers. The Company owns 27 drillings rigs, 26
which are currently operable. Twelve of the operable drilling rigs are based in
South and Southeast Texas and 14 of the operable rigs are based in West Texas.
The rigs have rated maximum depth capabilities ranging from 9,000 feet to 22,000
feet.
The 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 rig used for a
particular job. The Company's rigs are utilized for both exploration and
development drilling and can be used for either vertical or horizontal drilling.
Wells drilled with Company rigs in the Permian Basin are primarily vertical
wells. Both vertical wells and horizontal wells are drilled with Company rigs in
South and Southeast Texas.
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.
BUSINESS STRATEGY
The Company achieved its current position as a leading provider of contract
drilling services in its two primary areas of operations by providing high
quality services to its customers at competitive rates. Although generally of
lesser importance than price, Patterson 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 improving and replacing components of its drilling
rigs. Patterson also strives to employ experienced and dedicated drilling
supervisors for its various rigs in the field.
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<PAGE> 147
Patterson 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 expand its rig fleet through
selected acquisitions and or mergers.
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.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,(1)
--------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Number of wells drilled and completed(2).................... 132 179 229
Rigs available for service(3)............................... 12 18 23
Utilization rate of rigs available for service(3)(4)........ 79% 83% 78%
</TABLE>
- ---------------
(1) Average for the periods stated, other than number of wells drilled.
(2) Includes wells drilled in which Patterson owned small working interests as
follows: nine in 1993, eight in 1994 and 14 in 1995.
(3) Reflects two rigs owned 42.15% by Patterson and 57.85% by an affiliated
entity until April 1995, when Patterson acquired a 100% interest in the
rigs. See subcaption "Recent Rig Acquisitions" above in this Item.
(4) 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.
Patterson has substantial experience contract 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, and 54 in 1995.
The Company's contract drilling activity is affected by the level of
exploration and development activity conducted by oil and gas producers in the
Austin Chalk Trend and Permian Basin. Since mid-1982, when crude oil and natural
gas prices generally weakened, the market for contract drilling services has
been depressed and has been characterized by an oversupply of rigs, poor
contract drilling rates and intense competition. A particularly sharp decline in
rig utilization occurred in 1986. The number of rigs operating in the United
States fell to an all-time low in the spring of 1993 and has increased slightly
since that time. Patterson's rig utilization in 1990 through 1994 was slightly
higher than that experienced by the Company from 1986 through 1989. This higher
level did not continue during 1995, partly because of the inability to move
drilling rigs from location to location in South and Southeast Texas due to
heavy rains in that area during portions of March, April, June and July. The
1995 decline in utilization rates was also due to a softness in demand for
drilling rigs in both of the Company's areas of operation but primarily in South
and Southeast Texas. The Company believes that the reduced demand was caused by
low natural gas prices for much of 1995. Because of low natural gas prices
during the first six months of 1995, the Company reduced its contract drilling
rates in South and Southeast Texas. These contract drilling rates were increased
to the prior levels during mid 1995, and the price for natural gas increased
significantly in December over the price earlier in the year. Notwithstanding
the December increase in natural gas prices, the demand for drilling rigs in
both areas of the Company's operations continues to be unstable. This
instability may cause the Company to again reduce the rates in one or both of
its areas of operations in an effort to maintain utilization. Any reduction in
contract drilling rates would adversely impact the Company's operations.
Customers. For the year ended December 31, 1995, Patterson contract drilled
215 wells for 68 nonaffiliated customers. This compares with 171 wells drilled
for 61 nonaffiliated customers for the year ended December 31, 1994 and 123
wells drilled for 41 nonaffiliated customers for the year ended December 31,
1993.
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<PAGE> 148
No customer accounted for 10% of the Company's consolidated revenues in the
fiscal years ended December 31, 1995 and 1994. 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 twelve months have included Cobra Oil
and Gas, Inc., Snyder Oil Corporation, Chevron U.S.A., Phillips Petroleum
Company, Union Pacific Resources, Co., IP Petroleum and Union Oil Company of
California.
As of December 31, 1995, Patterson was drilling a total of 18 wells, all of
which were for nonaffiliated customers. Ten of these wells were located in the
Permian Basin and eight were located in South and Southeast Texas, primarily in
the Austin Chalk Trend.
DRILLING CONTRACTS
Most of Patterson'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 Patterson to pay certain
operating expenses, including wages of drilling personnel and maintenance
expenses and to furnish incidental 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. See
subcaption "Risks and Insurance" below in this Item. 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 Patterson 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 onsite
drilling conditions, the type of equipment to be used, the Company's estimate of
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, Patterson provides the drilling rig with the
required personnel to the operator who supervises the drilling of the contracted
well. Compensation to Patterson is based on a negotiated rate per day that the
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 rig. Under a footage contract, Patterson
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. Patterson 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, Patterson could
sustain substantial losses.
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<PAGE> 149
The following table sets forth for each of the years indicated the
approximate percentage of Patterson's drilling operation revenues attributable
to daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
TYPE OF REVENUES 1993 1994 1995
-------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Daywork........................................... 39% 53% 55%
Footage........................................... 49 44 39
Turnkey........................................... 12 3 6
</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. From time to time as favorable buying opportunities arise,
Patterson stockpiles bits and other drilling rig parts. Currently there is a
substantial shortage of drill pipe in the onshore contract drilling industry in
the United States. This shortage has caused the price of drill pipe to increase
significantly over the past 24 months. In addition, new drill pipe must be
placed on order at least 150 to 180 days in advance of expected use. See Item
6 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Results of
Operations -- Comparison of the years ended December 31, 1995 and 1994" for
information concerning the impact of this shortage on the Company's capital
expenditures and its effect on operations.
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 See subcaption
"Contract Drilling Activity" above in this Item.
OIL AND GAS OPERATIONS
OVERVIEW
Patterson has been engaged in oil and gas exploration, development and
production in the Austin Chalk Trend and the Permian Basin since early 1982.
Between that year and December 31, 1985, the Company participated as a working
interest owner in the drilling of approximately 78 wells, primarily in the
Austin Chalk Trend in Southeast Texas and, to a lesser extent, in the Permian
Basin in West Texas. Of the wells drilled, approximately 60 were completed and
approximately 18 were dry holes. Substantially all of the drilling prospects
were generated by Patterson personnel, and most of the wells were operated by
the Company. These activities were financed through cash flow generated by the
Company's contract drilling operations and through bank borrowings.
Substantially all of the Company's oil and gas reserves were sold in two
transactions in 1985 and 1987. The sale proceeds were used primarily to reduce
bank debt. Beginning in the first quarter of 1986, the Company's exploration and
development activities were severely curtailed due to the steep drop in the
price of oil and gas, a decline in the Company's cash flow from its contract
drilling operations and a severe liquidity shortage. Between the first quarter
of 1986 and continuing through 1991, Patterson participated as a small working
interest owner in a limited number of wells. Patterson increased its exploration
and development activity in 1992 primarily through the use of funds generated by
its contract drilling operations and further increased the activity level
beginning in the fourth quarter of 1993 with $2,000,000 of net proceeds from its
IPO allocated for oil and gas operations. The $2,000,000 of net proceeds was
expended during 1994. Subject to the availability of capital, Patterson intends
to continue this increased level of exploration and development activity.
The Company's oil and gas operations consist primarily of the geological
evaluation of prospective oil and gas properties and the acquisition of oil and
gas leases for the purpose of drilling and the production and sale of oil and
gas from its properties. Through internal personnel, consisting of two
geologists and three petroleum engineers, and, from time to time, through
outside consultants, Patterson conducts geological, engineering and economic
studies on the basis of which it acquires oil and gas drilling prospects.
Patterson usually acquires larger interests in undeveloped acreage than it
intends to retain. As is common in the oil and gas industry, the Company
attempts to raise all or a portion of the funds necessary for exploration, and,
if warranted,
8
<PAGE> 150
development, of undeveloped acreage through the sale of a portion of its
leasehold in the undeveloped acreage or working interest in the acreage or
through various types of cost-sharing arrangements, including some in which
officers, directors or other affiliates may participate.
The practice of selling part of its working interest or entering into
cost-sharing arrangements permits Patterson to use its resources to explore and
develop a greater number of properties and reduces the dollar amount of risk
should a particular program be unsuccessful. Although risk to the Company under
this practice is likely to be less, ultimate financial return is also likely to
be less should the program be successful. The Company may also take working
interests in prospects originated by others when it results in the award of the
drilling contract on that property.
At December 31, 1995, Patterson was the operator of 223 wells, of which it
was the drilling contractor for 46 wells. Agreements by which the Company has
been appointed operator give Patterson responsibility for, and control of,
drilling, completion, and operation of the wells. Patterson is a working
interest owner in substantially all of the operated wells.
Substantial capital is required to fund the Company's exploration,
development and production activities, the availability of which cannot be
assured. Possible sources of capital for such purposes include funds generated
by the Company's contract drilling and oil and gas operations and additional
borrowings; there can be no assurance of the availability of capital from any of
such sources.
BUSINESS STRATEGY
Patterson's basic strategy for its oil and gas operations is to increase
oil and gas reserves primarily through development drilling, as well as selected
acquisitions of producing properties for further development. The development
drilling is expected to occur near producing properties. Although Patterson from
time to time will participate through a working interest in exploration
drilling, the focus of the Company's drilling activities for the foreseeable
future will be exploration and development in South and Southeast Texas,
including the Austin Chalk Trend (horizontal drilling of the Austin Chalk, Buda,
Edwards, Glenrose and Georgetown formations) and 3-D seismic prospects in the
Permian Basin of West Texas and Southeastern New Mexico and in South Texas.
3-D seismic has become the predominant exploration tool for exploration and
development in the Permian Basin. A high percentage of the current drilling
activity in that area is being conducted on prospects generated by 3-D seismic.
3-D seismic enables the explorationist to analyze potential productive horizons
in three dimensions and to locate reservoirs that in some instances are unable
to be located with two dimensional seismic.
RECENT AND PROPOSED OPERATIONS
Since Patterson's IPO, the Company has used the $2,000,000 of IPO net
proceeds, funds generated from operations and borrowings primarily for
development drilling of horizontal wells in the Austin Chalk Trend, including
both new wells and re-entries of existing vertical wells for horizontal drilling
in targeted formations, development drilling of 3-D seismic prospects in the
Permian Basin, leasehold acquisitions in the Austin Chalk Trend, Permian Basin
and South Texas, acquisition of an 18% working interest in an existing oil field
located in the Permian Basin known as the North Nena Lucia Unit and drilling of
a 3-D seismic prospect in South Texas.
Patterson will continue to focus for the foreseeable future on development
drilling of additional horizontal wells (both new wells and re-entries) in the
Austin Chalk Trend, 3-D seismic prospects in the Permian Basin and exploratory
and development drilling in South Texas. The total drilling and completion costs
of new wells drilled in the Austin Chalk Trend range from $1,200,000 to
$2,000,000 (depending upon mechanical problems encountered). Those costs for
reentries range from approximately $600,000 to approximately $1,000,000. The
total drilling and completion costs of wells in the Permian Basin and in South
Texas range from $200,000 to $1,200,000. Patterson's share of the drilling and
completion costs will generally be proportional to its working
9
<PAGE> 151
interest. In addition, an engineering study has been conducted on the North Nena
Lucia Unit ("Unit") and is currently being analyzed to determine whether the
production from the Unit can be enhanced through a waterflood program. The
Company became the operator of the Unit at the time of acquisition of its 18%
working interest. The Unit consists of 102 wells, of which 68 have been shut-in,
24 are currently producing and 10 are water injection wells. The average daily
gross production from the 24 producing wells is approximately 250 Bbls of oil
and 900 Mcf of natural gas per day. Of the 68 shut-in wells one was plugged and
abandoned in 1995. The Company currently expects that of the remaining 67
shut-in wells, some may be used as water injection wells, should the decision be
made to pursue the waterflood program, and the balance of the wells will be
plugged and abandoned.
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.
Patterson markets oil produced from Company-operated wells through Patterson
Trading. A substantial portion of the oil produced from Company operated wells
are sold to a company owned in part by a son of Cloyce A. Talbott, the Company's
Chairman of the Board and Chief Executive Officer.
Most of Patterson's natural gas is sold through third-party 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. Patterson 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.
No customer for oil and gas accounted for more than 10% of the Company's
consolidated revenues for the 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.
COMPETITION
Contract Drilling Operations. The contract drilling industry is highly
competitive. Drilling activity being near an all-time low and depressed economic
conditions in the oil and gas industry have resulted in the supply of domestic
drilling equipment, other than drill pipe, substantially exceeding demand. As a
consequence, there has been intense competition in securing available drilling
contracts, resulting in drilling equipment being idle for long periods of time
and generally unfavorable prices for contract drilling.
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. If demand for drilling
rigs increases in the future, rig availability may also become a competitive
factor. 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 rigs in any region may result. Demand for land drilling
equipment is also dependent on the exploration and development programs of oil
and gas companies, which are in turn influenced primarily by the financial
condition of such companies, by general economic conditions, by prices of oil
and gas, and, from time to time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of Patterson, some of which have substantially greater resources and longer
operating histories than Patterson. Also, in recent years, many drilling
companies have sought protection from creditors under bankruptcy laws or have
undertaken a business combination with other companies as a result of the
downturn in the domestic contract drilling industry. Although this 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.
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<PAGE> 152
Oil and Gas Operations. There is substantial competition for the
acquisition of oil and gas leases suitable for exploration and for the hiring of
experienced personnel. The Company's competitors in oil and gas exploration,
development and production include major integrated oil and gas companies,
numerous independent oil and gas companies, drilling and production purchase
programs and individual producers and operators. The ability of the Company to
increase its holdings of oil and 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 Patterson.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and 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, pollution prevention and clean-up, obtaining
drilling permits and similar matters. Within the state of Texas, where
substantially all of Patterson's operations are currently conducted, these
regulations are principally enforced by the Texas Railroad Commission. To date
Patterson 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 for 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 liabilities
for noncompliance. Patterson has not been fined or incurred liabilities for
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.
The contract drilling industry is dependent on demand for services from the
oil and 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 gas industry. The adoption of laws and regulations affecting the oil and gas
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 Patterson has utilized operating and disposal
practices that were standard in the industry at the time, 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 or modified in the future. If such changes are
made to CERCLA and/or RCRA, Patterson 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 remedial plugging operations 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 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
11
<PAGE> 153
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. Patterson has oil spill response plans in place for
its oil and gas properties in South and Southeast Texas and in West Texas.
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 that are 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 of 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
Patterson'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 spillage, gas leaks and
extensive, uncontrolled fires. In addition, Patterson 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 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 $15,000,000 per
occurrence with a $15,000,000 aggregate. The Company's customers generally
require the Company to have at least $1,000,000 of third party liability
coverage.
Patterson 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 liabilities 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 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 rigs. In view of the difficulties that
may be encountered in renewing such insurance at reasonable rates, no assurance
can be given that Patterson 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.
Since April 1, 1992, Patterson has carried workers' compensation insurance,
with a deductible of $100,000 per occurrence. The Company currently pays monthly
premiums of approximately $35,000. From April 1, 1992, through November 30,
1992, the Company was required by the terms of the policy to make payments of
approximately $75,000 per month into a trust account as a reserve against the
Company's liability under the deductible portion of the policy. During this
eight-month period, a total of approximately $113,000 was paid from the trust
account to pay the Company's liability under the deductible portion of the
policy. Commencing on January 1, 1993, Patterson began paying its liability on
the deductible portion directly rather than making monthly payments into the
trust account. From January 1, 1993, through December 31, 1995, the Company paid
a total of approximately $914,000 on account of its liability under the
deductible portion of the
12
<PAGE> 154
policy. As of December 31, 1995, the balance in the trust account was
approximately $194,000, the amount required by the terms of the policy to be in
the trust account. In addition, a commercial bank has issued a letter of credit
to the insurance carrier on behalf of the Company in the amount of $150,000. The
balance required to be in the trust account may increase or decrease at any
time, depending upon the Company's ability to pay its liability under the
deductible portion of the policy. If the amount required to be in the trust
account is greater than the balance in the trust account, Patterson would be
required to pay the increased amount into the trust account in one or more
installments. Alternatively, the Company could provide another letter of credit,
if available to the Company, as collateral for its obligations to pay additional
funds into the trust account.
If multiple workers' compensation claims are filed, Patterson could incur
significant expenses, which in turn could have a material adverse impact on its
financial condition and operations.
EMPLOYEES
The Company employed a total of 457 full-time persons (31 as office
personnel and 426 as field personnel) as of December 31, 1995. The Company
estimates that the number of drilling rig employees will fluctuate between
approximately 200 and 500, depending upon demand for the Company's drilling
rigs. The Company considers its employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES.
The significant properties of the Company consist of (i) drilling rigs and
related equipment, (ii) proved developed oil and gas reserves, (iii) undeveloped
oil and gas leasehold interests held for resale, and (iv) office and support
facilities, more particularly described below.
13
<PAGE> 155
DRILLING RIGS AND RELATED EQUIPMENT
The following table provides certain information concerning the drilling
rigs currently owned by Patterson:
<TABLE>
<CAPTION>
RIG DEPTH
NO.(1) DRAWWORKS MANUFACTURER RATING (FEET)
- ------ --------------------------------------------------------------- -------------
<C> <S> <C>
1 Rig Manufacturing, Inc. 4610(2)................................ 12,500
2 Rig Manufacturing, Inc. D-42-550(2)............................ 9,000
3 Brewster N-46(2)............................................... 12,500
4 Brewster N-46(2)............................................... 12,500
5 Brewster N-46(3)............................................... 12,500
6 Rig Manufacturing, Inc. 4610(2)................................ 10,500
7 Brewster N-46(2)............................................... 12,500
8 Brewster N-46(3)............................................... 12,500
9 BDW 800M(2).................................................... 14,000
10 Rig Manufacturing, Inc. 1000(2)................................ 14,000
11 Brewster NE-46(2).............................................. 13,000
12 Ideco H-725(2)................................................. 10,500
14 Superior 1000-UE(2)............................................ 14,000
16 Brewster NE-12(4).............................................. 22,000
17 Brewster N-46(5)............................................... 12,500
18 Mid Continent U36A(5).......................................... 11,000
19 Gardner-Denver 1100-M(5)....................................... 18,000
20 Gardner-Denver 1500-E(5)(6).................................... 22,000
21 BDW 800-MX(5).................................................. 15,000
22 Superior 1000-M(5)............................................. 15,000
23 National 80-UE(5).............................................. 15,000
24 Superior 700-E(5).............................................. 12,000
25 Superior 1000-UE(5)............................................ 15,000
26 Skytop-Brewster N-75(5)........................................ 14,000
27 Skytop-Brewster N-75(5)........................................ 14,000
28 Skytop-Brewster N-75(5)........................................ 14,000
29 BDW 800-MXE(5)................................................. 15,000
</TABLE>
- ---------------
(1) All of the rigs are pledged as collateral on Patterson notes payable. See
Note 4 of Notes to Consolidated Financial Statements included as a part of
Item 7 of this report.
(2) Acquired prior to the Company's IPO.
(3) Acquired a 57.85% interest in this rig during April 1995. Prior to that
time, the Company owned the remaining interest and leased the acquired
interest from an affiliated entity. See Item 1 -- "Description of
Business -- Recent Rig Acquisitions."
(4) Constructed by the Company subsequent to the IPO.
(5) Acquired subsequent to the Company's IPO. See Item 1 -- "Description of
Business -- Recent Rig Acquisitions."
(6) Inoperable; acquired in May 1995.
Patterson owns 30 rig hauling trucks and 35 trailers. This equipment is
used to transport and rig up the Company's drilling rigs. The Company is not
dependent upon third parties for rig down, moving and rig up operations. The
Company believes that this increases the efficiency of its operations and saves
significant expense by hauling and rigging up its own rigs.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities in Snyder, LaGrange and Victoria,
Texas. Patterson believes that its operable drilling rigs and
14
<PAGE> 156
related equipment are in good operating condition. In addition to normal repair
and maintenance expenses, Patterson historically has spent significant funds for
its ongoing program of improving and replacing components of its existing
equipment. See Item 6 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
OIL AND GAS PROPERTIES
OIL AND GAS RESERVES
Patterson engaged an independent petroleum engineer to estimate Patterson'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. These 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, the independent petroleum engineer
used oil and gas prices and estimated average development and production costs
provided by the Company.
The following table sets forth information as of December 31, 1993, 1994
and 1995 derived from the reserve reports of the independent petroleum engineer.
The present values (discounted at 10%) of estimated future net revenues shown in
the table are not intended to represent the current market value of the
estimated oil and gas reserves owned by Patterson. For further information
concerning the present value of estimated future net revenue from these proved
developed reserves, see Note 13 of Notes to Consolidated Financial Statements
included as a part of Item 7 of this report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls)................................... 193,664 469,494 605,048
Gas (Mcf).................................... 1,280,727 2,482,156 3,971,503
Total (BOE).................................. 407,119 883,187 1,266,965
Estimated future net revenues before income
taxes (in thousands)...................... $ 3,258 $ 5,789 $ 10,635
Present value of estimated future net
revenues before income taxes discounted at
10% (in thousands)........................ $ 2,603 $ 4,254 $ 7,858
</TABLE>
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise.
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 set forth in this
Form 10-KSB. 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 Patterson's reserves.
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<PAGE> 157
PRODUCTION
Patterson's wells in South and Southeast Texas produce primarily natural
gas. In the Permian Basin, the wells produce primarily oil. The following table
sets forth the Company's net oil and gas production, average sales price and
average production (lifting) costs associated with such production during each
of the years in the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
-------- -------- ----------
<S> <C> <C> <C>
Net production:
Oil (Bbls)...................................... 97,328 97,564 147,451
Gas (Mcf)....................................... 379,131 603,248 1,031,301
Total (BOE)..................................... 160,517 198,105 319,335
Average net daily production:
Oil (Bbls)...................................... 267 267 403
Gas (Mcf)....................................... 1,039 1,653 2,825
Total (BOE)..................................... 440 542 875
Average sales price per unit:
Oil (Bbls)...................................... $17.40 $16.19 $17.39
Gas (Mcf)....................................... 1.99 1.74 1.51
Total (BOE)..................................... 15.24 13.28 12.92
Average production (lifting) costs per BOE........ $4.52 $4.41 $3.68
</TABLE>
DEVELOPED ACREAGE AND PRODUCTIVE OIL AND GAS WELLS
The following table sets forth the developed acreage and productive wells
in which Patterson owned a leasehold interest as of December 31, 1995:
<TABLE>
<CAPTION>
PRODUCTIVE WELLS (1)
------------------------
DEVELOPED ACRES(2) GROSS(3) NET(4)
------------------ ---------- ----------
LOCATION: GROSS(3) NET(4) OIL GAS OIL GAS
- ----------------------------------------------------- -------- ------ --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
West Texas and Southeastern
New Mexico (Permian Basin)......................... 20,277 4,677 207 -- 16 --
South and Southeast (Austin Chalk
Trend) Texas....................................... 20,219 2,462 66 9 8 1
------ ----- --- -- -- --
Totals..................................... 40,496 7,139 273 9 24 1
====== ===== === == == ==
</TABLE>
- ---------------
(1) Productive wells are producing wells and wells capable of production.
(2) Developed acres are leased acres spaced or assigned to productive wells.
(3) A gross well or acre is a well or acre in which a working interest is
owned. The number of gross wells or acres is the total number of wells or
acres in which a working interest is owned.
(4) A net well or acre is deemed to exist when the sum of fractional ownership
working interests in the gross wells or acres equals one. The number of net
wells or acres is the sum of the fractional working interests owned in
gross wells or acres expressed as whole numbers or fractions thereof.
A well is categorized under the reporting regulations of the Texas Railroad
Commission as an oil well or a gas well based upon the ratio of gas to oil
produced when it first commenced production and such designation may not be
indicative of current production. Patterson had no wells producing from multiple
formations at December 31, 1995.
Certain of the Company's developed acreage and productive wells are pledged
as collateral on a bank line of credit. See Note 4 of Notes to Consolidated
Financial Statements included as a part of Item 7 of this report.
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<PAGE> 158
UNDEVELOPED ACREAGE
The following table sets forth the undeveloped acreage in which Patterson
owned a leasehold interest as of December 31, 1995:
<TABLE>
<CAPTION>
UNDEVELOPED
ACRES(1)
------------------
LOCATION: GROSS NET
---------------------------------------------------------- ------ -----
<S> <C> <C>
West Texas and Southeastern New Mexico (Permian Basin).... 10,508 2,013
South and Southeast (Austin Chalk Trend) Texas............ 19,462 5,310
------ -----
Totals.......................................... 29,970 7,323
====== =====
</TABLE>
- ---------------
(1) Undeveloped acreage are those lease 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.
Many of the leases summarized in the table above as undeveloped acreage
will expire at the end of their respective primary terms unless production has
been obtained from the acreage subject to the lease prior to that date, in which
event the lease will remain in effect until the cessation of production. The
following table sets forth the gross and net acres subject to leases summarized
in the table of undeveloped acreage that will expire:
<TABLE>
<CAPTION>
LEASE ACRES
EXPIRING
------------------
GROSS NET
------ -----
<S> <C> <C>
Period Ending:
December 31, 1996....................................... 7,433 1,496
December 31, 1997....................................... 5,887 1,506
December 31, 1998 and later............................. 16,650 4,321
------ -----
Totals.......................................... 29,970 7,323
====== =====
</TABLE>
DRILLING ACTIVITIES
The following tables set forth the Company's participation as a working
interest owner in exploratory and development wells drilled during each of the
years in the three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
DEVELOPMENT WELLS(1) EXPLORATORY WELLS(2)
------------------------------ -----------------------------
PRODUCTIVE DRY(3) PRODUCTIVE DRY(3)
YEAR ENDED ------------- ------------- ------------ -------------
DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
- ------------ ----- ---- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993...................................... 7 1.25 2 1.60 -- -- -- --
1994...................................... 17 1.35 6 .87 1 .20 5 .96
1995...................................... 36 5.04 9 1.38 1 .16 2 .42
----- ---- ---- ---- ---- --- ---- ----
Totals.......................... 60 7.64 17 3.85 2 .36 7 1.38
===== ==== ==== ==== ==== === ==== ====
</TABLE>
- ---------------
(1) A development well is a well drilled within the proved area of an oil or
gas reservoir to a depth known to be productive.
(2) An exploratory well is a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
(3) A dry well (hole) is an exploratory or development well found to be
incapable of producing either oil or gas in sufficient quantities to
justify completion as an oil or gas well.
As of December 31, 1995, the Company was not participating as a working
interest owner in the drilling of any development or exploratory wells.
17
<PAGE> 159
TITLE TO OIL AND GAS PROPERTIES
Title to the Company's oil and gas properties is subject to royalty,
overriding royalty, carried working, and other similar interests and cost
sharing arrangements customary in the oil and 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 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.
HEADQUARTERS AND OTHER OFFICES
The Company has its headquarters in Snyder, Texas, with three small offices
in Austin, Houston and Midland. The Company maintains the outside offices due to
the distances between the Company's headquarters and its two principal areas of
operations. The Company's headquarters are located on approximately 64 acres at
4510 Lamesa Highway in Snyder, Texas. The following improvements are located on
the Company's headquarters:
(a) Executive office building containing approximately 8,850 square
feet;
(b) Main shop facility containing a total of approximately 6,790 square
feet, of which approximately 1,594 square feet are office space and
5,196 square feet are shop space. This facility is used for drilling
equipment repairs and contains a ten-ton crane;
(c) Office and shop facility containing a total of approximately 8,415
square feet, of which approximately 1,680 square feet are office
space for Patterson Petroleum, Inc., 3,175 square feet are a shop
office and shop with a 2,450 square foot wash bay and 1,110 square
feet are warehouse space. A one-ton crane is located in the ware-
house portion of the building;
(d) Open-ended metal storage facility containing a total of
approximately 10,200 square feet, of which approximately 7,800
square feet are storage space, 800 square feet are office space and
1,600 square feet are shop space. The storage portion of the
building contains a five-ton monorail crane. This facility is used
for storing large equipment;
(e) Back shop facility containing approximately 4,000 square feet. This
facility is used primarily for storage and contains a five-ton
crane; and
(f) A building with an office facility containing a total of
approximately 3,080 square feet and a shop containing approximately
6,106 square feet used for maintenance of the Company's truck fleet,
and a second building which is rented to a nonaffiliated company.
The Company's Austin office is used primarily as an exploration office for
the Company's Austin Chalk Trend exploration activities and consists of
approximately 2,704 square feet of leased space requiring monthly rental
payments of $4,225. The lease expires February 28, 2001. The Houston office is a
production and drilling office and consists of approximately 3,205 square feet
of leased space requiring monthly rental of $2,745. This lease expires on
November 30, 1997. The Company has two offices in Midland. One of the offices is
used as a sales office and consists of approximately 250 square feet of leased
space requiring monthly rental of $475. This office is leased on a
month-to-month basis. The other office is used as an exploration office and
consists of approximately 1,552 square feet of leased space requiring monthly
rental of $970. This lease expires May 31, 1998. The Company owns a yard in
LaGrange, Texas and Victoria, Texas, consisting of approximately seven acres and
eleven acres, respectively, which are used for equipment storage and repair.
The Company believes that its existing facilities are adequate to meet its
operational needs for the near future.
18
<PAGE> 160
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time subject to routine litigation incidental
to its business. The following paragraph describes certain pending litigation
not deemed by the Company to be incidental to the Company's business.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
19
<PAGE> 161
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has traded on the Nasdaq National Market under the symbol
"PTEN" since November 2, 1993, the date of the Company's IPO. Prior to that
time, there was no public market for the Common Stock. The following table sets
forth the high and low sale prices of the Common Stock for the periods indicated
as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1993:
Fourth quarter (from November 2, 1993).................... $ 7.75 $ 6.50
1994:
First quarter............................................. $ 7.25 $ 6.50
Second quarter............................................ 7.00 6.00
Third quarter............................................. 7.50 6.25
Fourth quarter............................................ 7.88 6.75
1995:
First quarter............................................. $ 7.75 $ 6.00
Second quarter............................................ 10.25 7.00
Third quarter............................................. 13.88 9.38
Fourth quarter............................................ 14.63 10.50
</TABLE>
As of March 6, 1996, there were approximately 72 holders of record
(approximately 750 beneficial owners) of the Common Stock.
Patterson has not paid cash dividends on the Common Stock in the past and
does not expect to pay any cash dividends on the Common Stock in the foreseeable
future. The Company instead intends to retain its earnings to support the
operations and growth of its businesses. Any future cash dividends would depend
on future earnings, capital requirements, the Company's financial condition and
other factors deemed relevant by the Board of Directors. In addition, the terms
of an existing $3,500,000 bank line of credit prohibits payment of dividends by
Patterson without the prior written consent of the bank. See Note 4 of Notes to
Consolidated Financial Statements included as a part of Item 7 of this report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, Patterson had working capital of approximately
$6,289,000 and cash and cash equivalents of approximately $2,467,000 as compared
to a working capital of approximately $5,169,000 and cash and cash equivalents
of approximately $3,369,000 as of December 31, 1994. For the year ended December
31, 1995, the Company generated net cash from operations of approximately
$5,116,000, borrowed additional funds in the amount of $9,375,000 and received
approximately $3,276,000 from the conversion of redeemable warrants and
underwriters redeemable warrants. These funds, along with $385,000 of proceeds
from the sale of property and equipment and approximately $902,000 of cash from
working capital, were used primarily to acquire drilling and related equipment
of approximately $12,486,000, to fund leasehold acquisition, exploration and
development of approximately $4,039,000, and to reduce and payoff certain notes
payable of $2,444,000. In 1994, the Company generated net cash from operations
of approximately $4,077,000 and received cash from financing activities of
$5,000,000. These funds, which include a bank loan in the amount of $5,000,000,
along with approximately $236,000 of proceeds from the sale of property and
equipment and approximately $645,000 of cash from working capital, were used
primarily to acquire substantially all of the assets of Questor (see Item 1.
"Description of Business -- Recent Rig Acquisitions") and other drilling and
related equipment of approximately $7,122,000, to fund oil and gas leasehold
acquisition, exploration and development of approximately $2,262,000 and to
reduce indebtedness for borrowed funds by approximately $573,000.
20
<PAGE> 162
Patterson'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 notes
payable for at least the next 12 months. The Company's ability to repay debt
would be adversely affected by a further decline in general economic conditions
in the industry or by unsuccessful results in the Company's drilling activities
or exploration, development and production activities. See subcaption
"Volatility of Oil and Gas Prices," below in this item.
The Company's capital expenditures during 1993, 1994, and 1995 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Contract drilling.................... $2,029,767 $ 8,997,151 $13,208,727
Oil and gas.......................... 1,307,390 2,261,842 4,038,875
---------- ----------- -----------
$3,337,157 $11,258,993 $17,247,602
========== =========== ===========
</TABLE>
Expenditures for contract drilling include acquisition of replacement
equipment, including drill collars, drill pipe, engines and rolling stock and,
in 1994, the $6,375,000 expended for the Questor assets ($4,500,000 in cash and
250,000 of Common Stock valued at $1,875,000). Patterson believes it must
continue to upgrade and maintain its contract drilling fleet and expended
approximately $7,315,000 (approximately $3,700,000 for drill pipe) for this
purpose during the year ended December 31, 1995. The Company used a portion of
the proceeds from a loan from The CIT Group/Equipment Financing, Inc. ("CIT
Loan") to fund these expenditures. See Note 4 of Notes to Consolidated Financial
Statements included as a part of Item 7 of this report. Patterson's budget for
these capital expenditures was increased in the second quarter of 1995 from
$3,000,000 to $3,500,000 and then further increased in the third quarter to
$6,000,000. The increase in this budget during the second quarter was caused
primarily by substantial increases since January 1995 in the price of drill
pipe, while the increase in the budget in the third quarter was due to further
increases in both the price and quantity of drill pipe purchased by the Company.
Because of the substantial increase in the price of drill pipe and uncertainty
as to future price increases and delivery, the Company, commencing in the third
quarter, accelerated its program for replacement of drill pipe on its drilling
rigs by increasing the quantity of drill pipe being purchased as a hedge against
further price increases and delays in delivery. The Company currently expects to
reduce the quantity of drill pipe purchases commencing in May 1996, to a level
necessary to meet normal attrition rates and would expect to stay at that level
for the foreseeable future. The Company had budgeted approximately $4,000,000 in
1995 for the partial construction of one rig and the assembly of four others
purchased in May 1995. See Item 1 "Description of Business -- Recent Rig
Acquisitions" and "Contract Drilling Operations -- Drilling Rigs and Related
Equipment." This budget was initially $3,250,000, but was increased to
$4,000,000 during the second quarter, primarily because of the assembly cost of
four rigs rather than the three rigs initially budgeted for assembly and the
increase in the price of drill pipe needed for the four rigs. Patterson used a
portion of the proceeds from the CIT Loan to fund these expenditures. See Note 4
of Notes to Consolidated Financial Statements as a part of Item 7 of this
report. Approximately $3,806,000 of this $4,000,000 revised budget had been
expended on the construction and assembly of the rigs as of December 31, 1995.
The construction of the rig was completed in August 1995, and the assembly of
two of the four rigs purchased in May were completed in May and September,
respectively. The assembly of one of the two remaining rigs was completed in
December 1995, and the assembly of the last rig has been postponed due to
decrease in demand for rigs. See "Volatility of Oil and Gas Prices" below.
The Company believes it must continue to upgrade and maintain its contract
drilling fleet, and if the level of drilling activity remains at the levels
experienced in 1993, 1994 and 1995 and the shortage of drill pipe continues
through 1996, management estimates that approximately $3,500,000 to $4,000,000
for capital expenditures will be necessary in 1996. Management has postponed the
assembly of one of the four rigs acquired in 1995 due to a decrease in demand
for rigs, however, if demand should increase, the Company estimates that it
would require approximately $350,000 to make the rig operable.
21
<PAGE> 163
Patterson initially budgeted approximately $3,000,000 for capital
expenditures in the oil and gas segment in 1995 for leasehold acquisitions,
exploration and development of oil and gas properties. For the year ended
December 31, 1995, the Company expended approximately $4,039,000 for capital
expenditures in this segment. This increase over the budgeted amount was due
primarily to increased levels of development drilling by the Company, primarily
the Austin Chalk Trend, and an increase in the percentage of the working
interest retained by the Company in certain of those wells. The Company used a
total of $2,000,000 of a $3,500,000 short-term line of credit during the first
and second quarters of 1995 to fund a portion of the expenditures for this
segment. This line of credit was initially for $1,000,000, but was increased to
$2,400,000 during June 1995 and further increased to $3,500,000 in December
1995. See Note 4 of Notes to Consolidated Financial Statements as a part of Item
7 of this report.
The Company has budgeted approximately $4,000,000 for capital expenditures
in the oil and gas segment in 1996. The funds (if available) will be used for
leasehold acquisitions, exploration and development of oil and gas properties.
The Company has drawn down in 1996 an additional $1,000,000 of the line of
credit discussed above in order to fund a portion of the 1996 budget.
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 1995 and 1994
For the year ended December 31, 1995, contract drilling revenues were
approximately $41,249,000 as compared to $31,408,000 for the same period in
1994, an increase of 31%. Average rig utilization was 78% for the year ended
December 31, 1995 as compared to 83% in 1994. The utilization rate for 1995 was
based on 25 rigs while 1994 was based on 22 rigs. Low prices of natural gas in
particular has caused a reduction in demand for rigs in South and Southeast
Texas beginning in March 1995. In addition, inclement weather conditions in the
same region in the latter part of March 1995 and continuing through April 1995
and again in June and July adversely impacted the 1995 utilization rates.
Although gas prices increased significantly in December, 1995 and remained
stable in January and February, 1996, rig utilization continues to be unstable.
See subcaption "Volatility of Oil and Gas Prices; Unstable Demand for Drilling
Rigs." Direct contract drilling costs for the year ended December 31, 1995 were
approximately $33,492,000 or 81% of contract drilling revenues as compared to
approximately $25,167,000 or 80% of the contract drilling revenues in 1994. The
increase in contract drilling revenues and direct drilling costs was due
primarily to the acquisition of the nine drilling rigs from Questor in July 1994
and the addition of one rig in May 1995 and two rigs in September 1995. General
and administrative expense for the contract drilling segment was approximately
$1,833,000 for the year ended December 31, 1995 as compared to approximately
$1,625,000 for the same period 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 was approximately
$3,432,000 for the year ended December 31, 1995 as compared to $2,001,000 in
1994. The increase in depreciation expense was due primarily to the Questor
acquisition in 1994, the addition of three rigs in 1995 and capital expenditures
for maintenance of the contract drilling fleet. In the year ended December 31,
1995, income from operations of this segment was approximately $2,748,000 as
compared to approximately $2,804,000 in 1994.
Oil and gas revenues were approximately $4,124,000 for the year ended
December 31, 1995, as compared to approximately $2,742,000 in 1994. Included in
oil and gas revenues in 1994 was a nonrecurring recognition of approximately
$115,000 in oil and gas revenues from the County Management, Inc. litigation.
The volume of oil and natural gas sold increased by 51% and 71%, respectively,
in 1995, as compared to 1994. The average price per barrel of oil was $17.39 in
1995, as compared to $16.19 in 1994, and the average price per Mcf of natural
gas was $1.51 in 1995 as compared to $1.74 in 1994. Lease operating and
production costs were $3.68 per barrel of oil equivalent in 1995, as compared to
$4.41 per barrel of oil equivalent in 1994. The decrease in lease operating and
production costs per barrel of oil equivalent is due primarily to flush
production from new wells with lower operating costs. General and administrative
expense for the oil and gas segment was approximately $1,368,000 in 1995, as
compared to $1,238,000 in 1994. The increase in general and
22
<PAGE> 164
administrative expense is due primarily to increased exploration and production
activity. Exploration costs for 1995 was $369,000 in 1995 as compared to
$207,000 in 1994. The increase is due to 3-D seismic expense of approximately
$160,000 in 1995. Depreciation, depletion and amortization expense was
approximately $1,882,000 in 1995, as compared to $880,000 in 1994. The increase
in this expense was due primarily to increased volumes of production. In 1995,
the loss from operations of the oil and gas segment was $1,000 compared to a
loss of $348,000 in 1994.
For the year ended December 31, 1995, interest expense was approximately
$1,065,000 compared to $366,000 in 1994. The increase is due to higher interest
rates and a substantial increase in the principal balance of outstanding notes
payable.
As noted in subcaption "Liquidity and Capital Resources" above, the Company
has incurred a significant increase in the level of capital expenditures during
the year ended December 31, 1995 in its contract drilling segment due to the
shortage of drill pipe. These increased capital expenditures have resulted in
higher levels of depreciation expense, which will continue for the foreseeable
future. To date, the Company has been unable to increase its contract drilling
rates to offset these higher levels of depreciation. If the Company is unable to
increase contract drilling rates to offset the increased depreciation expense,
the Company's operations would be further adversely affected. In addition,
should the drill pipe shortage continue, the Company may be unable to obtain the
drill pipe required for its contract drilling operations and its oil and gas
operations could be impaired because of the inability, or the delays in the
ability, to drill wells in which the Company has a leasehold interest.
Comparison of the years ended December 31, 1994 and 1993
For the year ended December 31, 1994, contract drilling revenues were
$31,408,087 as compared to $21,395,891 for the year ended December 31, 1993, an
increase of 46.8%. Average rig utilization was 83% in 1994 compared to 79% in
1993. Direct contract drilling costs for 1993 were $25,167,186 or 80% of the
contract drilling revenues as compared to $17,250,733 or 81% of contract
drilling revenues in 1993. The increase in contract drilling revenues and direct
drilling costs was due primarily to the acquisition of the nine drilling rigs
from Questor. General and administrative expenses for the contract drilling
segment were $1,624,776 in 1994 as compared to $1,195,234 in 1993. Included in
general administrative expenses for 1993 was an allowance for 100% of a doubtful
account receivable in the approximate amount of $355,500. Included in general
and administrative expenses for 1994 is an allowance for doubtful accounts of
$90,000, accrued Patterson contributions to the employees 401(k) profit sharing
plan of $75,000, an increase in general and administrative salaries of
approximately $160,000 and an increase in professional fees and other costs
related primarily to being a public company of approximately $365,000. In 1994,
income from this segment was $2,803,625 as compared to $1,834,089 in 1993. This
increase was due primarily to increased contract drilling revenues, greater
utilization of rigs and the Company's continual effort to control direct
contract drilling costs.
Oil and gas revenues for 1994 were $2,741,597 as compared to $2,447,786 in
1993, an increase of 12.0%. Included in oil and gas revenues in 1994 was a
nonrecurring recognition of approximately $115,000 in oil and gas revenues from
the County Management, Inc. litigation. See Note 5 of Notes to Consolidated
Financial Statements included as a part of Item 7 of this report. The volume of
oil sold was approximately the same in 1994 as 1993, while the volume of gas
sold increased by 59% in 1994 over 1993. The average price of oil decreased from
$17.40 per barrel of oil in 1993 to $16.19 in 1994. The average price of gas
decreased from $1.99 per Mcf in 1993 to $1.74 per Mcf in 1994. Lease operating
expenses were $873,568 in 1994 as compared to $725,486 in 1993, an increase of
20%. The increase was due to ownership of working interests in additional wells
and repairs of existing wells. General and administrative expenses, for the oil
segment, were $1,238,000 in 1994 as compared to $1,123,000 in 1993. Dry holes
and abandonments were $1,093,165 in 1994 as compared to $189,981 in 1993. The
increase was due primarily to the drilling of five dry holes ($646,000) and the
write off of certain oil and gas leases that expired by their terms ($195,000).
In 1994, the loss from the oil and gas segment was $348,497 compared to income
of $115,220 in 1993.
Interest expense was $366,152 in 1994 compared to $330,739 in 1993, an
increase of 10.7% due to higher interest rates and an increase in the principal
balance of the outstanding notes payable. Interest income was
23
<PAGE> 165
$193,417 in 1994 compared to $62,327 in 1993. The increase was due primarily to
the nonrecurring recognition of approximately $35,000 of interest income from
the County Management, Inc. litigation and interest earned on net proceeds from
Patterson's IPO.
Income Taxes
At December 31, 1995, Patterson had tax net operating loss ("NOL")
carryforwards of approximately $5,505,000. These NOL carryforwards expire at
various dates from 1998 through 2005, 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 effective federal income tax rate from
approximately 34% to approximately 2.5%. Due to a change of over 50% in the
stock ownership of Patterson during the three-year period ended August 3, 1995,
the NOL carryforwards became subject to an annual limitation. The amount of the
NOL carryforwards that can now be utilized in any year will be equal to
approximately $1,808,000 (the value of the Company's equity on August 2, 1995,
the day prior to the ownership change, times 5.88%, the federal long-term exempt
rate on that date as published by the U.S. Treasury Department). This limitation
on the use of the Company's NOL carryforwards could materially increase the
federal income tax liability of the Company and thereby adversely affect the
Company's net income.
During 1993, Patterson adopted Statement of Financial Accounting Standards
("SFAS") 109, "Accounting for Income Taxes." During 1994, the Company recognized
the benefit of deferred income taxes of approximately $407,000, and increased to
approximately $615,000 during the year ended December 31, 1995, which
represented management's estimate of near-term future benefits to be received by
the Company 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.
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 segment and its oil and gas segment. In recent
years, 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 Patterson. Any significant or
extended decline in oil and/or gas prices would have a material adverse effect
on the Company's financial condition and results of operations and could impair
access to sources of capital. The price of oil fell to a five-year low in
December 1993 ($13.50 per barrel in the United States), and was $20.19 per
barrel on March 6, 1996. The low level of oil prices existing during the latter
part of 1993 and the first five months of 1994 adversely impacted the Company's
oil and gas operations. Although the Company's contract drilling operations were
not impacted by these low levels, Patterson believes that this segment of its
business would have been adversely effected had prices not risen to at least
current levels.
The average price of natural gas per Mcf received by Patterson declined
from $1.97 in the first quarter of 1994 to a three-year low of $1.37 in the
first quarter of 1995 and has risen since then to $1.72 per Mcf during the
fourth quarter of 1995. If oil prices and/or gas prices (stay at current levels
or further decline), the Company's rig utilization, contract drilling rates and
oil and gas operations could be further adversely effected. The demand for
drilling rigs in both areas of the Company's operations softened during 1995,
particularly in South and Southeast Texas. The Company believes that the reduced
demand was due to low level natural gas prices during much of 1995. Due to the
reduced demand, the Company decreased its contract drilling rates in South and
Southeast Texas during the first quarter of 1995. These rates were subsequently
increased in mid-1995 to prior levels. However, the demand for rigs continues to
be unstable in both areas. This instability may
24
<PAGE> 166
cause the Company to again reduce rates in South and Southeast Texas and
possibly in the Permian Basin. Any reduction in contract drilling rates could
adversely impact the Company's operations.
IMPACT OF INFLATION
Patterson believes that inflation will not have a significant impact on its
financial position.
RECENT ACCOUNTING STANDARDS
During March 1995, the Financial Accounting Standards Board issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Preliminary analysis of this new standard by the
Company indicates that the standard will not have a material impact on the
Company. The standard is effective for financial statements for fiscal years
beginning after December 15, 1995.
SFAS 123, "Accounting for Stock-Based Compensation" which was issued in
1995 is not effective until 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 accounting as prescribed by
Accounting Principles Board Opinion No. 25. The Company plans to continue using
the intrinsic value based method.
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements are filed as a part of this report at the end of Part
III hereof beginning at page F-1, Index to Consolidated Financial Statements and
are incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Part III is omitted from this report because
the Company will file a definitive Proxy Statement for the Company's 1996 Annual
Meeting of Stockholders (the "Proxy Statement") pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form 10-KSB and certain information included therein
is incorporated herein by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
25
<PAGE> 167
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<C> <S>
2.1 -- Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson Energy,
Inc., a Delaware corporation, together with related Certificates of
Merger.(1)
3.1 -- Certification of Incorporation of the Registrant.(1)
3.2 -- Bylaws of the Registrant.(1)
4.1 -- Excerpt from Certificate of Incorporation of Patterson Energy, Inc.
regarding authorized Common Stock and Preferred Stock.(1)
10.1 -- Model Form Operating Agreement.(2)
10.2 -- Form of Drilling Bid Proposal and Footage Drilling Contract.(2)
10.3 -- Form of Turnkey Drilling Agreement.(2)
10.4 -- Promissory Note dated December 13, 1993, from Patterson Energy, Inc.
to Financial Services Partnership for a revolving line of credit up
to $710,000.(3)
10.5 -- Amendment to Promissory Note dated December 13, 1993, from Patterson
Energy, Inc. to Financial Services Partnership.(4)
10.5.1 -- Amendment to Promissory Note dated December 13, 1993, from Patterson
Energy, Inc. to Financial Services Partnership.
10.6 -- Asset Purchase Agreement, dated July 8, 1994, by and between Questor
Drilling Corp. and Patterson Energy, Inc.(5)
10.7 -- Registration Rights Agreement, dated July 15, 1994, as amended on
October 5, 1994, by and between Patterson Energy, Inc. and Questor
Drilling Corp.(5)
10.8 -- Amended and Restated Registration Rights Agreement, dated as of
September 12, 1995, between Patterson Energy, Inc. and Metropolitan
Life Insurance Company Separate Account EN, amending and restating
the Registration Rights Agreement, dated July 15, 1994, as amended
October 5, 1994 (see 10.7 above).
10.9 -- Stock Issuance Agreement, dated July 15, 1994, by and between
Patterson Energy, Inc. and Questor Drilling Corp.(5)
10.10 -- Promissory Note, dated July 12, 1994, in the original principal
amount of $5,000,000 from Patterson Energy, Inc. to U.S. Bancorp
Leasing & Financial.(5)
10.11 -- Security Agreement, dated July 12, 1994, from Patterson Energy, Inc.
to U.S. Bancorp Leasing & Financial.(5)
10.11.1 -- Amendment No. 1 to Security Agreement, dated July 12, 1994, from
Patterson Energy, Inc. to U.S. Bancorp Leasing & Financial.
10.12 -- Loan Agreement -- Revolving Line of Credit, dated June 1, 1995, among
Parker Square Bank, N.A., Patterson Energy, Inc. and Patterson
Petroleum, Inc.(7)
10.13 -- Revolving Line of Credit Promissory Note, dated June 1, 1995.(7)
10.14 -- Mortgage, Deed of Trust, Assignment, Security Agreement and Financing
Statement, dated September 15, 1994, from Patterson Petroleum, Inc.,
as Grantor, to Tommy L. McCulloch, as Trustee, and Parker Square
Bank, N.A., as Noteholder.(6)
10.14.1 -- Amendment No. 1 to Mortgage, Deed of Trust, Assignment, Security
Agreement and Financing Statement, dated as of March 14, 1995,
between Patterson Petroleum, Inc. and Parker Square Bank, N.A.
</TABLE>
26
<PAGE> 168
<TABLE>
<C> <S>
10.14.2 -- Amended and Restated Loan Agreement -- Revolving Line of Credit,
dated December 1, 1995, among Norwest Bank Texas, Wichita Falls,
N.A., Patterson Energy, Inc., and Patterson Petroleum, Inc.(8)
10.14.3 -- Revolving Line of Credit Promissory Note dated December 1, 1995.(8)
10.14.4 -- Amendment of Mortgage, Deed of Trust, Assignment, Security Agreement
and Financing Statement dated December 1, 1995, from Patterson
Petroleum, Inc., as Grantor, to James B. Frank, Trustee, Norwest Bank
Texas, Wichita Falls, N.A. as Noteholder.(8)
10.14.5 -- Mortgage, Deed of Trust, Assignment, Security Agreement and Financing
Statement, dated December 1, 1995, from Patterson Petroleum, Inc., as
Grantor, to James B. Frank, as Trustee, Norwest Bank Texas, Wichita
Falls, N.A., as Noteholder.(8)
10.15 -- Loan Agreement, dated as of March 14, 1995, between Patterson Energy,
Inc. and The CIT Group/Equipment Financing, Inc. and related
Promissory Note and Security Agreement.(4)
10.16 -- Termination Agreement, dated February 15, 1995, among Talbott
Aviation, Inc., SSI Oil & Gas, Inc. and Patterson Energy, Inc.
relating to termination of the Amended and Restated Aircraft Lease
dated July 12, 1992. (4)
10.17 -- Aircraft Lease, dated February 15, 1995 (effective January 1, 1995)
between Talbott Aviation, Inc. and Patterson Energy, Inc.(4)
10.18 -- Plan and Agreement of Merger, dated as of April 21, 1995, by and
between Navajo Rigs, Inc. and Patterson Energy, Inc.(7)
10.19 -- Asset Purchase Agreement, dated May 23, 1995, between Perry E. Esping
and Patterson Energy, Inc., together with related Stock Purchase
Warrant and Registration Rights Agreement.(7)
10.20 -- Participation Agreement, dated October 19, 1994, between Patterson
Petroleum Trading Company, Inc. and BHT Marketing, Inc.(7)
10.20.1 -- Participation Agreement, dated October 24, 1995, between Patterson
Petroleum Trading Company, Inc. and BHT Marketing, Inc.
10.21 -- Crude Oil Purchase Contract, dated October 19, 1994, between
Patterson Petroleum, Inc. and BHT Marketing, Inc.(7)
10.21.1 -- Crude Oil Purchase Contract, dated October 24, 1995, between
Patterson Petroleum, Inc. and BHT Marketing, Inc.
10.22 -- Patterson Energy, Inc. 1993 Stock Incentive Plan.(7)
10.23 -- Patterson Energy, Inc. Non-Employee Directors' Stock Option Plan.(7)
10.24 -- Form of Warrant Agreement among the Company and Gilford Securities
Incorporated and First Colonial Securities Group, Inc., the
underwriters of the Company's initial public offering completed in
December 1993.(1)
10.25 -- Consulting and Stock Option Agreement, dated as of November 15, 1994,
between Patterson Energy, Inc. and Shimmerlik Corporate
Communications, Inc.
10.25.1 -- Extended Consulting Agreement, dated as of April 1, 1995, between
Patterson Energy, Inc. and Shimmerlik Corporate Communications, Inc.
10.26 -- Consulting and Stock Option Agreement, dated as of November 15, 1994,
between Patterson Energy, Inc. and Peter Hoffman.
</TABLE>
27
<PAGE> 169
<TABLE>
<C> <S>
10.26.1 -- Consulting and Stock Option Agreement, dated as of February 15, 1995,
between Patterson Energy, Inc. and Peter Hoffman.
10.26.2 -- Consulting and Stock Option Agreement, dated as of August 2, 1995,
between Patterson Energy, Inc. and Peter Hoffman.
11.1 -- Statement re computation of per share earnings.
21.1 -- List of Subsidiaries of Patterson Energy, Inc.
</TABLE>
- ---------------
(1) Incorporated by reference to Item 27. "Exhibits" to Amendment No. 2 to
Registration Statement on Form SB-2 (File No. 33-68058-FW) filed with the
Commission on October 28, 1993.
(2) Incorporated by reference to Item 27. "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
(3) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated January 4, 1994 and filed on January 5, 1994.
(4) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1994.
(5) Incorporated by reference to Item 13. "Exhibits and Reports on Form 8-K" to
Form 8-K and Form 8-K/A dated July 15, 1994 and filed on November 11, 1994.
(6) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated September 15, 1994 and filed on November 11, 1994.
(7) Incorporated by reference to Item 27. "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2 (File No.
33-68058-FW).
(8) Incorporated by reference to Item 5. "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(b) Reports on Form 8-K.
One report on Form 8-K was filed during the quarter ended December 31,
1995, relating to an Amended and Restated Loan Agreement -- Revolving Line of
Credit, dated December 1, 1995, among Norwest Bank Texas, Wichita Falls, N.A.,
and the Company.
28
<PAGE> 170
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
Date: March 13, 1996 By: /s/ CLOYCE A. TALBOT
-----------------------------------
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Patterson Energy,
Inc. and in the capacities indicated as of March 13, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------- ----------------------------------------
<C> <S>
/s/ CLOYCE A. TALBOTT Chairman of the Board, Chief Executive
- -------------------------------------------- Officer and Director
Cloyce A. Talbott
(Principal Executive Officer)
/s/ A. GLENN PATTERSON President, Chief Operating Officer and
- -------------------------------------------- Director
A. Glenn Patterson
/s/ JAMES C. BROWN Vice President -- Finance, Chief Financial
- -------------------------------------------- Officer, Secretary and Treasurer
James C. Brown
(Principal Accounting Officer)
/s/ ROBERT C. GIST Director
- --------------------------------------------
Robert C. Gist
/s/ KENNETH E. DAVIS Director
- --------------------------------------------
Kenneth E. Davis
</TABLE>
29
<PAGE> 171
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Financial Statements:
Consolidated Balance Sheets...................................................... F-3
Consolidated Statements of Income................................................ F-4
Consolidated Statements of Stockholders' Equity.................................. F-5
Consolidated Statements of Cash Flows............................................ F-6
Notes to Consolidated Financial Statements....................................... F-7
</TABLE>
F-1
<PAGE> 172
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Patterson Energy, Inc.
We have audited the accompanying 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 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 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
F-2
<PAGE> 173
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $ 3,369,382 $ 2,467,482
Accounts receivable:
Trade:
Billed..................................................... 9,017,658 8,722,373
Unbilled................................................... 1,442,659 1,807,029
Oil and gas sales............................................ 228,466 487,027
Equipment inventory............................................. 401,194 405,049
Deferred income taxes........................................... 406,515 614,567
Undeveloped oil and gas properties held for resale.............. 1,385,781 2,122,112
Other current assets............................................ 146,647 174,588
----------- -----------
Total current assets.................................... 16,398,302 16,800,227
----------- -----------
Property and equipment, at cost, net.............................. 14,608,259 26,470,324
Deposits on workers' compensation insurance policy................ 556,864 343,760
Other assets...................................................... 92,271 176,115
----------- -----------
Total assets............................................ $31,655,696 $43,790,426
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable............................. $ 918,834 $ 909,634
Accounts payable:
Trade........................................................ 7,518,232 6,102,382
Revenue distribution......................................... 896,176 1,595,411
Other........................................................ 602,284 245,374
Accrued expenses................................................ 1,293,488 1,657,994
----------- -----------
Total current liabilities............................... 11,229,014 10,510,795
----------- -----------
Notes payable, less current maturities............................ 5,966,710 12,906,473
----------- -----------
Commitments and contingencies (Notes 5, 6 and 7).................. -- --
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 and outstanding 2,635,000 shares and 3,194,951 shares
at December 31, 1994 and 1995, respectively. ................ 26,350 31,950
Additional paid-in capital...................................... 10,102,557 14,095,200
Retained earnings............................................... 4,331,065 6,246,008
----------- -----------
Total stockholders' equity.............................. 14,459,972 20,373,158
----------- -----------
Total liabilities and stockholders' equity......... $31,655,696 $43,790,426
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 174
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Drilling.......................................... $21,395,891 $31,408,087 $41,248,844
Oil and gas sales................................. 2,447,786 2,741,597 4,124,473
Well operation fees............................... 815,360 833,963 1,132,279
Other............................................. 168,926 133,240 148,976
----------- ----------- -----------
24,827,963 35,116,887 46,654,572
----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs............................. 17,250,733 25,167,186 33,491,622
Lease operating and production.................... 725,486 873,568 1,174,658
Exploration costs................................. 279,644 206,659 369,133
Dry holes and abandonments........................ 189,981 1,093,165 682,597
Depreciation, depletion and amortization.......... 2,321,306 2,880,985 5,313,917
General and administrative expense................ 2,317,741 2,863,331 3,201,452
----------- ----------- -----------
23,084,891 33,084,894 44,233,379
----------- ----------- -----------
Operating income.................................... 1,743,072 2,031,993 2,421,193
----------- ----------- -----------
Other income (expense):
Net gain on sale of assets........................ 84,215 359,083 313,167
Interest income................................... 62,327 193,417 145,774
Interest expense.................................. (330,739) (366,152) (1,064,523)
Other............................................. 122,022 64,052 11,914
----------- ----------- -----------
Other income (expense), net............... (62,175) 250,400 (593,668)
----------- ----------- -----------
Income before income taxes.......................... 1,680,897 2,282,393 1,827,525
----------- ----------- -----------
Income taxes:
Current........................................... 123,309 165,462 120,634
Deferred income tax benefit....................... -- (406,515) (208,052)
----------- ----------- -----------
Income tax expense (benefit).............. 123,309 (241,053) (87,418)
----------- ----------- -----------
Net Income.......................................... $ 1,557,588 $ 2,523,446 $ 1,914,943
=========== =========== ===========
Net income per common share:
Primary........................................... $ .95 $ 1.01 $ .68
=========== =========== ===========
Assuming full dilution............................ $ N/A $ N/A $ .65
=========== =========== ===========
Weighted average number of common shares
outstanding:
Primary........................................... 1,647,801 2,501,438 2,836,391
=========== =========== ===========
Assuming full dilution............................ N/A N/A 2,961,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 175
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....... 1,803,604 $18,036 351,158 $(730,292) $ 4,241,781 $ 250,031 $ 3,779,556
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....................... -- -- -- -- -- 1,557,588 1,557,588
--------- ------- -------- --------- ----------- ---------- -----------
Balance, December 31, 1993....... 2,638,604 26,386 253,604 (681,120) 8,908,641 1,807,619 10,061,526
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) -- --
Net income....................... -- -- -- -- -- 2,523,446 2,523,446
--------- ------- -------- --------- ----------- ---------- -----------
Balance, December 31, 1994....... 2,635,000 26,350 -- -- 10,102,557 4,331,065 14,459,972
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............ 35,577 356 -- -- 280,353 -- 280,709
Net income....................... -- -- -- -- -- 1,914,943 1,914,943
--------- ------- -------- --------- ----------- ---------- -----------
Balance, December 31, 1995....... 3,194,951 $31,950 -- $ -- $14,095,200 $6,246,008 $20,373,158
========= ======= ======== ========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 176
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................... $1,557,588 $2,523,446 $ 1,914,943
Adjustments to reconcile net income to net cash from operating
activities:
Loss on abandonment......................................... 19,951 213,726 243
Depreciation, depletion and amortization.................... 2,321,306 2,880,985 5,313,917
Net gain on sale of assets.................................. (84,215) (359,083) (313,167)
Deferred income tax benefit................................. -- (406,515) (208,052)
Change in current assets and liabilities:
Increase in trade accounts receivable.................. (1,825,452) (4,399,616) (40,181)
(Increase) decrease in oil and gas sales receivable.... 91,026 (47,110) (258,561)
Increase in undeveloped oil and gas properties held for
resale............................................... (469,710) (549,440) (736,331)
(Increase) decrease in other current assets............ 198,831 (157,563) (106,599)
Increase (decrease) in trade accounts payable.......... 440,385 3,112,454 (1,415,850)
Increase in revenue distribution payable............... 45,426 181,459 699,235
Increase (decrease) in other current liabilities....... (47,191) 1,107,299 53,495
Net change in deposits on workers' compensation insurance
policy.................................................... 57,853 (22,901) 213,104
---------- ---------- -----------
Net cash provided by operating activities.......... 2,305,798 4,077,141 5,116,196
---------- ---------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................... (3,337,157) (9,383,993) (16,525,352)
Sale of property and equipment................................ 119,962 235,518 384,544
Change in other assets........................................ -- -- (83,844)
---------- ---------- -----------
Net cash used in investing activities.............. (3,217,195) (9,148,475) (16,224,652)
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from notes payable................................... 2,766,488 5,000,000 9,375,000
Payments on notes payable..................................... (4,681,296) (573,456) (2,444,437)
Issuance of common stock and redeemable warrants.............. 4,671,275 -- 3,275,993
Proceeds from sale of treasury stock.......................... 53,107 -- --
---------- ---------- -----------
Net cash provided by financing activities.......... 2,809,574 4,426,544 10,206,556
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... 1,898,177 (644,790) (901,900)
Cash and cash equivalents at beginning of year.................. 2,115,995 4,014,172 3,369,382
---------- ---------- -----------
Cash and cash equivalents at end of year........................ $4,014,172 $3,369,382 $ 2,467,482
========== ========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................... $ 347,888 $ 344,487 $ 992,651
Income taxes................................................ 101,711 74,176 182,595
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 5 and 6).
During the year ended December 31, 1994, the Company retired
253,604 shares of common stock that were held in treasury
(See Note 6).
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 6).
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 177
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., dba Patterson Drilling Company
and its wholly-owned subsidiaries, 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.
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.
Provision for losses is 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.
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................................ 3-7
Automotive equipment....................................... 3-7
Office furniture........................................... 3-5
Other...................................................... 3-7
Buildings.................................................. 15
</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
(Continued)
F-7
<PAGE> 178
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Financial Accounting Standards Board issued SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Preliminary analysis of this new standard by the Company indicates that the
standard will not have a material impact on the Company. The standard is
effective for financial statements for fiscal years beginning after December 15,
1995.
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 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 merger
discussed in Note 6.
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 6). 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 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. 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.
(Continued)
F-8
<PAGE> 179
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. CASH
Included in cash as of December 31, 1994 and 1995 was approximately
$896,000 and $1,595,000, respectively, of monthly oil and gas sales to be
distributed to revenue owners subsequent to year-end.
3. 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........................... $ 23,240,517 $ 35,234,458
Producing oil and gas properties, successful efforts
method of accounting................................ 6,271,340 9,813,967
Other equipment....................................... 6,965,024 8,066,201
Buildings............................................. 1,522,398 1,524,693
Land.................................................. 264,626 264,626
------------ ------------
38,263,905 54,903,945
Less accumulated depreciation, depletion and
amortization........................................ (23,655,646) (28,433,621)
------------ ------------
$ 14,608,259 $ 26,470,324
============ ============
</TABLE>
4. 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
</TABLE>
(Continued)
F-9
<PAGE> 180
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
4. NOTES PAYABLE (CONTINUED)
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, an entity related to 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>
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,
(Continued)
F-10
<PAGE> 181
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
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): $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> <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 Workers Compensation Insurance carrier on behalf of
the Company in the amount of $150,000.
(Continued)
F-11
<PAGE> 182
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE (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>
5. 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 6).
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 a resale under Rule 144(k) of the
Securities Act of 1933. The provisions relating to the $7.50 price guarantee and
the remittance to the Company of sales proceeds in excess of $9.00 per share
were eliminated.
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.
(Continued)
F-12
<PAGE> 183
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(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.
(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.
6. 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 has 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
(Continued)
F-13
<PAGE> 184
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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 Drilling
Corp. ("Questor"), a Delaware corporation wholly-owned by Phibro Energy USA,
Inc. ("Phibro"), 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.
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 NASDAQ/NM over the preceding 12 calendar
months, and (b) the
(Continued)
F-14
<PAGE> 185
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
right to join the registrable securities in any registration statements filed by
the Company with the Commission.
At December 31, 1995, the Company has 3,194,951 shares of Common Stock
issued and 3,194,951 shares outstanding and no shares of Preferred Stock issued
or outstanding.
7. 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.
Non-Employee Directors' Stock Option Plan -- In June 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan ("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 the options will be the fair market value of the
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 in 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
(Continued)
F-15
<PAGE> 186
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
compensation for public relations services rendered to the Company. The
respective options were fully exerciseable 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 underwriting firms 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
exerciseable at $9.00 per share as partial consideration for the purchase of
three drilling rigs and related equipment. (See Note 6). The warrants were
exerciseable upon issuance and expire on December 31, 1997. No warrants have
been exercised at December 31, 1995.
The following table contains information concerning stock options and
warrants:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Granted
1993............................................................. 112,973 $ 8.29
1994............................................................. 45,000 7.78
1995............................................................. 331,000 9.67
Exercised
1993............................................................. -- --
1994............................................................. -- --
1995............................................................. 37,658 $ 7.45
Outstanding at Year End
1993............................................................. 112,973 $ 8.29
1994............................................................. 157,973 8.14
1995............................................................. 451,315 9.31
Exerciseable at Year End
1993............................................................. 112,973 $ 8.29
1994............................................................. 157,973 8.14
1995............................................................. 308,515 8.97
</TABLE>
SFAS 123, "Accounting for Stock-Based Compensation" which was issued in
1995 is not effective until 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 accounting as prescribed by
(Continued)
F-16
<PAGE> 187
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
Accounting Principles Board Opinion No. 25. The Company plans to continue using
the intrinsic value based method.
8. LEASES
Rent expenses 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.
9. 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 $ 57,132 $ 45,899
Deferred income tax (benefit)................... -- (406,515) (208,052)
-------- --------- ---------
41,213 (349,383) (162,153)
State:
Current......................................... 82,096 108,330 74,735
-------- --------- ---------
Total income tax expense (benefit).............. $123,309 $(241,053) $ (87,418)
======== ========= =========
</TABLE>
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......................... -- (17.8) (11.4)
State franchise taxes.................................... 4.9 4.7 4.1
Alternative minimum taxes................................ 2.4 2.5 2.5
----- ----- -----
Effective tax rate....................................... 7.3% (10.6%) (4.8%)
===== ===== =====
</TABLE>
There is $7,132 of accrued Federal income taxes in accrued expenses at
December 31, 1994. There is $54,101 of prepaid Federal income taxes in prepaid
expenses 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 total deferred tax asset valuation allowance of
approximately $4,657,000 was due to net operating loss ("NOL") carryforwards
which were not expected to be utilized before the expiration date 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
(Continued)
F-17
<PAGE> 188
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
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......... $ 4,181 $(752) $ 3,429 $(910) $ 2,519 $(647) $ 1,872
Investment tax credit carryforwards...... 469 -- 469 -- 469 -- 469
AMT credit carryforwards................. 62 41 103 56 159 45 204
Property and equipment................... -- 38 38 21 59 (59) --
Other.................................... 21 65 86 87 173 89 262
------- ----- ------- ------ ------- ----- -------
4,733 (608) 4,125 (746) 3,379 (572) 2,807
Valuation allowance...................... (4,657) 532 (4,125) 1,153 (2,972) 877 (2,095)
------- ----- ------- ------ ------- ----- -------
Deferred tax assets.................... 76 (76) -- 407 407 305 712
Deferred tax liabilities:
Property and equipment basis
difference............................. (76) 76 -- -- -- (97) (97)
------- ----- ------- ------ ------- ----- -------
Net deferred tax asset................. $ -- $ -- $ -- $ 407 $ 407 $ 208 $ 615
======= ===== ======= ====== ======= ===== =======
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $5,505,000 and alternative minimum tax ("AMT") NOL carryforwards
of approximately $5,461,000 at December 31, 1995. In addition, the Company had
AMT credit carryforwards of $204,000 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 2005. During the years ended December 31, 1993, 1994 and 1995, the
Company utilized approximately $2,212,000, $2,682,000, and $1,904,000
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.
In August, 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). The NOL
carryforwards that can now be utilized in any year will be equal to
approximately $1,808,000, which is determined by the value of the Company's
equity on August 2, 1995, the day prior to the ownership change, times 5.88%,
the federal long-term exempt rate on that date as published by the U. S.
Treasury Department.
10. 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 has been accrued in the year ended December 31, 1995.
(Continued)
F-18
<PAGE> 189
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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 includes 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................................. $21,395,891 $31,408,087 $41,248,844
Oil and gas....................................... 3,432,072 3,708,800 5,405,728
----------- ----------- -----------
Total revenues...................................... $24,827,963 $35,116,887 $46,654,572
=========== =========== ===========
Income (loss) from operations:
Contract drilling................................. $ 1,834,089 $ 2,803,625 $ 2,747,521
Oil and gas....................................... 115,220 (348,497) (1,247)
----------- ----------- -----------
1,949,309 2,455,128 2,746,274
Interest income..................................... 62,327 193,417 145,774
Interest expense.................................... (330,739) (366,152) (1,064,523)
----------- ----------- -----------
Income before income taxes.......................... $ 1,680,897 $ 2,282,393 $ 1,827,525
=========== =========== ===========
Identifiable assets:
Contract drilling................................. $13,093,814 $23,846,248 $35,948,356
Oil and gas....................................... 5,335,680 7,809,448 7,842,070
----------- ----------- -----------
Total assets........................................ $18,429,494 $31,655,696 $43,790,426
=========== =========== ===========
Depreciation, depletion and amortization:
Contract drilling................................. $ 1,239,215 $ 2,001,060 $ 3,431,873
Oil and gas....................................... 1,082,091 879,925 1,882,044
----------- ----------- -----------
Total depreciation, depletion and amortization...... $ 2,321,306 $ 2,880,985 $ 5,313,917
=========== =========== ===========
Capital expenditures:
Contract drilling................................. $ 2,029,767 $ 8,997,151 $13,208,727
Oil and gas....................................... 1,307,390 2,261,842 4,038,875
----------- ----------- -----------
Total expenditures.................................. $ 3,337,157 $11,258,993 $17,247,602
=========== =========== ===========
</TABLE>
For the year ended December 31, 1993, one customer accounted for 10% of
consolidated revenues. No customer accounted for more than 10% of the Company's
consolidated revenues for the years ended December 31, 1994 and 1995.
12. 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..................... $ 116,120 $ 658,660 $ 794,692
Exploration costs.............................. 1,305,502 2,082,536 3,655,367
Development costs.............................. 245,421 552,598 673,328
---------- ---------- ----------
$1,667,043 $3,293,794 $5,123,387
========== ========== ==========
</TABLE>
(Continued)
F-19
<PAGE> 190
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. OIL AND GAS EXPENDITURES (CONTINUED)
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.............................. $4,392,464 $6,271,340 $9,813,967
Accumulated depreciation, depletion and
amortization................................. 3,101,578 3,701,296 5,163,666
---------- ---------- ----------
Net proved properties.......................... $1,290,886 $2,570,044 $4,650,301
========== ========== ==========
</TABLE>
13. 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 engineering firm 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.......................... 164,378 500,959
Revision in previous estimates............................... 11,938 219,362
Extensions, discoveries and other additions.................. 114,676 939,537
Sales of reserves-in-place................................... -- --
Production................................................... (97,328) (379,131)
-------- ----------
Estimated quantity, January 1, 1994.......................... 193,664 1,280,727
Revision in previous estimates............................... 127,894 360,913
Extensions, discoveries and other additions.................. 265,462 1,447,516
Sales of reserves-in-place................................... (19,962) (3,752)
Production................................................... (97,564) (603,248)
-------- ----------
Estimated quantity, January 1, 1995.......................... 469,494 2,482,156
Revision in previous estimates............................... (62,441) 412,238
Extensions, discoveries and other additions.................. 345,446 2,108,410
Sales of reserves-in-place................................... -- --
Production................................................... (147,451) (1,031,301)
-------- ----------
Estimated quantity, January 1, 1996.......................... 605,048 3,971,503
======== ==========
</TABLE>
(Continued)
F-20
<PAGE> 191
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION AND RELATED DATA (UNAUDITED)
(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........................... $2,447,786 $2,741,597 $4,124,473
Gain on sale of oil and gas properties......... -- 151,287 38,394
Gain on sale of undeveloped properties......... -- 48,506 66,755
---------- ---------- ----------
2,447,786 2,941,390 4,229,622
Costs and expenses (benefit):
Production costs............................. 738,321 882,931 1,381,517
Exploration expenses......................... 215,247 1,333,548 1,102,762
Depreciation, depletion and amortization..... 1,082,091 879,925 1,795,088
Income tax (benefit)......................... 140,123 (58,825) (16,913)
---------- ---------- ----------
2,175,782 3,037,579 4,262,454
---------- ---------- ----------
Results of operations for oil and gas producing
activities................................... $ 272,004 $ (96,189) $ (32,832)
========== ========== ==========
</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
------ ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Future gross revenues.................................... $4,667 $10,861 $17,124
Future development and production costs.................. 1,409 5,072 6,489
Future income tax expense(a)............................. 566 949 2,035
------ ------- -------
Future net cash flows.................................... 2,692 4,840 8,600
Discount at 10% per annum................................ (541) (1,284) (2,246)
------ ------- -------
Standardized measure of discounted future net cash
flows.................................................. $2,151 $ 3,556 $ 6,354
====== ======= =======
</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.
(Continued)
F-21
<PAGE> 192
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION AND RELATED DATA (UNAUDITED)
(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
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Standardized measure at beginning of year................ $ 1,347 $ 2,151 $ 3,556
Sales and transfers of oil and gas produced, net of
production costs....................................... (1,722) (1,753) (2,950)
Net changes in sales price and future production and
development costs...................................... (170) (1,540) 815
Extensions, discoveries and improved recovery,
less related costs..................................... 2,037 2,889 5,150
Sales of minerals-in-place............................... -- (158) --
Revision of previous quantity estimates.................. 791 2,135 513
Accretion of discount.................................... 135 215 356
Net change in income taxes............................... (267) (383) (1,086)
------- ------- -------
Standardized measure at end of year...................... $ 2,151 $ 3,556 $ 6,354
======= ======= =======
</TABLE>
14. 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............................... $ 417,912 $ 454,450
Deposit in FDIC and SIPC-insured institutions over
$100,000................................................ 4,258,509 4,880,990
----------- -----------
4,676,421 5,335,440
Less outstanding checks and other reconciling items....... (1,307,039) (2,867,958)
----------- -----------
Cash and cash equivalents................................. $ 3,369,382 $ 2,467,482
=========== ===========
</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 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 $90,000
and $120,000, respectively.
(Continued)
F-22
<PAGE> 193
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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. The Company
paid monthly rental of $4,500 plus the Company's proportionate share of fuel.
Under this agreement insurance, taxes and maintenance were shared equally by the
Company and the 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.
Costs associated with the transportation of drilling fluids -- During 1993,
1994 and 1995, the Company paid approximately $23,000, $25,700, and $1,864
respectively, and at December 31, 1994 and 1995 had accounts payable of
approximately $397 and $941, respectively, for the transportation of drilling
fluids that were provided by a company owned by the son-in-law of a member of
the Company's Board of Directors.
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 4.
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 6).
(Continued)
F-23
<PAGE> 194
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACQUISITION
On July 15, 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 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 the Company's Common Stock, par value $0.01
per share. The total value of the transaction was $6,375,000. The purchase price
was determined through arm's-length negotiation between Questor and the Company.
Neither Questor nor Phibro is an affiliate of the Company. The operating results
have been included in the consolidated operating results of the Company since
the date of acquisition.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if Questor had been acquired as of the
beginning of 1993, after including the impact of certain adjustments, such as
the elimination of revenues and other income and expenses attributed to the
assets not acquired from Questor, the increased interest expense on the
acquisition debt, and related income tax effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994
(UNAUDITED) (UNAUDITED)
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues..................................................... $43,214 $43,609
Net income................................................... 1,037 3,270
Net income per share......................................... .55 1.24
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
F-24
<PAGE> 195
ANNEX V
PATTERSON ENERGY, INC.
P. O. DRAWER 1416
SNYDER, TEXAS 79550
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 6, 1996
To the Stockholders of
PATTERSON ENERGY, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Patterson
Energy, Inc., a Delaware corporation (the "Company"), will be held at the
Embassy Suites Hotel, 3880 West Northwest Highway, Dallas, Texas, on Thursday,
June 6, 1996, at 10:00 A.M., local time, for the following purposes:
1. To elect four (4) directors of the Company to serve until the next
annual meeting of stockholders or until their respective successors shall
be elected and qualified;
2. To consider and vote upon a proposal to ratify the selection of
Coopers & Lybrand L.L.P., independent accountants, as independent auditors
for the Company for the fiscal year ending December 31, 1996; and
3. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Only stockholders of record at the close of business on April 25, 1996, are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. WHETHER
OR NOT YOU PLAN TO BE PRESENT AT THE MEETING, YOU ARE REQUESTED TO SIGN AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE SO THAT YOUR SHARES MAY BE
VOTED IN ACCORDANCE WITH YOUR WISHES AND IN ORDER THAT THE PRESENCE OF A QUORUM
MAY BE ASSURED. THE GIVING OF SUCH PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON, SHOULD YOU LATER DECIDE TO ATTEND THE MEETING. PLEASE DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOUR VOTE IS
IMPORTANT.
By Order of the Board of Directors
/s/ JAMES C. BROWN
JAMES C. BROWN
Secretary
SNYDER, TEXAS
April 26, 1996
<PAGE> 196
PATTERSON ENERGY, INC.
P. O. DRAWER 1416
SNYDER, TEXAS 79550
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 6, 1996
This Proxy Statement is furnished to stockholders of Patterson Energy,
Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
Annual Meeting of Stockholders (the "Meeting") to be held at Embassy Suites
Hotel, 3880 West Northwest Highway, Dallas, Texas, on Thursday, June 6, 1996, at
10:00 A.M., local time, for the purposes set forth in the accompanying Notice of
Annual Meeting of Stockholders. The approximate date on which this Proxy
Statement and the enclosed Proxy will first be sent to stockholders is April 25,
1996.
ACTION TO BE TAKEN AT THE MEETING
Shares represented by a properly executed Proxy, unless the stockholder
otherwise instructs in the Proxy, will be voted (i) for the election of the four
individuals named below under the caption "Election of Directors" as directors
of the Company; (ii) for the ratification of the selection of Coopers & Lybrand
L.L.P., independent accountants, as independent auditors of the Company for the
fiscal year ending December 31, 1996; and (iii) at the discretion of the proxy
holders on any other matter or business that may be properly presented at the
Meeting or any adjournment thereof. Where a stockholder properly executes a
Proxy and gives instructions on how his shares are to be voted, the shares will
be voted in accordance with those instructions.
A Proxy may be revoked at any time by a stockholder before it is exercised
by giving written notice to the Secretary of the Company or by signing and
delivering a Proxy which is dated later, or if the stockholder attends the
Meeting in person, by either notice of revocation to the inspectors of election
at the Meeting or by voting at the Meeting.
The only matters that management intends to present at the Meeting are the
two matters referenced in subparagraphs (i) and (ii) above. If any other matter
or business is properly presented at the Meeting, the proxy holders will vote
upon it in accordance with their best judgment.
VOTING SECURITIES
The record date for the Meeting is April 25, 1996. Only stockholders of
record at the close of business on April 25, 1996, will be entitled to vote at
the Meeting. At the close of business on that date, there were issued and
outstanding 3,194,951 shares of the Company's common stock, par value $0.01 per
share, (the "Common Stock"), entitled to one vote per share. In the election of
directors, cumulative voting is not allowed. There are no outstanding shares of
preferred stock. A majority of the outstanding Common Stock, present in person
or by Proxy and entitled to vote, will constitute a quorum for the transaction
of business at the Meeting. Under Delaware law and the Company's Certificate of
Incorporation, if a quorum is present at the Meeting, (a) to be elected a
director, each nominee must receive a plurality of the votes of the shares
present in person or by Proxy at the Meeting and entitled to vote on the matter,
and (b) the affirmative vote of the majority of shares present in person or by
Proxy at the Meeting and entitled to vote on the matter is required (i) to
approve the proposal to ratify the selection of Coopers & Lybrand L.L.P., as
independent auditors of the Company for the fiscal year ending December 31,
1996, and (ii) approve any other matter submitted to a vote of stockholders at
<PAGE> 197
the Meeting. In the election of directors, any action other than a vote for a
nominee will have the practical effect of voting against the nominee. Abstention
from voting on ratification of Coopers & Lybrand L.L.P., as independent auditors
of the Company for the fiscal year ending December 31, 1996, or on any other
matter presented at the Meeting, will have the practical effect of voting
against any such matter since it is one less vote for approval, while broker
non-votes on any such matter will not be considered "shares present" for voting
purposes.
BENEFICIAL OWNERSHIP OF THE COMPANY'S COMMON STOCK
The following table sets forth, as of March 31, 1996, information
concerning the beneficial ownership of the Company's Common Stock by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of the Company's Common Stock, (ii) each director and nominee
as director of the Company, (iii) each of the executive officers named in the
Summary Compensation Table set forth below under the caption "Executive
Compensation," and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP OF
NAME AND ADDRESS COMMON STOCK(1)(2) PERCENT OF CLASS
--------------------------------------------------- ------------------ ----------------
<S> <C> <C>
Cloyce A. Talbott.................................. 639,974(3) 20.03%
2500 Towle Park Road
Snyder, TX 79549
Metropolitan Life Insurance Company................ 250,000(4) 7.82%
One Madison Avenue
New York, NY 10010
C. A. Delaney Capital Management, Ltd.............. 280,500(5) 8.78%
Suite 5100
161 Bay Street
P. O. Box 713
Toronto, Ontario, M5J251
A. Glenn Patterson................................. 198,081(6) 6.16%
2807 34th Street
Snyder, TX 79549
Kenneth E. Davis................................... 67,554(7) 2.11%
Box 8297
Horseshoe Bay, TX 78654
Robert C. Gist..................................... 13,943(8) *
12809 Plum Hollow Drive
Oklahoma City, OK 73142
All executive officers and directors as a group
(8 persons)...................................... 918,437(9) 28.39%
</TABLE>
- ---------------
* Less than 1%
(1) Except as stated in the following notes, each person has sole voting and
investment powers associated with the shares stated as beneficially owned by
him.
(2) 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
<PAGE> 198
(3) Includes 37,862 shares owned by H.A. and Audrey Talbott Trust, of which
Cloyce A. Talbott is a beneficiary and co-trustee, and 57,298 shares owned
by SSI Oil & Gas, Inc., a Texas corporation beneficially owned 50% by Cloyce
A. Talbott and directly owned 50% by A. Glenn Patterson.
(4) 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.
(5) Number of shares stated was obtained from a Schedule 13G filed with the
Securities and Exchange Commission by C. A. Delaney Capital Management, Ltd.
(6) Includes 19,360 shares purchasable under exercisable employee stock options
and 57,298 shares owned by SSI Oil & Gas, Inc., a Texas corporation
beneficially owned 50% by Cloyce A. Talbott and directly owned 50% by A.
Glenn Patterson (see note 3 above).
(7) Includes 5,474 shares owned by the wife of Mr. Davis and 1,000 shares
purchasable under exercisable Non-Employee Directors Stock Options.
(8) Includes 1,000 shares purchasable under exercisable Non-Employee Directors
Stock Options.
(9) Includes a total of 39,760 shares purchasable under exercisable employee
stock options including the 19,360 shares referenced in note (6) above for
Mr. Patterson, and 2,000 shares purchasable under Non-Employee Directors
Stock Options (see notes 7 and 8 above).
ELECTION OF DIRECTORS
(PROPOSAL 1 ON PROXY CARD)
Under the Company's Bylaws, the number of members of the Board of Directors
presently is four. The Company's Board of Directors is not divided into classes;
therefore, all four directors are to be elected at the Meeting. Directors are
elected to serve until the next annual meeting of stockholders or until their
successors are elected and qualified.
Unless authority is withheld, it is intended that the shares represented by
a properly executed Proxy will be voted for the election of all of the nominees
(Cloyce A. Talbott; A. Glenn Patterson; Robert C. Gist; and Kenneth E. Davis) as
directors. The nominees constitute all of the members of the Company's present
Board of Directors. If these nominees are unable to serve for any reason, such
Proxy will be voted for such persons as shall be designated by the Board of
Directors to replace such nominees. The Board of Directors has no reason to
expect that these nominees will be unable to serve.
The following table sets forth certain information concerning the
individuals nominated for election as directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------- --- -----------------------------------------------------
<S> <C> <C>
Cloyce A. Talbott 60 Chairman of the Board; Chief Executive Officer;
Director
A. Glenn Patterson 49 President; Chief Operating Officer; Director
Robert C. Gist 55 Director
Kenneth E. Davis 73 Director
</TABLE>
The following is a brief description of each nominee's business experience
during the past five years:
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 since 1983 and also as Chief Executive Officer of the Company from
1983 to 1986 and since June 1993. He also serves as Chairman of the Board
and Chief Executive Officer of the Company's three subsidiaries, Patterson
Petroleum, Inc. ("Patterson Petroleum") and Patterson Petroleum Trading
Company, Inc., and Patterson Drilling Programs, Inc. Mr. Talbott is
primarily responsible
3
<PAGE> 199
for the Company's exploration and development activities for oil and gas.
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 from
1983 to 1986 and since June 1993. Mr. Patterson also serves as President of
the Company's three subsidiaries. Mr. Patterson is primarily responsible
for the day-to-day management of the Company's contract drilling
activities. Mr. Patterson received his Bachelor of Science degree in
Business in 1970 from Angelo State University, San Angelo, Texas.
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 1962
and a law degree in 1965 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 gas industry.
KENNETH E. DAVIS has served as 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. Mr. Davis was the owner and director of Fluid Transports, Inc., an
oil field trucking company until he sold the company in December, 1994 and
retired.
OTHER EXECUTIVE OFFICERS
The following table sets forth certain information concerning executive
officers who are not also directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- ------------------- --- -----------------------------------
<S> <C> <C>
James C. Brown 44 Vice President -- Finance;
Secretary and Treasurer; Chief
Financial Officer
Lee W. Staiger 47 Senior Vice President -- Operations
Jimmy C. Slay, Jr. 42 Senior Vice President -- Sales
Douglas W. Pillow 54 Vice President -- Marketing
</TABLE>
The following four paragraphs set forth certain information concerning the
business experience of the foregoing executive officers during the past five
years:
JAMES C. BROWN has served as Secretary and Treasurer of the Company
since June 1993 and as Vice President-Finance and 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 December 1983 until June 1990. Mr. Brown also serves as
Vice-President Finance, Treasurer and Secretary 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 Accounting 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.
LEE W. STAIGER has served as Senior Vice President-Operations of the
Company since February 1994. Mr. Staiger acted as Manager-Gulf Coast
Operations of Patterson Petroleum from October 1982 until February 1994. He
is responsible for directing operations of Company-operated wells and
contract wells for outside operators in the Gulf Coast region. He oversees
the Company's interests in wells not operated by the Company and supervises
contract drilling operations in the Austin Chalk Trend. Mr. Staiger
received a Bachelor of Science degree in Petroleum Engineering from Montana
College of Mineral, Science and Technology, Butte, Montana, in 1970. He is
a Registered Professional Engineer.
4
<PAGE> 200
JIMMY C. SLAY, JR. has served as Senior Vice President-Sales of the
Company since February 1994. Mr. Slay acted as Manager-Contracts of the
Company from October 1982 until February 1994. Mr. Slay has also been a
sales representative for the Company since 1984. Mr. Slay is responsible
for negotiating drilling contracts for the Company's drilling rigs located
in West Texas (Permian Basin) and for working with the Company's customers
in connection with those contracts.
DOUGLAS W. PILLOW has served as Vice President-Marketing of the
Company since September 1994. He served as Executive Vice President of
Questor Drilling Corp. ("Questor") from 1988 until July 1994 when the
Company purchased the assets of Questor. He is responsible for negotiating
drilling contracts for the Company's rigs located in South and Southeast
(Austin Chalk Trend) Texas. Mr. Pillow received a Bachelor of Business
Administration degree in Accounting from Lamar University, Beaumont, Texas
in 1968. He is a Certified Public Accountant.
The officers of the Company 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 or she 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.
OTHER SIGNIFICANT EMPLOYEE
In addition to the directors and executive officers listed above, the
Company believes the following employee is significant to its operations:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
------------------------ --- ---------------------------------------------------
<S> <C> <C>
Kenneth C. Nelson....... 46 Manager -- Exploration of Patterson Petroleum, Inc.
</TABLE>
KENNETH C. NELSON has acted as Manager-Exploration of Patterson Petroleum
since July 1988. He was exploration manager from 1984 through 1986, and has been
exploration manager since July 1988. He is responsible for the exploration
activities of the Company. Mr. Nelson received a Bachelor of Science degree in
Petroleum Engineering with highest honors from the University of Texas at Austin
in 1971 and a Master of Science degree in Petroleum Engineering from the
University of Texas at Austin in 1973. He is a Registered Professional Engineer.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held four formal meetings during the year ended
December 31, 1995. Each director attended all of the meetings. In addition to
those meetings, certain business was conducted by unanimous written consent of
the Board of Directors. The Company's officers have made a practice of keeping
directors informed of corporate activities by personal meetings and telephone
discussions and (as indicated above) directors ratify or authorize certain
Company actions through unanimous written consent actions.
The Company has an Audit Committee and a Compensation Committee of the
Board of Directors consisting in each case of Kenneth E. Davis and Robert C.
Gist. The Audit Committee's function is to review and approve the services of
the outside firm of independent accountants. 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 Stock
Incentive Plan. During 1995, the Audit Committee held one formal meeting, and
the Compensation Committee held one formal meeting. The two committee members
attended both of those meetings. In addition to the one Compensation Committee
meeting, certain business was conducted by unanimous written consent of the
Compensation Committee members.
At present, the Company has no nominating, executive, or similar
committees.
5
<PAGE> 201
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued during each
of the years in the three-year period ended December 31, 1995, to the Company's
Chief Executive Officer and to the only other executive officer whose total
compensation exceeded $100,000 for the last fiscal year for services in his
capacity as such.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------ ----- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Cloyce A. Talbott, Chairman
of the Board/Chief Executive
Officer 1995 $125,000 $ 507 $15,000 $ 3,053
1994 125,000 -- 15,000 4,620
1993 105,917 -- 15,000 --
A. Glenn Patterson,
President and Chief
Operating Officer 1995 $125,000 $60,507 $15,000 $ 3,623
1994 125,000 50,000 15,000 4,620
1993 105,917 -- 15,000 --
</TABLE>
- ---------------
(1) The Company furnishes various benefits to Messrs. Talbott and Patterson and
certain of its other employees and officers. These benefits include one or
more of the following: The use of an automobile owned or leased by the
Company; payment of annual country club dues and monthly charges, including
personal meals; personal landscape and secretarial services through Company
employees at the Company's expense. The amount set forth is the estimate of
value of such benefits to Messrs. Talbott and Patterson in 1993, 1994 and
1995.
(2) Represents Company contributions to the Patterson Energy, Inc. 401(k) Plan
(the "Plan") for the account of Messrs. Talbott and Patterson. The Plan
became effective January 1, 1992. All employees of the Company who are at
least 21 years of age, were employed on the last day of the year and have at
least six months of service with the Company or its subsidiaries are
eligible to participate in the Plan. The Company has no obligation to make
contributions under the Plan; Company contributions are discretionary.
Company contributions vest over a five-year period, based on credited years
of service with the Company, and may be made either by (i) matching all or a
portion of the respective participants contributions to the Plan or (ii) a
profit sharing contribution to the accounts of participants which, are in
turn allocated to the accounts of active participants in the same proportion
that each active participant's compensation bears to the total compensation
of all active participants for the plan year. No Company contributions were
made for any years prior to 1994. Messrs. Talbott and Patterson are fully
vested in the Plan.
Neither Mr. Talbott nor Mr. Patterson has an employment agreement with the
Company.
6
<PAGE> 202
OPTION GRANTS IN 1996
The following table sets forth information concerning options granted
during the year ended December 31, 1995 to the Company s President/Chief
Executive Officer. No option shares have been granted to the Company's Chairman
of the Board/Chief Executive Officer (Cloyce A. Talbott).
OPTIONS GRANTED DURING YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
NUMBER OF SHARES GRANTED TO EMPLOYEES
UNDERLYING OPTIONS DURING YEAR-ENDED EXERCISE EXPIRATION
NAME GRANTED(1) DECEMBER 31, 1995 PRICE DATE
- --------------------------- ------------------ -------------------- -------- ----------
<S> <C> <C> <C> <C>
A. Glenn Patterson 40,000 24.10% $ 7.25 3/31/2005
A. Glenn Patterson 30,000 18.07% 12.50 10/27/2005
------ -----
Total Options Granted 70,000 42.17%
====== =====
</TABLE>
- ---------------
(1) Options were granted under the Patterson Energy, Inc. 1993 Stock Incentive
Plan.
AGGREGATED OPTION EXERCISES AND OPTION VALUE AT DECEMBER 31, 1995
The following table sets forth information concerning each exercise of
stock options during the year ended December 31, 1995, by the Company's
President and Chief Operating Officer and the fiscal year-end value of
unexercised options held by him.
AGGREGATED OPTION EXERCISES
FOR YEAR ENDED DECEMBER 31, 1995
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT YEAR END(#)(2) YEAR-END($)(3)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#)(1) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ -------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
A. Glenn Patterson -- -- 19,360 50,640 $ 115,640 $ 208,290
</TABLE>
- ---------------
(1) No options were exercised during the year ended December 31, 1995.
(2) The total number of unexercised options held as of December 31, 1995,
separated between those options that were exercisable and those options
that were not exercisable.
(3) Calculated by subtracting actual option exercise price from market price at
year end ($14.125 per share) and multiplying the difference by the number
of shares in each category.
DIRECTOR COMPENSATION
In June 1993, the Board of Directors approved the payment of a $1,000 per
month fee to non-management directors of the Company beginning in July 1993 as
compensation for services as board members. No compensation was paid to
directors for services as such prior to July 1993. Non-management directors are
reimbursed for travel expenses incurred in attending meetings.
7
<PAGE> 203
CERTAIN 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 a lease dated February 15, 1995,
effective January 1, 1995 (the "Current Lease"). Under the terms of the Current
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 data processing employee of the Company.
The Current Lease expires on December 31, 1996. Mr. Talbott and Mr. A. Glenn
Patterson, the President of the Company, and other Company officers are entitled
to use the aircraft for personal use, for which they pay the Company $500 per
flight hour. The Company has a right of first refusal to purchase the aircraft.
From September 1, 1992 to January 1, 1995, the Company and SSI Oil & Gas, Inc.
("SSI"), which is beneficially owned 50% by Mr. Talbott and directly owned 50%
by A. Glenn Patterson, were co-lessees of the aircraft (the "Prior Lease"). The
monthly rental of $9,000 and insurance, taxes and maintenance costs were shared
by the Company and SSI on a 50/50 basis while fuel costs were shared based on
usage of the aircraft. The total cost to the Company for the aircraft (exclusive
of the pilot's salary) under the Prior Lease, was $126,497 in 1994. The total
cost to the Company for the aircraft (exclusive of the pilot's salary) under the
current lease was $174,455 in 1995. The Company used the aircraft for 213 flight
hours out of a total of 278 flight hours for the aircraft in 1994 and 223 flight
hours out of a total of 300 flight hours in 1995. The Company 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 disinterested members of the Board of
Directors believe that the Current Lease is, and the Prior Lease was, on the
same or better terms than the Company could have obtained from a nonaffiliated
party.
In April 1992, the Company entered into a revolving line of credit of
$710,000 from Financial Services Partnership, a partnership made up of family
members and family trusts of Messrs. Talbott and Patterson. The original line of
credit provided for interest at 10% per annum, payable monthly, and was due May
1, 1993, but was renewed until May 1, 1994. On November 2, 1993, the interest
rate was reduced to 8% per annum. In December 1993, the line of credit was
renewed. The renewed line of credit bears interest at 8% per annum, payable
monthly, and is collateralized by the Company's accounts receivable and general
intangibles and was to mature in December 1995. In December 1994, the maturity
date was extended to December 1996 and in December 1995, the maturity was again
extended to December 1997. A total of $609,000 was outstanding under the line of
credit at December 31, 1995. The Company believes that the terms of this loan
are at least as favorable as it could have obtained from a nonaffiliated party.
Fluid Transports, Inc.("FTI") owned, until December 1994, by Kenneth E.
Davis, a director of the Company, and his son-in-law, hauls drilling fluids to
drill sites for the Company. In December 1994, Mr. Davis sold his interest in
FTI to his son-in-law. The Company paid $25,700 for such services in 1994 and
$1,864 in 1995. The services are awarded on the basis of competitive quotes. The
Company intends to continue to obtain such services from FTI if its prices are
competitive.
Robert C. Gist, a director of the Company, was paid a monthly retainer of
$1,000, or a total of $12,000 in 1994 and 1995, for legal and consulting
services provided to the Company. The Company intends to continue to obtain such
services from Mr. Gist. In addition, the Company paid premiums for Mr. Gist's
family health insurance coverage in the amount of approximately $5,359 in 1994
and approximately $5,048 in 1995.
In 1994 and 1995, the Company provided contract drilling services for which
it received approximately $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.
The Company sells substantially all of the oil produced from
Company-operated wells to BHT Marketing, Inc. ("BHT"), a Texas 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 basin sediment and water
deductions. The bonus is determined by competitive bid and is
8
<PAGE> 204
currently $0.65 to $1.40 per Bbl of sweet oil and $0.95 per Bbl of sour oil. 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
$5,870,000. Simultaneously with the execution of the Purchase Contracts, the
Company and BHT have entered into participation agreements (the "Participation
Agreements") pursuant to which the Company and BHT have 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.
Certain of the Company's directors, executive officers and key employees
and their family members (collectively referred to herein as "Affiliated
Persons") have participated, either individually or through entities they
control, in oil and 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 December 31, 1995, Affiliated
Persons were working interest owners in 95 of the 223 wells then being operated
by the Company. Of the 95 wells, the Company also sold working interests in 83
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. 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. 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 following table sets forth production revenues received and joint
production costs paid by each of the Affiliated Persons during 1994 and 1995 for
all wells operated by the Company in which they have working interests. 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.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
--------------------------- ---------------------------
PRODUCTION JOINT PRODUCTION JOINT
REVENUES INTEREST REVENUES INTEREST
NAME RECEIVED(1) BILLINGS(2) RECEIVED(1) BILLINGS(2)
- ------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cloyce A. Talbott......................... $ 286,690 $ 175,139 $ 250,685 $ 232,398
Anita Talbott(3).......................... 170,352 98,190 170,685 122,580
SSI Oil & Gas, Inc.(4).................... 724,490 497,322 1,141,964 1,782,969
Steve Talbott(3).......................... 137,635 66,066 116,493 65,443
Stan Talbott(3)........................... 33,804 27,837 46,958 56,400
Lisa Beck and Stacy Eiland(3)............. 154,123 116,844 160,644 191,542
H.A. and Audrey Talbott Children's
Trust(5)................................ -- 4,641 9,050 6,071
---------- ---------- ---------- ----------
Subtotal........................ 1,507,094 986,039 1,896,479 2,457,403
---------- ---------- ---------- ----------
A. Glenn Patterson........................ 42,703 33,485 97,627 124,408
Melco Services, Inc....................... 2,149 701 -- --
---------- ---------- ---------- ----------
Subtotal........................ 44,852 34,186 97,627 124,408
---------- ---------- ---------- ----------
</TABLE>
9
<PAGE> 205
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995
PRODUCTION JOINT PRODUCTION JOINT
REVENUES INTEREST REVENUES INTEREST
NAME RECEIVED(1) BILLINGS(2) RECEIVED(1) BILLINGS(2)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Kenneth E. Davis.......................... 195,844 151,405 178,735 205,520
Sandra Davis(6)........................... 46,202 22,207 51,618 66,166
Donna Holt(6)............................. 913 357 342 175
Fluid Transports, Inc.(7)................. 4,707 7,901 3,005 --
---------- ---------- ---------- ----------
Subtotal........................ 247,666 181,870 233,700 271,861
---------- ---------- ---------- ----------
Lee W. Staiger............................ 155,426 142,134 193,475 279,464
---------- ---------- ---------- ----------
Kenneth C. Nelson......................... 771,754 991,013 1,435,599 1,986,608
Jaca Oil & Gas, Inc.(8)................... 36,668 11,559 49,268 54,926
---------- ---------- ---------- ----------
Subtotal........................ 808,422 1,002,572 1,484,867 2,041,534
---------- ---------- ---------- ----------
James C. Brown............................ 1,843 746 968 300
---------- ---------- ---------- ----------
Total........................... $2,765,303 $2,347,547 $3,907,116 $5,174,970
========== ========== ========== ==========
</TABLE>
- ---------------
(1) Revenues received for production of oil and gas, net of state severance
taxes.
(2) Includes leasehold costs, tangible equipment costs, intangible drilling
costs and lease operating expense billed during that period. All joint
interest billings have been paid on a timely basis.
(3) Anita Talbott is the wife of Cloyce A. Talbott. Steve and Stan Talbott, Lisa
Beck and Stacy Eiland are Mr. Talbott's adult children.
(4) SSI Oil & Gas, Inc. is beneficially owned 50% by Cloyce A. Talbott and
directly owned 50% by A. Glenn Patterson.
(5) H.A. and Audrey Talbott Children's Trust is a trust of which Cloyce A.
Talbott is a beneficiary and co-trustee.
(6) Sandra Davis is the wife of Kenneth E. Davis. Donna Holt is Mr. Davis' adult
daughter.
(7) Fluid Transports, Inc. was owned 100% by Kenneth E. Davis and his son-in-law
until December, 1994, when Mr. Davis sold his interest to his son-in-law.
(8) Jaca Oil & Gas, Inc. is owned 100% by Kenneth C. Nelson.
During April 1995, Navajo Rigs, Inc. ("Navajo"), a Texas corporation and
the owner of an undivided 57.85% interest in two drilling rigs (the "Navajo
Rigs") in which the Company owned the remaining 42.15% undivided interest,
merged into the Company (the "Merger"). At the time of the Merger, Navajo's only
assets were the Navajo Rigs. As consideration for the Merger, the Navajo
stockholders received a total cash payment of $433,875, based on a price of
$750,000 for a 100% interest in the Navajo Rigs. The Navajo stockholders had the
option of either approving the Merger or, in the alternative, electing to
purchase the Company's undivided 42.15% interest for $316,125. Navajo was owned
17.40% by Mr. Gist, 13.00% by Mr. Talbott and 8.70% by Mr. Davis, with the
balance of the Navajo shares owned by current and former stockholders of the
Company. Prior to the Merger and since January 1992, the Company leased Navajo's
57.85% interest in the Navajo Rigs on a month-to-month basis at a rate of $1,150
per month.
In October 1994, the Company purchased drilling equipment and parts from
SSI Oil & Gas, Inc., a Texas corporation beneficially owned 50% by Mr. Talbott
and directly owned 50% by Mr. Patterson for a price of $150,000. The Company
believes that the price paid for the equipment and parts was at least as
favorable as it could have obtained from a nonaffiliated seller.
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 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.
10
<PAGE> 206
During February 1994, the Board adopted a blanket policy approving in
advance all Joint Participations with Affiliated Persons in oil and gas
prospects and properties after that date, provided that the participations of
said Affiliated Persons are on the same basis as participations with
nonaffiliated persons. In those instances when there are no nonaffiliated third
party participants, prior Board approval is required on a participation-by-
participation basis.
SECTION 16 REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Each of these persons is required by SEC regulation to
furnish the Company with copies of Section 16(a) filings. Based solely on its
review of copies of such forms received by it and written representations from
certain reporting persons that no Form 5's were required for those persons, the
Company believes that, during the fiscal year ended December 31, 1995, its
officers, directors, and greater than 10% beneficial owners complied with all
applicable filing requirements.
PROPOSAL TO RATIFY THE SELECTION
OF COOPERS & LYBRAND L.L.P. AS AUDITORS
(PROPOSAL 2 ON PROXY CARD)
The Board of Directors voted to engage Coopers & Lybrand L.L.P. as
independent accountants to audit the financial statements of the Company for the
fiscal year ending December 31, 1996, and directed that such engagement be
submitted to the stockholders of the Company for ratification. In recommending
ratification by the stockholders of such engagement, the Board of Directors is
acting upon the recommendation of the Audit Committee, which has satisfied
itself as to the firm's professional competence and standing. Although
ratification by stockholders of the engagement of Coopers & Lybrand L.L.P. is
not required by Delaware corporate law or the Company's Certificate of
Incorporation or Bylaws, management feels a decision of this nature should be
made with the consideration of the Company's stockholders. If stockholder
approval is not received, management will reconsider the engagement.
It is expected that one or more representatives of Coopers & Lybrand L.L.P.
will be present at the Meeting and will be given the opportunity to make a
statement if they so desire. It also is expected that the representatives will
be available to respond to appropriate questions from the stockholders.
Ratification of the selection of Coopers and Lybrand L.L.P. requires the
affirmative vote of the holders of a majority of the Common Stock present, or
represented, and entitled to vote at the Meeting assuming the presence of a
quorum. Each share of Common Stock is entitled to one vote.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF COOPERS
& LYBRAND L.L.P. AS INDEPENDENT AUDITORS FOR THE COMPANY'S 1996 FISCAL YEAR.
PROXIES RECEIVED WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY OTHERWISE IN THE
PROXY.
COST AND METHOD OF PROXY SOLICITATION
The accompanying Proxy is being solicited on behalf of the Board of
Directors of the Company. All expenses for soliciting Proxies, including the
expense of preparing, printing and mailing the form of Proxy and the material
used in the solicitation thereof, will be borne by the Company. In addition to
the use of the mails, Proxies may be solicited by personal interview, telephone
and telegram by directors and regular officers and employees of the Company.
Such persons will receive no additional compensation for such services.
Arrangements may also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and the Company may
reimburse them for reasonable out-of-pocket expenses incurred by them in
connection therewith.
11
<PAGE> 207
ANNUAL REPORTS AND CONSOLIDATED FINANCIAL STATEMENTS
You are referred to the Company's annual report, including consolidated
financial statements, for the year ended December 31, 1995, enclosed herewith
for your information. The annual report is not incorporated in this Proxy
Statement and is not to be considered part of the soliciting material.
DEADLINE FOR RECEIPT OF STOCKHOLDER
PROPOSALS FOR 1997 ANNUAL MEETING
Any proposals that stockholders of the Company desire to have presented at
the 1997 Annual Meeting of Stockholders must be received by the Company at its
principal executive offices no later than December 31, 1996.
SNYDER, TEXAS
April 26, 1996
12
<PAGE> 208
ANNEX VI
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
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 MARCH 31, 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 since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of May 2, 1996 the issuer had 3,194,951 shares of Common Stock, par
value $0.01 per share, outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 209
PATTERSON ENERGY, INC.
INDEX
<TABLE>
<CAPTION>
PART I--FINANCIAL INFORMATION PAGE
- ---------------------------------------------------------------------------------------- ----
<S> <C> <C>
Item 1. Financial statements
Unaudited consolidated balance sheets......................................... 3
Unaudited consolidated statements of income................................... 5
Unaudited consolidated statements of cash flows............................... 6
Notes to unaudited consolidated financial statements.......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 8
PART II--OTHER INFORMATION
- ----------------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.............................................. 10
Signatures.................................................................... 11
</TABLE>
2
<PAGE> 210
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FOLLOWING 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)
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 2,467,482 $ 3,432,761
Accounts receivable:
Trade:
Billed..................................................... 8,722,373 7,709,159
Unbilled................................................... 1,807,029 1,184,350
Oil and gas sales............................................ 487,027 414,185
Equipment inventory............................................. 405,049 469,606
Deferred income taxes........................................... 614,567 614,567
Undeveloped oil and gas properties held for resale.............. 2,122,112 2,785,351
Other current assets............................................ 174,588 153,655
----------- -----------
Total current assets.................................... 16,800,227 16,763,634
----------- -----------
Property and equipment, at cost, net.............................. 26,470,324 26,898,518
Deposits on workers' compensation insurance policy................ 343,760 343,760
Deferred income taxes............................................. -- 1,609,892
Other assets...................................................... 176,115 148,977
----------- -----------
Total assets............................................ $43,790,426 $45,764,781
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
(Continued)
3
<PAGE> 211
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1995 1996
---------- ----------
<S> <C> <C>
Current liabilities:
Current maturities of notes payable............................. $ 909,634 $ 2,207,005
Accounts payable:
Trade........................................................ 6,102,382 5,529,134
Revenue distribution......................................... 1,595,411 1,481,773
Other........................................................ 245,374 290,900
Accrued expenses................................................ 1,657,994 1,514,347
----------- -----------
Total current liabilities............................... 10,510,795 11,023,159
----------- -----------
Notes payable, less current maturities............................ 12,906,473 12,592,363
----------- -----------
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 and outstanding shares of
3,194,951.................................................... 31,950 31,950
Additional paid-in capital...................................... 14,095,200 14,095,200
Retained earnings............................................... 6,246,008 8,022,109
----------- -----------
Total stockholders' equity.............................. 20,373,158 22,149,259
----------- -----------
Total liabilities and stockholders' equity............ $43,790,426 $45,764,781
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 212
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Operating revenues:
Drilling........................................................ $ 9,042,256 $10,533,137
Oil and gas sales............................................... 918,913 1,324,143
Well operation fees............................................. 251,941 344,827
Other........................................................... 40,610 74,015
----------- -----------
10,253,720 12,276,122
----------- -----------
Operating costs and expenses:
Direct drilling costs........................................... 7,454,536 8,746,180
Lease operating and production.................................. 276,525 387,546
Exploration costs............................................... 68,653 115,929
Dry holes and abandonments...................................... 154,580 67,921
Depreciation, depletion and amortization........................ 1,029,769 1,733,382
General and administrative expense.............................. 720,512 808,092
----------- -----------
9,704,575 11,859,050
----------- -----------
Operating income.................................................. 549,145 417,072
----------- -----------
Other income (expense):
Net gain on sale of assets...................................... 28,984 26,613
Interest income................................................. 34,561 34,640
Interest expense................................................ (187,876) (329,454)
Other........................................................... 5,057 40,777
----------- -----------
Other expense, net...................................... (119,274) (227,424)
----------- -----------
Income before income taxes........................................ 429,871 189,648
----------- -----------
Income taxes:
Current......................................................... 16,601 23,439
Deferred income tax benefit, net................................ -- (1,609,892)
----------- -----------
Income tax expense (benefit)............................ 16,601 (1,586,453)
----------- -----------
Net income........................................................ $ 413,270 $ 1,776,101
=========== ===========
Net income per common share:
Primary......................................................... $ .16 $ .53
=========== ===========
Assuming full dilution.......................................... $ N/A $ .53
=========== ===========
Weighted average number of common shares outstanding
Primary......................................................... 2,635,000 3,334,032
=========== ===========
Assuming full dilution.......................................... N/A 3,340,594
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 213
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 413,270 $ 1,776,101
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation, depletion and amortization..................... 1,029,769 1,733,382
Net gain on sale of assets................................... (28,984) (26,613)
Deferred income tax benefit.................................. -- (1,609,892)
Change in current assets and liabilities:
Decrease in trade accounts receivable...................... 1,167,078 1,635,893
(Increase) decrease in oil and gas sales receivable........ (27,648) 72,842
Increase in oil and gas properties held for resale......... (191,170) (663,239)
Increase in other current assets........................... (205,484) (43,624)
Decrease in trade accounts payable......................... (1,084,245) (573,248)
Increase (decrease) in revenue distribution payable........ 514,186 (113,638)
Decrease in other current liabilities...................... (288,037) (98,121)
----------- -----------
Net cash provided by operating activities.................... 1,298,735 2,089,843
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................. (3,479,195) (2,170,860)
Sale of property and equipment.................................. 43,010 35,897
(Increase) decrease in other assets............................. (20,925) 27,138
----------- -----------
Net cash used in investing activities........................ (3,457,110) (2,107,825)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable..................................... 5,500,000 1,140,000
Payments on notes payable....................................... (1,537,824) (156,739)
Loan commitment fees............................................ (67,242) --
----------- -----------
Net cash provided by financing activities.................... 3,894,934 983,261
----------- -----------
Net increase in cash and cash equivalents.................... 1,736,559 965,279
Cash and cash equivalents at beginning of period.................. 3,369,382 2,467,482
----------- -----------
Cash and cash equivalents at end of period........................ $ 5,105,941 $ 3,432,761
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest..................................................... $ 171,856 $ 328,791
Income taxes................................................. 81,371 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 214
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The consolidated financial statements include the accounts of Patterson
Energy, Inc. dba Patterson Drilling Company and its wholly-owned subsidiaries,
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.
The consolidated financial statements have been prepared by the 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. 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 three months ended March 31, 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. 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. As such, the
corresponding net tax benefit totalling approximately $1,610,000 was credited to
income. 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.
3. The Company adopted Statement of Financial Accounting Standard 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 the Company's assets.
The Company adopted Statement of Financial Accounting Standard 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 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. There were no stock options issued
during the quarter ended March 31, 1996.
4. On April 22, 1996, the Company and Tucker Drilling Company, Inc.
("Tucker"), executed a definitive merger agreement pursuant to which the Company
will be merged with and into Tucker and the Company will be the survivor. The
terms of the merger agreement provide that each outstanding share of Tucker's
common stock will be converted into the right to receive 0.74 of a share of the
Company's common stock.
The merger will take the form of a tax-free exchange and is expected to be
accounted for as a pooling of interests. The merger has been approved by the
Boards of Directors of the Company and Tucker and is subject to approval by
their respective stockholders as well as other customary conditions and
approvals.
7
<PAGE> 215
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had working capital of approximately
$5,740,000 and cash and cash equivalents of approximately $3,433,000 as compared
to a working capital of approximately $6,385,000 and cash and cash equivalents
of approximately $5,106,000 as of March 31, 1995. For the three months ended
March 31, 1996, the Company generated net cash from operations of approximately
$2,090,000 and borrowed additional funds in the amount of $1,140,000. These
funds were used primarily to acquire drilling and other related equipment of
approximately $1,238,000, to fund leasehold acquisition, exploration and
development of approximately $933,000, to reduce certain notes payable by
approximately $157,000 and to increase cash by approximately $965,000.
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 notes
payable for at least the next 12 months. The Company's ability to repay 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 activities 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, and has budgeted approximately $4,000,000 in capital
expenditures for fiscal year 1996 for maintaining the contract drilling fleet.
For the three months ended March 31, 1996 the Company had expended $1,146,000 of
this budget for the acquisition of drilling equipment (primarily new drill
pipe).
The Company has budgeted approximately $4,000,000 for capital expenditures
in the oil and gas segment in 1996. The funds (if available) will be used for
leasehold acquisitions, exploration and development of oil and gas properties.
As of March 31, 1996 the Company had expended approximately $933,000 of this
budget and has drawn down, in the first quarter of 1996, $1,000,000, of a
$3,500,000 line of credit with Norwest Bank Texas, Wichita Falls, N.A.
RESULTS OF OPERATIONS
Comparison of the fiscal quarters ended March 31, 1996 and 1995
For the fiscal quarter ended March 31, 1996 contract drilling revenues were
approximately $10,533,000 as compared to $9,042,000 for the same fiscal quarter
in 1995, an increase of 16%. Average rig utilization was 77% for the fiscal
quarter ended March 31, 1996 as compared to 76%, in the same fiscal quarter in
1995. Direct contract drilling cost for the fiscal quarter ended March 31, 1996
was approximately $8,746,000 or 83% of contract drilling revenues as compared to
approximately $7,455,000 or 82% of contract drilling revenues for the same
period in 1995. The increase in contract drilling revenues and direct drilling
costs was due primarily to the addition of three drilling rigs acquired during
the second and third quarters of 1995. General and administrative expense for
the contract drilling segment was $447,000 for the fiscal quarter ended March
31, 1996 as compared to approximately $442,000 for the same period in 1995.
Depreciation expense was approximately $1,131,000 for the drilling segment in
the fiscal quarter ended March 31, 1996 as compared to approximately $693,000 in
the same period in 1995. The increase in depreciation expense is due primarily
to the addition of the aforementioned drilling rigs in late 1995 and significant
capital expenditures for drill pipe. The Company expended approximately
$4,254,000 during fiscal 1995 and approximately $556,000 during the fiscal
quarter ended March 31, 1996 to acquire approximately 242,000 feet of new drill
pipe. In the fiscal quarter ended March 31, 1996, income from this segment was
approximately $268,000 as compared to approximately $458,000 for the same period
in 1995.
Oil and gas revenue was approximately $1,324,000 for the fiscal quarter
ended March 31, 1996, as compared to approximately $919,000 for the fiscal
quarter ended March 31, 1995. The volume of oil and gas sold increased by 22%
and 43%, respectively, in the fiscal quarter ended March 31, 1996 as compared to
the same period in 1995. The average price per barrel of oil was $18.30 in the
first quarter of 1996 as compared to $16.46 for the same period in 1995, and the
average price per mcf of gas was $1.53 in the first quarter of 1996 as compared
to $1.37 in the first quarter of 1995. General and administrative expenses for
the oil and gas segment was approximately $361,000 for the fiscal quarter ended
March 31, 1996 as compared to approxi-
8
<PAGE> 216
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
mately $279,000 for the same period in 1995. In the fiscal quarter ended March
31, 1996 income from the oil and gas segment was approximately $217,000 as
compared to $125,000 for the fiscal quarter ended March 31, 1995.
For the fiscal quarter ended March 31, 1996 interest expense was
approximately $329,000 compared to $188,000 for the same period in 1995. The
increase is due to higher interest rates and an increase in the principal
balance of outstanding notes payable.
INCOME TAXES
Subsequent to fiscal year end 1995 and first quarter end March 31 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 reduced its valuation allowance and recognized a net deferred income tax
benefit of approximately $1,610,000 in the quarter ended March 31, 1996.
VOLATILITY OF OIL AND GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices of oil and gas, both with respect
to its contract drilling and 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
those prices would have a material adverse effect on the Company's financial
condition and results of operations. The price of oil fell to a five-year low in
December, 1993, ($13.50 per barrel in the United States) and has risen and
fallen since then to $21.11 per barrel on May 7, 1996.
The average price of natural gas per mcf received by the Company has
increased from $1.37 in the first quarter of 1995 to $1.53 in the first quarter
of 1996. The sustained low prices of natural gas in particular have continued to
suppress the demand for contract drilling rigs in South and Southeast Texas and
have caused the Company's contract drilling rates in that area to remain
relatively flat among periods. If oil and gas prices decline from their current
levels, the Company's rig utilization, contract drilling rates and oil and gas
operations would be further adversely effected.
9
<PAGE> 217
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following Exhibit is filed herewith or incorporated by reference
herein:
11. Statement re computation of per share earnings.
27. Financial Data Schedule
10
<PAGE> 218
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: May 8, 1996
11
<PAGE> 219
ANNEX VII
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE, ACT OF
1934 FOR THE FISCAL YEAR ENDED MARCH 31,1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 0-7984
TUCKER DRILLING COMPANY, INC.
(Name of small business issuer in its charter)
DELAWARE 75-1462136
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 1876 76902
SAN ANGELO, TEXAS (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (915) 655-6773
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None None
- -------------------------------- -----------------------------------------
Title of each class Name of each exchange on which registered
SECURITIES REGISTERED UNDER TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE
-----------------------------
(Title of Class)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15 (D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE ISSUER WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO / /
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM
405 OF REGULATION S-B AND NO DISCLOSURE WILL BE CONTAINED IN THIS FORM, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB. /X/
ISSUER'S TOTAL REVENUES FOR THE YEAR ENDED MARCH 31, 1996 WERE $17,870,000.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE ISSUER ON MAY 24, 1996 WAS $22,462,000.
THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT OUTSTANDING ON MAY
24, 1996: 2,103,476.
================================================================================
<PAGE> 220
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is the successor to a business originally formed in 1951 by
Walter F. Tucker and others to provide contract drilling of oil and gas wells.
In 1958, Mr. Tucker purchased the interests of his partners and formed the
Company's predecessor, Tucker Drilling Company, Inc., a Texas corporation which
was merged into the Company in 1975. The Company incorporated in Delaware in
1974 to merge with its predecessor for the purpose of changing the domicile of
the predecessor corporation. Prior to the merger, the Delaware corporation had
no other operations.
As used herein, the term "Company" or "Registrant" shall refer to Tucker
Drilling Company, Inc., and its predecessors.
The Company is principally engaged in onshore contract oil and gas drilling
operations in Texas, and also engages in oil and gas exploration and development
for its own account and in the production and sale of oil and gas from its net
reserves. Most of the Company's contract drilling activities were conducted in
West and North Texas in the Permian and Hardeman Basins.
INDUSTRY SEGMENTS
For information on business segments of the Company, see Note G to the
Financial Statements, Page 25.
NARRATIVE DESCRIPTION OF BUSINESS
CONTRACT DRILLING
General. The Company engages in onshore contract drilling of oil and gas
wells for major oil companies, independent oil and gas producers and for its own
account. The Company owns and operates 13 land drilling rigs with depth
capacities to 13,500 feet. Generally, the Company's rigs are operated in the
Permian Basin of West Texas and the Hardeman Basin of North Texas. An onshore
drilling rig consists of engines, drawworks, mast, pumps to circulate the
drilling fluid, blowout preventers, the drillstring and related equipment. The
size and type of rig utilized depend upon well depth and site conditions, among
other factors.
Contracts. All wells drilled by the Company are on the basis of rate
charges determined on a footage, daywork or, turnkey basis or a combination
thereof, with rates dependent on the anticipated complexity of drilling the
well, on-site drilling conditions, the type of equipment to be used, the
Company's estimate of the risks involved and the estimated duration of the work
to be performed, among other considerations. For the two years ended March 31,
1996, the majority of contracts were performed on a footage basis, the
substantial portion of which were in the mid depth range of 6,000 to 9,000 feet.
Drilling contracts are obtained either through competitive bidding or
through direct negotiation. Contracts are usually entered into for short-term
periods covering the drilling of one or more wells and obligate the Company to
advance certain costs and to assume certain expenses in connection with drilling
operations.
Contracts entered into on a footage basis provide for an agreed price per
foot drilled regardless of the time required or the problems involved in
drilling the well, with certain limitations, and related costs of drilling
(i.e., rig mobilization, labor, fuel usage and other costs) are included in the
footage charge. Daywork contracts provide for a fixed charge per day for
drilling the well, and the customer generally bears the major portion of the
related costs of drilling. In other instances, the Company drills wells on a
turnkey basis which normally requires the drilling of a well to a specified
depth at an agreed price. Compared to daywork contracts, footage and turnkey
contracts involve a higher degree of risk to the Company, and accordingly,
normally provide a potential for greater profitability.
2
<PAGE> 221
The Company encounters substantial risk of damage to its property and
property to others, personal injury to its employees and others, and loss of
hole, among other risks. Such risks may result in difficulty in predicting
future costs and recovering costs through pricing of contracts.
The following table sets forth for each of the periods indicated the
approximate percentages of contract drilling revenues attributable to each of
the various forms of drilling contracts performed by the Company.
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------
TYPE OF CONTRACT 1996 1995
- ------------------------------------------------------------------------------- ---- ----
<S> <C> <C>
Footage........................................................................ 61% 95%
Daywork........................................................................ 39% 5%
</TABLE>
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have, from time to time, been
in short supply. The Company has not recently experienced any shortage of these
resources.
Market, Customers and Competition. The following table sets forth certain
information regarding the Company's contract drilling activity for the two-year
period ended March 31, 1996.
<TABLE>
<CAPTION>
NUMBER
OF RIGS
NUMBER PERCENTAGE OPERATING RIG
OF WELLS OF AT END OF UTILIZATION
YEAR ENDED MARCH 31: DRILLED(1) REVENUES PERIOD RATE(2)
- --------------------------------------------------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
1996............................................... 166 93% 5 52%
1995............................................... 281 96% 10 66%
</TABLE>
- ---------------
(1) Certain contracts were in connection with Company-operated wells in which
the Company assumed its proportionate share of the drilling expenses. The
number of gross wells involved in such contracts in which the Company had
varying percentage interests for the two years ended March 31, 1996 were as
follows: nine in 1996; and five in 1995.
(2) Utilization rates are based on a 365-day year. A rig is considered utilized
when it is operating or being moved, assembled or dismantled under
contract.
The Company's level of drilling rig utilization is influenced primarily by
the perceived level of future oil and gas prices, tax incentives, mineral lease
terms, and past success ratio for drilling in the Company's areas of operations.
The Company encounters substantial competition in its onshore contract
drilling operations from other drilling contractors. The usual method of
competition in the contract drilling industry is on the basis of price, customer
relations, rig availability, performance and condition of equipment used.
Competition can be readily moved into the Company's areas of operations at any
time. Many of such competitors have greater resources and personnel than the
Company.
For the year ended March 31, 1996, the Company drilled a total of 157 wells
for 40 unaffiliated customers, most of whom were independent oil and gas
operators. This compared with 276 wells drilled for 38 unaffiliated customers
for the year ended March 31, 1995. During the year ended March 31, 1996 two
contract drilling customers accounted for 21% and 19%, respectively, of
revenues. During the year ended March 31, 1995 three contract drilling customers
accounted for 17%, 15% and 14%, respectively, of revenues.
OIL AND GAS OPERATIONS
General. The Company's oil and gas operations consist of the geological
evaluation of prospective oil and gas properties, the acquisition of oil and gas
leases or other mineral interests for the purpose of drilling for
3
<PAGE> 222
its own account, and the production and sale of oil and gas from its properties.
These operations are principally conducted in West Texas.
The Company has one full-time geologist whose services are principally
utilized in the generation and evaluation of oil and gas prospects. From time to
time the Company also utilizes the services of independent consulting
geologists.
The Company participates with other individuals, partnerships and
corporations in its oil and gas operations, as is customary in the industry. For
some of the wells in which it has an interest the Company acted as drilling
contractor and acts as operator through agreements with other interest owners.
These agreements give the Company responsibility for and control of drilling,
completion and operations of the wells.
The Company's agreements involving the drilling of wells with participants
vary but generally provide for a working interest with a proportionate or less
than proportionate share of costs to the Company on the first well drilled on a
prospect to the point a well is determined to be commercially productive or is
otherwise plugged and abandoned. These agreements also provide that all
participants, including the Company, pay their proportionate share of all
subsequent costs. In addition, where the Company is the operator, interest
owners make an additional per well payment to the Company to compensate it for
its administrative and supervisory services.
Substantial capital is required for oil and gas exploration and
development. The Company has financed its oil and gas operations through cash
flows generated from its operations. The extent and the ability of the Company
to participate in oil and gas exploration and development operations in the
future will largely depend on the continued ability to generate such funds.
Market, Customers and Competition. No customer for oil and gas produced by
the Company accounted for 10% or more of the Company's revenues for the fiscal
year ended March 31, 1996.
Oil and gas produced by the Company is marketed under contracts in
accordance with usual industry practice. Oil is sold under short-term agreements
for delivery at the well site, at posted field prices of the oil
produced. Gas is sold under short-term or negotiated long-term supply contracts
for delivery at the well head, with periodic price redetermination clauses. The
price of the Company's gas is not regulated at this time.
Demand and prices for oil and gas in general may depend on domestic
production and consumption, the amount of foreign oil imported and, in the case
of gas, the proximity and capacity of natural gas pipelines and the availability
of alternative fuels. There can be no assurance that current market conditions
will continue to exist, nor can it be determined what effect, if any, future
regulation of the oil and gas industry will have upon the Company's marketing,
operations or production.
Principal materials essential for exploration and production of oil and gas
are drilling rigs and related equipment, production and completion equipment and
supplies, tubing, pumps and pump parts, gas transmission lines, storage tanks,
and other related materials and services. In addition, an adequate availability
of prospects and qualified technical personnel are necessary ingredients to
successful exploration efforts. Except for the availability of its own drilling
rigs, the Company must compete for these materials, properties, and services
with other oil and gas operators and with other industries as well. While the
Company has maintained satisfactory long-term associations and contacts with
suppliers of these materials and services and has maintained an active land
department for the acquisition of new properties, the continued availability of
such materials and services and oil and gas prospects is dependent on a number
of factors not within the control of the Company, and such availability cannot
always be assured.
The Company encounters strong competition from major oil and gas companies,
independent oil and gas operators and others in acquiring properties and leases
for exploration. Many of the Company's competitors have financial resources,
technical staffs and facilities substantially greater than those of the Company.
This competition has intensified in recent years due to the shortage of
attractive and available prospects.
4
<PAGE> 223
THE EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL CONTROL AND CONSERVATION LAWS
The production of oil and gas and the exploration for petroleum products in
general are subject to regulation under the conservation laws and environmental
regulations of the majority of the oil and gas producing states as well as the
federal government. These regulations generally govern the allowable rates and
volume of production for oil and gas, the type of equipment used, the spacing of
wells, the treatment of abandoned wells, the anti-pollution measures to be
observed in drilling and production and numerous other matters.
The enforcement of these regulations may have the effect of substantially
increasing the cost of equipment and the conduct of the Company's operations,
particularly with respect to the measures necessary for compliance with existing
environmental control laws. Within the state of Texas where substantially all of
the Company's operations are conducted, these regulations are principally
enforced at the state level by the Texas Railroad Commission and the Texas Water
Commission.
The Company believes that its equipment as currently utilized and its
methods of operations generally conform to the standards of applicable
regulations, and the Company does not anticipate any material or extraordinary
capital expense to comply with these regulations.
NUMBER OF PERSONS EMPLOYED BY THE COMPANY
At March 31, 1996, the Company employed 168 persons all of whom are full
time employees, of which 150 persons were employed in operations, 9 persons were
administrative employees, 8 persons were supervisory personnel, and there was
one technical staff.
ITEM 2. DESCRIPTION OF PROPERTIES
The significant properties of the Company consist of (i) proved developed
oil and gas reserves, (ii) undeveloped mineral leasehold interests, (iii)
machinery and equipment, and (iv) office and support facilities, more
particularly described as follows:
PROVED DEVELOPED OIL AND GAS RESERVES
Substantially all of the Company's production of oil and gas and producing
properties are located within the United States, in the State of Texas.
The Company's estimated proved oil and gas reserves at March 31, 1996, as
compared with March 31, 1995:
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
<TABLE>
<CAPTION>
NET QUANTITIES OF ESTIMATED
PROVED RESERVES FUTURE
(1)(4)(5) NET
------------------- REVENUES
OIL GAS DISCOUNTED
BBLS. MCF(2) AT 10%
------- -------- ---------
<S> <C> <C> <C>
Proved developed reserves:(3)
March 31, 1995........................................... 130,575 1,287,092 $2,179,000
March 31, 1996........................................... 151,894 1,298,421 $2,437,000
</TABLE>
See Note I, Item 1 of Notes to Financial Statements
- ---------------
(1) "Proved Reserves" are estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Prices for oil and gas control the
economic limitations for the extraction of oil and gas, and the Company has
calculated its reserves on the basis of prices for oil and gas
5
<PAGE> 224
in effect on the dates the estimates were made. Revisions of prices, either
upward or downward, would affect the estimates of the Company's reserves.
(2) No information is included for any reserves of gas which do not have access
to pipelines. Proved reserves are shown only for properties in those areas
which are now open to production.
(3) Proved developed reserves are the estimated quantities of oil and gas which
can be expected to be recovered through existing wells with existing
equipment and operating methods.
(4) Estimates are based upon studies prepared by Badgwell & Haas, independent
engineers.
(5) Reserves are shown net of other interests or royalties, and include operated
and non-operated properties.
Other than with the Securities and Exchange Commission, the Company has not
filed any oil or gas estimates, nor has it included any such estimates in
reports to federal governmental agencies.
The following table sets forth certain information concerning production
from the Company's producing properties for each of the last two fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Crude Oil Production (in barrels)(1)................................ 43,891 26,455
Natural Gas Production (in MCF)(1)(2)............................... 330,469 256,543
Gross Revenues from Production...................................... $1,275,063 $ 852,189
Production and Processing Costs(3).................................. (334,548) (267,823)
---------- ---------
Net Revenues........................................................ $ 940,515 $ 584,366
========== =========
Average Sale Price Per Unit:
Oil (barrel)...................................................... $ 17.79 $ 17.17
---------- ---------
Gas (MCF)......................................................... $ 1.50 $ 1.55
---------- ---------
Average Production Cost Per Unit (in barrel equivalents)(4)......... $ 3.34 $ 3.87
---------- ---------
</TABLE>
- ---------------
(1) Oil and gas production is shown net of royalties and production attributable
to the interests of others.
(2) Only marketable production of gas on an "as sold" basis is included.
(3) "Production and Processing Costs" are costs directly related to the
extraction of oil or gas, and do not include depreciation, depletion, or
amortization of exploration and development costs. For additional
information relating to production costs, see the information described
below with respect to capital costs and expenses incurred in production
operations.
(4) Six MCF of gas is equivalent to one barrel of oil.
At March 31, 1996, the Company had interests in productive wells and
acreage as set forth in the table below.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS(1)(4)
- -------------------------------------------------
OIL GAS DEVELOPED ACREAGE(1)
- --------------------- --------------------- ---------------------
GROSS(2) NET(3) GROSS(2) NET(3) GROSS(2) NET(3)
- -------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
43 7.90 29 4.80 7,720 1,290
</TABLE>
- ---------------
(1) Productive wells are producing wells and wells which are capable of
production. Developed acres are acres which are spaced or assigned to
productive wells.
(2) A gross well or acre is a well or acre in which an interest is owned. The
number of gross wells or acres is the total number of wells or acres in
which an interest is owned.
(3) A net well or acre is deemed to exist when the sum of the fractional
ownership working interests in gross wells or acres equals one.
6
<PAGE> 225
(4) The Company had one gross well with multiple completions at March 31, 1996,
which is shown in the table above as one well.
During the fiscal years ended March 31, 1996, and 1995, the Company
participated in a total of 16 and 14, respectively, gross new wells for its own
account with the following results:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1996 1995
-------------- --------------
GROSS NET GROSS NET
----- ---- ----- ----
<S> <C> <C> <C> <C>
Exploratory Wells:
Oil........................................................ -- -- -- --
Gas........................................................ 1 .08 1 .25
Dry Holes.................................................. 2 .31 7 .68
-- ---- -- ----
TOTAL................................................... 3 .39 8 .93
== ==== == ====
Development Wells:
Oil........................................................ 5 1.72 4 1.09
Gas........................................................ 2 .36 2 .44
Dry Holes.................................................. 6 1.30 -- --
-- ---- -- ----
TOTAL................................................... 13 3.38 6 1.53
== ==== == ====
</TABLE>
UNDEVELOPED MINERAL LEASEHOLD INTERESTS
The Company presently has full or partial interests in oil and gas leases,
oil and gas mineral rights, fee rights or other rights authorizing it to drill
for and produce oil and gas.
At March 31, 1996, the Company owned undeveloped leasehold interests (i.e.,
leases on which wells have not been drilled or completed to the point where
production exists) in approximately 34,000 gross acres and 5,600 net acres,
located principally in the Permian Basin of West Texas. This compares with
approximately 9,000 gross acres and 1,300 net acres held at March 31, 1995.
Leasehold interests in oil and gas properties are generally entered into
for a fixed period of time, such as for three to five years, and are usually
capable of being extended by production or the payment of delay rentals, which
are payments made for the privilege of deferring production or exploration, as
may be required by the terms of the lease. Such interests are also subject to
development and rental requirements, which if not performed may cause the lease
to be terminated. If not extended, a substantial portion of the Company's
undeveloped leasehold interests expire during the next three fiscal years.
Oil and gas properties in general are subject to customary royalty
interests contracted in connection with the acquisition of title, liens incident
to operating agreements, liens for current taxes, and other burdens and minor
encumbrances, easements and restrictions. The Company believes that the
existence of any such burdens does not materially detract from the value of its
leasehold interests.
The Company usually undertakes a comprehensive title examination of its
properties at the time of acquisition, including, in most cases, receiving a
title opinion of legal counsel. Prior to the commencement of drilling
operations, in certain cases, a supplemental updating of title is made,
depending on the date of acquisition and according to the requirements of the
participants in its drilling prospect. The Company believes that the title of
all of its properties is generally good and that any defects which might affect
any particular parcel of property would not be deemed material.
MACHINERY AND EQUIPMENT
Principal equipment utilized by the Company in its operations consists of
thirteen land drilling rigs with depth ranges from 5,000 to 13,500 feet, all of
which are in good operating order and are well maintained. Most
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<PAGE> 226
of the Company's drilling equipment was acquired as used equipment or was
otherwise assembled in the Company's yard, utilizing both new and used parts.
The table set forth below summarizes the Company's drilling equipment
available for operations.
<TABLE>
<CAPTION>
DEPTH RANGE
NUMBER OF RIG TYPE (IN FEET)
------------------ ------------------- ---------------
<S> <C> <C>
Rig #1............ Gardner Denver 700 5,000 - 10,500
Rig #2............ BDW-650 5,000 - 10,000
Rig #3............ Brewster N-55 5,000 - 8,500
Rig #4............ BDW-650 5,000 - 8,500
Rig #5............ BDW-650 5,000 - 10,000
Rig #6............ BDW-800 5,000 - 13,500
Rig #7............ Brewster N-45 5,000 - 7,200
Rig #8............ BDW-650 5,000 - 10,500
Rig #9............ BDW-650 5,000 - 8,500
Rig #10........... Brewster N-55 5,000 - 8,500
Rig #11........... BDW-800 5,000 - 13,500
Rig #12........... Gardner Denver 700 5,000 - 10,500
Rig #14........... Brewster N-75 5,000 - 10,500
</TABLE>
The Company maintains a substantial inventory of spare drilling rig
components in its yard at San Angelo, Texas. Many of these components have in
the past been part of drilling rigs operated by the Company and may be
interchanged with similar components which are part of drilling rigs currently
being operated by the Company.
The Company also owns and operates miscellaneous vehicles, pick-up trucks,
and eleven tractor trailers.
OFFICE AND SUPPORT FACILITIES
The principal offices of the Company, which are owned by the Company, are
located in the Petroleum Building, 14 East Beauregard, in San Angelo, Texas
consisting of approximately 11,000 square feet of office facilities. The Company
owns a warehouse consisting of approximately 9,700 square feet; an equipment
yard, consisting of approximately twenty-three acres; and a rig maintenance
building consisting of approximately 10,000 square feet, all approximately five
miles from the Company's offices.
The Company also owns land and a building at San Angelo, which was formerly
operated as a supply store by the Company.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
8
<PAGE> 227
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded in the NASDAQ, National Market
System under the symbol TUCK. The following table sets forth the high and low
closing prices for the common stock on a quarterly basis for the past two years.
<TABLE>
<CAPTION>
CLOSING
PRICES
-------------
HIGH LOW
---- ----
<S> <C> <C>
Fiscal 1996:
April 1 through June 30, 1995.............................................. 8 6 1/4
July 1 through September 30, 1995.......................................... 8 3/4 7
October 1 through December 31, 1995........................................ 8 3/4 7 1/4
January 1 through March 31, 1996........................................... 10 1/2 7 5/8
Fiscal 1995:
April 1 through June 30, 1994.............................................. 5 4 3/8
July 1 through September 30, 1994.......................................... 6 1/8 4 3/4
October 1 through December 31, 1994........................................ 6 5/8 5 1/16
January 1 through March 31, 1995........................................... 7 1/4 5
</TABLE>
There were approximately 453 stockholders of record on May 24, 1996.
There have been no cash dividends paid on the common stock. The Board of
Directors has historically followed a policy of reinvesting the earnings of the
Company in its business and of not distributing any part thereof as dividends.
The Board of Directors has no present intention to initiate the payment of cash
dividends, and future dividend policy of the Company will depend on the
earnings, capital requirements and financial condition of the Company and other
relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996 the Company had cash and cash equivalents in the
amount of $6,877,000 compared to $3,476,000 as of March 31, 1995. For the year
ended March 31, 1996 cash flows from operations were $4,418,000 compared to
$4,164,000 for the year ended March 31, 1995. Although working capital provided
by operations decreased to $3,028,000 from $4,348,000 due primarily to a
decrease in net income, relative changes in accounts receivable balances
resulted in an increase in cash flow from operations in the amount of $1,517,000
for the year ended March 31, 1996. Cash flows used in investing activities was
$1,163,000 for the year ended March 31, 1996 compared to $2,839,000 for the year
ended March 31, 1995. Purchases of property and equipment were $3,381,000 for
the year ended March 31, 1996 (approximately $2,300,000 for drilling equipment
and approximately $1,100,000 for oil and gas properties) compared to $2,233,000
for the year ended March 31, 1995 (approximately $1,300,000 for drilling
equipment and approximately $900,000 for oil and gas properties). Purchases of
drill pipe were approximately $1,400,000 for the year ended March 31, 1996. This
amount was significantly higher than planned, as the Company accelerated its
purchases in anticipation of longer intervals between order and delivery, and
price increases. Proceeds from the sale of property and equipment decreased to
$171,000 from $1,080,000. During the year ended March 31, 1995 the Company sold
its interests in 35 producing oil and gas wells. For the year ended March 31,
1996 net sales of marketable securities were $2,046,000 compared to net
purchases in the amount of $1,686,000 for the year ended March 31, 1995.
Management decided to decrease the average maturity of its investments of excess
cash balances.
9
<PAGE> 228
The Company will continue to incur capital costs necessary to maintain the
efficiency of its drilling rigs and to drill for its own account when necessary
to maintain its leasehold position. Management expects to spend an aggregate of
$1,500,000 to $2,000,000 for these purposes in the year ending March 31, 1997.
RESULTS OF OPERATIONS
Segment Revenues and Operating Income or Loss
For the year ended March 31, 1996 compared to the year ended March 31, 1995
contract drilling revenues decreased 28% as average rig utilization decreased
14%. Revenue from daywork contracts increased to 31% from 5%. Comparing daywork
to footage type contracts, daywork normally results in lower revenues and costs
per day, and lower risk for the contractor. Income from this segment decreased
to $1,030,000 from $3,123,000 due primarily to lower gross profit resulting from
lower rig utilization.
For the year ended March 31, 1996 compared to the year ended March 31, 1995
oil and gas sales increased 50%. Average oil volumes increased 66% to 120
barrels per day and the average price per barrel increased 4% to $17.79. Average
gas volumes increased 29% to 903 MCF per day and the average price of gas
decreased 3% to $1.50 per MCF. There was a loss from this segment of $169,000
for the year ended March 31, 1996 compared to a loss of $108,000 for the year
ended March 31, 1995. As of March 31, 1996 the Company adopted SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and accordingly, wrote down the carrying value of certain of its
oil and gas fields, resulting in a charge to expense in the amount of $159,000
for the year ended March 31, 1996.
For the year ended March 31, 1996 general and administrative expenses
include approximately $150,000 for financial advisory and legal services related
to merger and acquisition activities.
INCOME TAXES
For the year ended March 31, 1996 the Company recognized benefits of
deferred income tax assets, primarily net operating loss and depletion
carryforwards, in the amount of $840,000. Management believes that it is more
likely than not that such carryforwards will be utilized to reduce future
federal income tax liabilities of the Company. No such benefits have been
recognized in prior years.
RECENT ACCOUNTING STANDARDS
In 1995 the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", which is effective for years beginning after December 15, 1995.
The Company adopted SFAS 121 as of March 31, 1996 and has determined to group
all of the assets of the contract drilling segment as a whole, and the assets of
the oil and gas segment by field for the purpose of determining whether an asset
is impaired.
SFAS 123, "Accounting for Stock-Based Compensation", which was issued by
the Financial Accounting Standard Board, is effective for years beginning after
December 15, 1995. 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 plans to continue using the intrinsic value
based method.
FUTURE
On April 22, 1996 the Company and Patterson Energy, Inc. (Patterson)
executed a definitive merger agreement whereby, subject to the approval of
stockholders of the Company and Patterson and certain other conditions, the
Company and Patterson will merge through an exchange of common stock with
Patterson being the surviving entity. The merger is expected to be consummated
during the second quarter of the Company's Fiscal Year 1997.
10
<PAGE> 229
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are filed as a part of this report. See page 12, Index
to Financial Statements.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
11
<PAGE> 230
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................................ 13
Financial Statements:
Balance Sheets at March 31, 1996 and 1995............................................. 14
Statements of Operations for the Years Ended March 31, 1996 and 1995.................. 15
Statements of Changes in Stockholders' Equity for the Years Ended March 31, 1996 and
1995............................................................................... 16
Statements of Cash Flows for the Years Ended March 31, 1996 and 1995.................. 17
Notes to Financial Statements........................................................... 18
</TABLE>
12
<PAGE> 231
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
TUCKER DRILLING COMPANY, INC.
We have audited the accompanying 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 stockholders' equity and cash flows for the
years then ended. 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 years then ended in conformity with generally accepted
accounting principles.
San Antonio, Texas ARTHUR ANDERSEN LLP
May 16, 1996
13
<PAGE> 232
TUCKER DRILLING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................... $ 6,877,012 $ 3,475,677
Marketable securities, partially restricted as to use (Note C).... 524,323 2,570,459
Accounts receivable, net of allowance for doubtful accounts of
$17,757 in 1996 and 1995....................................... 2,073,988 2,792,795
Insurance refund receivable....................................... -- 756,946
Equipment inventory............................................... 8,628 25,703
Costs of uncompleted drilling contracts in excess of related
billings....................................................... 227,269 415,471
Prepaid expenses.................................................. 176,991 168,892
Deferred tax assets............................................... 444,380 --
----------- -----------
Total current assets........................................... 10,332,591 10,205,943
----------- -----------
Property and equipment, at cost
Drilling rigs and equipment....................................... 22,363,721 20,505,968
Producing oil and gas properties, based on successful efforts
accounting..................................................... 5,573,617 4,944,323
Unproved properties, based on successful efforts accounting....... 251,500 338,032
Automotive equipment.............................................. 2,392,183 1,987,932
Buildings......................................................... 1,218,445 1,225,594
Office furniture.................................................. 520,411 511,814
Land.............................................................. 96,622 96,622
Other............................................................. 481,942 439,602
----------- -----------
32,898,441 30,049,887
Less accumulated depreciation, depletion and amortization...... 25,125,040 23,305,968
----------- -----------
7,773,401 6,743,919
----------- -----------
Deferred tax assets................................................. 396,043 --
----------- -----------
Other assets........................................................ 590,432 646,468
----------- -----------
Total assets........................................................ $19,092,467 $17,596,330
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................. $ 1,013,315 $ 1,016,303
Accrued insurance expenses........................................ 120,076 237,198
Accrued payroll and other accrued expenses........................ 264,184 307,902
Royalties payable................................................. 91,215 70,844
Income taxes payable.............................................. 51,810 46,384
Billings on uncompleted drilling contracts in excess of related
costs.......................................................... -- 45,000
----------- -----------
Total current liabilities...................................... 1,540,600 1,723,631
----------- -----------
Deferred liabilities................................................ 376,746 324,650
----------- -----------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $.01 par value
Authorized -- 500,000 shares................................... -- --
Common stock, $.01 par value
Authorized shares -- 5,000,000
Issued and outstanding shares -- 2,097,476 in 1996 and
2,072,476 in 1995............................................. 20,975 20,725
Capital in excess of par value.................................... 4,946,384 4,799,509
Retained earnings................................................. 12,207,762 10,727,815
----------- -----------
17,175,121 15,548,049
----------- -----------
Total liabilities and stockholders' equity..................... $19,092,467 $17,596,330
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
<PAGE> 233
TUCKER DRILLING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues
Contract drilling............................................... $16,594,979 $23,189,704
Oil and gas..................................................... 1,275,063 852,189
----------- -----------
17,870,042 24,041,893
----------- -----------
Costs and expenses
Contract drilling............................................... 13,140,272 17,743,859
Oil and gas exploration and production.......................... 334,548 294,711
Depreciation, depletion and amortization........................ 2,184,236 1,942,899
Writedown due to impairment of long-lived assets................ 159,403 --
Dry holes and abandonments...................................... 108,624 185,968
General and administrative...................................... 1,697,510 1,784,360
----------- -----------
17,624,593 21,951,797
----------- -----------
Income from operations............................................ 245,449 2,090,096
----------- -----------
Other income (expense)
Net gain on sale of property and equipment...................... 64,280 357,390
Interest income................................................. 399,689 215,528
Other........................................................... 23,032 (39,032)
----------- -----------
487,001 533,886
----------- -----------
Income before income taxes........................................ 732,450 2,623,982
Income taxes (benefits)
Current......................................................... 92,926 47,887
Deferred........................................................ (840,423) --
----------- -----------
Net income........................................................ $ 1,479,947 $ 2,576,095
=========== ===========
Net income per common share....................................... $ .71 $ 1.25
=========== ===========
Weighted average number of common shares outstanding.............. 2,084,925 2,065,177
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE> 234
TUCKER DRILLING COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN
------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS
-------- ------- --------- ----------
<S> <C> <C> <C> <C>
Balance at March 31, 1994..................... 2,065,076 $20,651 $4,756,133 $ 8,151,720
Exercising of stock options................... 7,400 74 43,376 --
Net income.................................... -- -- -- 2,576,095
--------- ------- ---------- -----------
Balance at March 31, 1995..................... 2,072,476 20,725 4,799,509 10,727,815
Exercising of stock options................... 25,000 250 146,875 --
Net income.................................... -- -- -- 1,479,947
--------- ------- ---------- -----------
Balance at March 31, 1996..................... 2,097,476 $20,975 $4,946,384 $12,207,762
========= ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 235
TUCKER DRILLING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................... $1,479,947 $2,576,095
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation, depletion and amortization..................... 2,184,236 1,942,899
Writedown due to impairment of long lived-assets............. 159,403 --
Dryholes and abandonments.................................... 108,624 185,968
Net gain on sales of property and equipment.................. (64,280) (357,390)
Deferred income tax benefit.................................. (840,423) --
Decrease in other assets........................................ 56,036 126,809
Increase in deferred liabilities................................ 52,096 182,701
Changes in current assets and liabilities
(Increase) decrease in accounts receivable................... 1,475,753 (41,529)
(Increase) decrease in equipment inventory................... 17,075 (3,168)
(Increase) decrease in costs of uncompleted drilling
contracts in excess of related billings..................... 188,202 (184,168)
Increase in prepaid expenses................................. (8,099) (21,458)
Decrease in payables and accrued expenses.................... (345,978) (287,343)
Increase (decrease) in billings on uncompleted drilling
contracts in excess of related costs........................ (45,000) 45,000
---------- ----------
Net cash provided by operating activities....................... 4,417,592 4,164,416
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net sales (purchases) of marketable securities.................. 2,046,136 (1,685,929)
Proceeds from the sale of property and equipment................ 171,334 1,079,973
Purchases of property and equipment............................. (3,380,852) (2,233,232)
---------- ----------
Net cash used in investing activities........................... (1,163,382) (2,839,188)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the exercise of stock options..................... 147,125 43,450
---------- ----------
Net increase in cash and cash equivalents....................... 3,401,335 1,368,678
Cash and cash equivalents at beginning of year.................. 3,475,677 2,106,999
---------- ----------
Cash and cash equivalents at end of year........................ $6,877,012 $3,475,677
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 236
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996 AND 1995
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
1. DESCRIPTION OF BUSINESS AND MANAGEMENT ESTIMATES
Tucker Drilling Company, Inc. (Company) engages in onshore contract
drilling of oil and gas wells for major oil companies, independent oil and gas
producers and for its own account. The Company owns 13 drilling rigs with depth
capacities to 13,500 feet which generally operate in the Permian Basin of West
Texas and the Hardeman Basin of North Texas. The Company is also engaged in oil
and gas operations, primarily in West Texas.
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 revenues and expenses for the reporting period.
Actual results could differ from those estimates.
2. EQUIPMENT INVENTORY
Equipment inventory consists of oil field equipment to be used in
conjunction with the Company's oil and gas producing activities and expendable
parts to be used in the Company's drilling activities. The inventory is stated
at the lower of cost or market. Cost is determined by the average cost method.
3. DRILLING OPERATIONS
The Company follows the completed contract method of accounting for
contract drilling operations. 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;
however, provisions for losses are made on incomplete contracts when significant
losses are anticipated.
4. OIL AND GAS SALES
The Company recognizes oil and gas sales when the oil and gas is delivered
into facilities owned by the purchaser.
5. PROPERTY AND EQUIPMENT
(a) 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, all development costs and estimated restoration and
abandonment costs in excess of estimated salvage value are capitalized.
Exploration costs which do not result directly in discovering oil and gas
reserves are charged to expense in the year of determination. The capitalized
costs, consisting of lease acquisition costs, intangible development costs,
lease and well equipment and estimated restoration and abandonment costs in
excess of estimated salvage value 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.
Under the Company's method of accounting prior to March 31, 1996, the
aggregate amount of capitalized costs should not exceed the present value
(discounted at 10%) of the estimated net future cash flows from the proved
developed oil and gas reserves based on year end pricing. Accordingly, it has
been the Company's policy to charge to expense, in the year of determination,
capitalized costs in excess of such value.
18
<PAGE> 237
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
As of March 31, 1996 the Company adopted SFAS 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
accordingly will charge to expense, in the year of determination, capitalized
costs in excess of the present value of the estimated net future cash flows from
the proved developed oil and gas reserves for each field. For the year ended
March 31, 1996 the Company wrote down the carrying value of certain of its oil
and gas fields in the amount of approximately $159,000.
(b) Other property and equipment
Depreciation of property and equipment (other than oil and gas properties)
is provided principally on the straight-line method over estimated useful lives
as follows:
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Drilling rigs and equipment.............................. 2-15
Automotive equipment..................................... 2- 6
Buildings................................................ 5-20
Office furniture......................................... 5-10
Other.................................................... 3- 7
</TABLE>
As of March 31, 1996 the Company adopted SFAS 121 and accordingly will
charge to expenses, in the year of determination, capitalized costs in excess of
the present value of future net cash flows from the contract drilling segment as
a whole. There was no impairment of contract drilling assets recognized as of
March 31, 1996.
(c) Unproved leaseholds and royalties
The costs of acquiring unproved properties are capitalized and carried in
the accounts until the property is capitalized as a producing oil and gas
property, or is surrendered or otherwise disposed of, at which time the full
amount is charged to operations. Unproved leaseholds and royalties are assessed
annually for impairment of value. As of March 31, 1996 and 1995, $55,989 and
$313,440, respectively, were reserved for impairment and included in accumulated
depreciation, depletion and amortization.
6. MAINTENANCE AND REPAIRS
Maintenance and repairs are charged to operations. Renewals and betterments
which extend the life of or improve existing properties are capitalized.
7. INCOME PER COMMON SHARE
Income per share of common stock is based on the weighted average number of
shares outstanding during the year and common stock equivalents for the year, if
any. Common stock equivalents are excluded when their effect is antidilutive.
8. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and investments with original maturities of three months or less.
19
<PAGE> 238
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
9. INCOME TAXES
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109). SFAS No. 109 requires recognition
of deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted regular tax rates for the year in which the asset is recovered or the
liability is settled.
10. IMPAIRMENT OF VALUE
Management continually evaluates the recoverability of the carrying value
of the Company's assets and provides for any impairment of such assets on a
quarterly basis based on assumptions that Management determines to be reasonable
in light of the current business environment.
11. RECLASSIFICATION
Certain reclassifications have been made to the financial statements as of
March 31, 1995 and for the year then ended in order for them to conform to the
presentation as of March 31, 1996 and for the year then ended. The
reclassifications had no effect on net income or stockholders' equity for that
year.
NOTE B -- CERTAIN BANKING RELATIONSHIPS
During the year ended March 31, 1995, the Company had a director who was
also a director of a subsidiary of the bank holding company in which a portion
of the Company's cash was deposited. During such year the Company was not
indebted to such bank and a substantial amount of the Company's cash and cash
equivalents were and continue to be invested in U.S. Treasury securities or
accounts collaterized by U.S. Treasury securities. Substantially all of the
Company's interest income is derived from its cash and cash equivalents. As of
January, 1995 the Company terminated its relationship with such bank.
NOTE C -- LETTER OF CREDIT
As of March 31, 1996 the Company has established 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. The Company pays a
fee in the amount of one percent per annum on the unused balance and the letter
of credit expires on November 30, 1996 with provision for an indefinite number
of annual extensions of the expiration date. As of March 31, 1996, no amounts
have been drawn under such letter of credit.
The Company has pledged as collateral a U.S. Treasury bill which matures on
November 14, 1996 with a book value of $524,323 as of March 31, 1996 against the
letter of credit.
NOTE D -- SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective April 1, 1991, the Company established the Tucker Drilling
Company, Inc. Supplemental Executive Retirement Plan for officers and key
employees. Pursuant to agreements with participants, the Company is obligated to
pay each participant or his beneficiaries a lump sum at such participant's
death, disability or retirement. These obligations are unsecured general
liabilities of the Company. As of March 31, 1996 there were seven participants
in the plan and benefits will accrue to the participants in equal annual amounts
over ten years of service beginning April 1, 1991. Fully-vested benefits are, in
the aggregate,
20
<PAGE> 239
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
$1,498,000. The estimated present value of future benefits as of April 1, 1991
will be accrued over the same ten year period as benefits vest. As of March 31,
1996, $237,037 has been accrued as a liability, and for the year ended March 31,
1996, $44,188 has been expensed. As of March 31, 1995, $192,849 had been accrued
as a liability, and for the year then ended, $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. As of March 31, 1996,
these assets are included as Other Assets at a book value of approximately
$568,000. As of March 31, 1995, Other Assets included approximately $528,000 of
these assets.
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.
NOTE E -- EMPLOYEE STOCK OPTION PLAN
In March 1983, the Board of Directors 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
is to attract and retain key employees and directors to the Company and to
provide such persons with a proprietary interest in the Company through the
granting and exercise of stock options. The maximum number of shares of Common
Stock which may be granted under the Plan is 171,500 shares. The proceeds from
the sale of Common Stock pursuant to the Plan will be added to the general funds
of the Company and used for general corporate purposes.
In June 1994 the Board of Directors adopted the Tucker Drilling Company,
Inc. 1994 Non Qualified Stock Option Plan. Officers and directors of the Company
are not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan is 28,000 shares. 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
date of grant.
Stock option activity for the years ended March 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
PRICE PER
SHARES SHARE AGGREGATE
------- ---------- ---------
<S> <C> <C> <C>
Balance, March 31, 1994................................. 158,500 $5.75-6.38 $ 941,125
Granted................................................. 12,000 6.13 73,500
Exercised............................................... (7,400) 5.75-6.13 (43,450)
Surrendered............................................. (600) 6.13 (3,675)
------- ---------- ---------
Balance, March 31, 1995................................. 162,500 $5.75-6.38 $ 967,500
Granted................................................. -- -- --
Exercised............................................... (25,000) 5.89 (147,125)
Surrendered............................................. (2,400) 6.13 (14,700)
------- ---------- ---------
Balance, March 31, 1996................................. 135,100 $5.75-6.38 $ 805,675
======= ========== =========
</TABLE>
21
<PAGE> 240
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
Outstanding options are exercisable in equal annual installments over five
or ten year periods and expire in February 2001. Options for 125,500 shares are
exercisable at March 31, 1996, at an average exercise price of $5.96 per share.
SFAS 123, "Accounting for Stock-Based Compensation", which is effective for
years beginning after December 15, 1995, defines a fair value based method of
accounting for employee stock options or similar plans (i.e., using an option
pricing model such as Black-Scholes). The Statement also allows an entity to
measure compensation costs for those plans using intrinsic value (the amounts by
which the market price of the underlying stock exceeds the underlying price of
the options) based accounting method as prescribed by Accounting Principles
Board Opinion No. 25. The Company plans to continue to use the intrinsic value
based method.
NOTE F -- INCOME TAXES
All components of income before income taxes are derived within the United
States.
The effective income tax rate varies from the Federal statutory rate as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31,
----------------
1996 1995
------ -----
<S> <C> <C>
Statutory tax rate........................................................ 34.0% 34.0%
Net operating loss carryforward........................................... (34.0) (34.0)
Alternative minimum taxes................................................. 0.3 1.8
State franchise taxes..................................................... 12.3 --
Reduction of valuation allowance.......................................... (114.7) --
------ -----
Effective tax rate...................................................... (102.1%) 1.8%
====== =====
</TABLE>
As of March 31, 1996 and 1995, the Company had deferred tax assets totaling
$1,545,000 and $1,613,000, respectively; deferred tax liabilities totaling
$705,000 and $799,000, respectively. As of March 31, 1996 the Company did not
provide a valuation allowance as a reduction of its deferred tax assets. Based
on the Company's recent history of earnings and the outlook for the Company's
future, management believes that it is more likely than not that the Company
will realize the benefits of its deferred tax assets. The Company recognized a
deferred tax benefit in the amount of $840,000 during the year ended March 31,
1996. As of March 31, 1995, the Company had a valuation allowance in the amount
of $814,000. The valuation allowance
22
<PAGE> 241
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
was based on the likelihood that tax benefits would not be realized. As of March
31, 1996 and 1995, the components of deferred tax amounts are as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
ASSETS
(LIABILITIES)
AS OF MARCH 31,
----------------
1996 1995
----- ------
<S> <C> <C>
Net operating loss carryforward.......................................... $ 845 $1,041
Depletion carryforward................................................... 612 413
Alternative minimum tax credit carryforward.............................. 78 47
Depreciation, depletion, and amortization................................ (705) (799)
Other.................................................................... 10 112
----- ------
840 814
Valuation allowance...................................................... -- (814)
----- ------
$ 840 --
===== ======
</TABLE>
As discussed in Note A, the Federal income tax provisions were calculated
in accordance with SFAS No. 109.
As of March 31, 1996, the Company had net operating loss carryforwards for
regular tax purposes of approximately $2,485,000 which expire in 2003 through
2008, and $327,000 net operating loss carryforwards for alternative minimum tax
purposes which expire in 2005 through 2008. In addition, a statutory depletion
carryforward of approximately $1,801,000 is available to reduce future taxable
income, subject to statutory limitations, and may be carried forward
indefinitely.
The availability of the net operating loss carryforwards to reduce taxable
income is subject to various limitations under the Internal Revenue Code of 1986
(Code), as amended, in the event of an ownership change as defined in Section
382 of the Code.
NOTE G -- 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 unaffiliated customers.
Information concerning the Company's business segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues
Contract drilling............................................... $16,594,979 $23,189,704
Oil and gas..................................................... 1,275,063 852,189
----------- -----------
$17,870,042 $24,041,893
=========== ===========
Income (loss) from operations
Contract drilling............................................... $ 1,029,702 $ 3,122,927
Oil and gas..................................................... (169,053) (107,740)
Other, net...................................................... (126,542) (121,611)
----------- -----------
734,107 2,893,576
General corporate income (expense)(a)............................. (1,657) (269,594)
----------- -----------
Income before income taxes........................................ $ 732,450 $ 2,623,982
=========== ===========
</TABLE>
23
<PAGE> 242
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1996 1995
----------- -----------
<S> <C> <C>
Identifiable assets
Contract drilling............................................... $ 7,597,409 $ 8,334,631
Oil and gas..................................................... 2,139,283 1,802,975
Other........................................................... 9,355,775 7,458,724
----------- -----------
Total assets...................................................... $19,092,467 $17,596,330
=========== ===========
Depreciation, depletion and amortization
Contract drilling............................................... $ 1,563,712 $ 1,508,885
Oil and gas..................................................... 493,982 312,403
Other........................................................... 126,542 121,611
----------- -----------
$ 2,184,236 $ 1,942,899
=========== ===========
Capital expenditures
Contract drilling............................................... $ 2,425,812 $ 1,300,829
Oil and gas..................................................... 1,068,020 706,783
Other........................................................... 42,340 21,718
----------- -----------
$ 3,536,172 $ 2,029,330
=========== ===========
</TABLE>
- ---------------
(a) General corporate income consists primarily of interest income and
unallocated general and administrative expenses.
For the year ended March 31, 1996, two customers who are affiliated with
each other accounted for 25% of revenues, and one other customer accounted for
19% of revenues.
For the year ended March 31, 1995, two customers who are affiliated with
each other accounted for 19% of revenues, and two other customers accounted for
15% and 14% of revenue, respectively.
NOTE H -- OIL AND GAS EXPENDITURES
Gross oil and gas expenditures by the Company in the United States are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1995
--------- --------
<S> <C> <C>
Property acquisition costs -- evaluated properties................. $ 87,585 $191,965
unevaluated properties.............. 304,582 10,134
Exploration costs.................................................. 81,570 250,390
Development costs.................................................. 711,802 415,335
---------- --------
$1,185,539 $867,824
========== ========
</TABLE>
The aggregate amount of capitalized costs of oil and gas properties was
comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Proved properties................................................. $5,573,617 $4,944,323
Unproved properties............................................... 251,500 338,032
---------- ----------
$5,825,117 $5,282,355
========== ==========
Accumulated depreciation, depletion and amortization.............. $3,987,198 $3,929,817
========== ==========
</TABLE>
24
<PAGE> 243
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
NOTE I -- SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION
AND RELATED DATA (UNAUDITED)
1. 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 March 31, 1996, and 1995. The quantities were estimated by an
independent petroleum engineering firm. 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 GAS
(BBLS) (MCF)
------- --------
<S> <C> <C>
Estimated quantity, March 31, 1994................................... 153,109 1,241,887
Revision in previous estimates....................................... (2,409) 107,833
Extensions, discoveries and other additions.......................... 34,161 424,996
Purchases of reserves in place....................................... 27,400 181,495
Sales of reserves in place........................................... (55,231) (412,576)
Production........................................................... (26,455) (256,543)
------- ---------
Estimated quantity, March 31, 1995................................... 130,575 1,287,092
Revision in previous estimates....................................... 3,012 137,084
Extensions, discoveries and other additions.......................... 59,918 164,328
Purchases of reserves in place....................................... 2,280 40,386
Production........................................................... (43,891) (330,469)
------- ---------
Estimated quantity, March 31, 1996................................... 151,894 1,298,421
======= =========
</TABLE>
2. RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1996 1995
--------- --------
<S> <C> <C>
Oil and gas revenues............................................... $1,275,063 $852,189
---------- --------
Costs and Expenses
Production costs................................................. 333,638 267,659
Exploration expenses............................................. 34,795 160,128
Depreciation, depletion and amortization......................... 493,982 312,403
Write down due to impairment..................................... 159,403 --
Income tax....................................................... 86,103 38,080
---------- --------
1,107,921 778,270
---------- --------
Results of operations for oil and gas producing activities......... $ 167,142 $ 73,919
========== ========
</TABLE>
25
<PAGE> 244
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
3. STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-----------------
1996 1995
------ ------
(000'S OMITTED)
<S> <C> <C>
Future gross revenues.................................................... $5,312 $4,475
Future development and production costs.................................. 2,134 1,700
Future income tax expense (a)............................................ 123 106
------ ------
Future net cash flows.................................................... 3,055 2,669
Discount at 10% per annum................................................ (741) (659)
------ ------
Standardized measure of discounted future net cash flows................. $2,314 $2,010
====== ======
</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.
4. 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
MARCH 31,
-----------------
1996 1995
------ ------
(000'S OMITTED)
<S> <C> <C>
Standardized measure at beginning of year................................ $2,010 $1,858
Sales and transfers of oil and gas produced, net of production costs..... (941) (584)
Sale of reserves in place................................................ -- (569)
Net changes in sales price and future production and development costs... (8) 24
Extensions, discoveries, improved recovery and purchase of reserves in
place, less related costs.............................................. 1,128 1,181
Revision of previous quantity estimates.................................. 154 91
Accretion of discount.................................................... 218 186
Net change in income taxes............................................... (17) (106)
Changes in production rates.............................................. (264) (142)
Other.................................................................... 34 71
------ ------
Standardized measure at end of year...................................... $2,314 $2,010
====== ======
</TABLE>
26
<PAGE> 245
TUCKER DRILLING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED MARCH 31, 1996 AND 1995
NOTE J -- 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 March 31, 1996
and 1995, the Company's demand deposits and temporary cash investments consisted
of the following:
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Deposits in FDIC-insured institutions at or below $100,000 and
cash on hand.................................................... $ 109,293 $ 153,534
Deposits in FDIC-insured institutions over $100,000............... 103,685 --
Investment in U.S. Treasury securities............................ -- 985,875
Mutual fund collaterized by U.S. Treasury obligations and
repurchase agreements which are collaterized by U.S. Treasury
obligations..................................................... 6,664,034 2,336,268
---------- ----------
Cash and Cash equivalents......................................... 6,877,012 3,475,677
Investment in U.S. Treasury securities (at cost as of March 31)... 524,323 2,570,459
---------- ----------
$7,401,335 $6,046,136
========== ==========
</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 credit losses from individual contracts were
experienced during each of the two years ended March 31, 1996.
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.
NOTE K -- SUBSEQUENT EVENTS
On April 22, 1996 the Company and Patterson Energy, Inc. (Patterson)
executed a definitive merger agreement whereby, subject to the approval of
stockholders of the Company and Patterson and certain other conditions, the
Company and Patterson will merge through an exchange of common stock with
Patterson being the surviving entity. The merger is expected to be consummated
during the second quarter of the Company's Fiscal Year 1997.
27
<PAGE> 246
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT
A brief description of each director and executive officer of the Company
is provided below. Executive officers are elected by the Board of Directors at
its annual meeting and hold office at the pleasure of the Board of Directors or
until the next annual meeting or until their successors are elected and
qualified.
Larry J. Tucker, 48, has served as Chairman of the Board of Directors since
May 1988, as President of the Company since May 1980 and as Chief Executive
Officer since February 1986. He served as Vice President-Exploration of the
Company for more than five years prior thereto. Since May 1, 1996 he has been on
temporary leave of absence due to personal illness.
Charles B. Middlekauf, 49, has served as Executive Vice President of the
Company since August 1984. He also has served as Secretary of the Company since
March 1984 and as Treasurer of the Company since May 1980.
T. Mark Tucker, 42, has served as Vice President-Land of the Company since
March 1983 and as landman for the Company since October 1981. Since May 1, 1996
he has been Acting Chairman of the Board and President.
Bruce L. Fly, 70, served as Chairman of the Board of Directors of the
Company from December 1981 until his retirement in May 1988, and he served as
Chief Executive Officer from May 1982 to February 1986. Mr. Fly served as Vice
Chairman of the Board of Directors of the Company from May 1980 to December 1981
and as President of the Company for more than five years prior thereto.
Marcus H. Cheaney, 72, has served as a Director of Texas Commerce Bank-San
Angelo since February 1973, and as Senior Chairman of the Board of Directors of
that bank from 1979 until his retirement in February 1986.
W.P. Carr, Jr., 55, has been an independent oil and gas operator for more
than five years.
Ronald L. Scandolari, 46, has served as Vice President-Contract Drilling of
the Company since February 1986. Mr. Scandolari served as Contract
Representative for the Company from December 1981 to February 1986.
Larry J. Tucker and T. Mark Tucker are brothers.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the officers and directors of the Company and persons who beneficially own more
than ten percent of the Company's common stock to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors and greater than ten-percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review for reportable transactions, it has been
determined that for the year ended March 31, 1996 all reports required to be
filed were timely filed.
28
<PAGE> 247
ITEM 10. EXECUTIVE COMPENSATION
TABLES
The following tables set forth information relating to officers of the
Company whose total annual salary and bonus from the Company exceeded $100,000
for the year ended March 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
AWARDS
----------------------------------------
NUMBER OF PAYOUTS
ANNUAL COMPENSATION OTHER RESTRICTED SECURITIES -------
------------------------- ANNUAL STOCK UNDERLYING LTIF ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($) ($)
- ----------------------------- ------ ------- ------ ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Larry J. Tucker.............. 1996 150,000 2,880 -- -- -- -- 41,600(2)
Chairman of the Board 1995 147,917 43,750 -- -- -- -- 41,600(2)
and President 1994 137,500 2,000 -- -- -- -- 41,600(2)
</TABLE>
- ---------------
(1) Mr. Tucker was provided certain non-cash compensation and personal benefits.
However, the aggregate amount of such other compensation did not exceed
$50,000 or 10% of the compensation paid to him.
(2) Represents the amount that became vested during the year pursuant to the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END (#) FY-END ($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ------------ ---------------------- --------------------
<S> <C> <C> <C> <C>
Larry J. Tucker......... -- -- 20,000 Exercisable $ 76,375
</TABLE>
SEVERANCE PAY AGREEMENTS
The Company and five of its officers and/or key employees are parties to
severance pay agreements pursuant to which amounts would be payable to such
persons upon a change in control of the Company followed by such person's
termination, significant reduction of job responsibilities, reduction of such
person's salary, or required relocation of such person. As of March 31, 1996,
Larry J. Tucker would be entitled to $300,000 under a severance pay agreement
upon occurrence of the above mentioned events.
COMPENSATION PURSUANT TO STOCK OPTION PLAN
In March, 1983 the Board of Directors of the Company adopted the Tucker
Drilling Company, Inc. 1983 Incentive Stock Option Plan (the "Option Plan")
which was amended and restated in January 1988. The Option Plan was approved by
the stockholders of the Company at the Company's 1983 Annual Meeting of the
Stockholders and the amendment and restatement were approved by the stockholders
of the Company at the Company's 1988 Annual Meeting of the Stockholders. The
amendment and restatement provided for: the granting of non-qualified options as
well as incentive stock options; both employees and directors to be eligible to
receive non-qualified options; an option holder to tender payment of the
exercise price in cash, shares of previously owned Common Stock, or a
combination of both; and payments upon exercise of stock appreciation rights to
be made in shares of Common Stock, cash, or a combination of both. The Board of
Directors further amended the Option Plan in August 1991, to eliminate stock
appreciation rights. The Option Plan is administered by the Compensation
Committee of the Board of Directors.
29
<PAGE> 248
The price at which options are granted must be not less than 100% of the
fair market value at the time the option is granted. The option period may not
be longer than ten years from the date the option is granted. No options may be
granted under the Option Plan after January 31, 1993; however, options granted
before the termination date continue to be effective and subject to the terms of
the Option Plan.
For the year ended March 31, 1996, no options were granted, 25,000 options
were exercised and 2,400 options were terminated. As of March 31, 1996 there
were 19 participants in the Option Plan to whom options for an aggregate of
123,100 shares have been granted and were outstanding at an average option price
of $5.95 per share.
In June, 1994 the Board of Directors of the Company adopted the Tucker
Drilling Company, Inc. 1994 Non Qualified Stock Option Plan. Officers and
directors of the Company are not eligible to receive options. The maximum number
of shares available for issuance under the plan is 28,000 shares. The price at
which options are granted must not be less than 100% of the fair market value of
the stock at the time the option is granted and the option period may not be
longer than ten years from the date the option is granted. No options may be
granted under the plan after January 31, 1999. Options for 12,000 shares at an
average option price of $6.13 per share have been granted as of March 31, 1996
(of which 2,400 shares were exercisable).
COMPENSATION PURSUANT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective April 1, 1991, the Company established the Tucker Drilling
Company, Inc. Supplemental Executive Retirement Plan. Pursuant to agreements
with participants, the Company is obligated to pay each participant or his
beneficiaries a lump sum at such participant's death, disability, or retirement.
These obligations are unsecured general liabilities of the Company and are
unfunded except to the extent of available death benefits or accumulated cash
value of related life insurance policies. Eligible participants and benefits are
determined by the Compensation Committee of the Board of Directors of the
Company. As of March 31, 1996, there were seven participants in the plan.
Benefits accrue to the participants and vest in equal annual amounts over ten
years of service beginning April 1, 1991, and the estimated present value of
future benefits as of April 1, 1991 are expensed over the same ten year period.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants, proceeds from which benefits will be
paid. Premiums on the life insurance policies either have been paid or will be
paid from an annuity contract owned by the grantor trust. There have been no
benefits paid to participants since inception of the plan. Larry J. Tucker's
fully-vested benefits (at death or normal retirement at age 65) are $416,000,
50% of which was vested as of March 31, 1996.
30
<PAGE> 249
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 24, 1996, information concerning
the beneficial ownership of Common Stock of the Company by each Director of the
Company and by each person known to the Company to be the beneficial owner of
more than 5% of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS
- ---------------------------------------------------------------- --------------------- --------
<S> <C> <C>
Dimensional Fund Advisors, Inc.................................. 149,600(2) 7.11%
1229 Ocean Ave., Suite 650
Santa Monica, California 90401
Larry J. Tucker................................................. 116,732(3)(4) 5.50%
P.O. Box 1876
San Angelo, Texas 76902
Stavisky Family................................................. 114,500(5) 5.44%
c/o Reid & Priest
40 West 57th Street
New York, New York 10019
T. Mark Tucker.................................................. 66,804(6) 3.15%
3226 Ridgecrest
San Angelo, Texas 76904
Charles B. Middlekauf........................................... 16,000(7) 0.75%
3209 Clearview
San Angelo, Texas 76904
Bruce L. Fly.................................................... 9,505(8) 0.45%
3102 San Antonio
San Angelo, Texas 76901
Marcus H. Cheaney............................................... 8,000(8) 0.38%
3706 Inglewood
San Angelo, Texas 76904
W. P. Carr, Jr.................................................. 8,000(8) 0.38%
8333 Douglas, Suite 950
Dallas, Texas 75225
All officers and directors as a group (7 persons)............... 231,741 10.61%
</TABLE>
- ---------------
(1) Unless otherwise indicated, each person has sole voting and dispositive
power with respect to the shares set forth opposite his name.
(2) According to Dimensional Fund Advisors Inc. ("Dimensional"), a registered
investment adviser, Dimensional is deemed to have beneficial ownership of
149,600 shares of Common Stock as of March 31, 1996, all of which shares
are held in portfolios of DFA Investment Dimensions Group Inc., a
registered open-end investment company, or in series of the DFA Group
Trust, a Delaware business trust, or the DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, for both of which
Dimensional serves as investment manager. Dimensional disclaims beneficial
ownership of all such shares.
(3) Excludes 1,100 shares held by Mrs. Larry J. Tucker; Larry J. Tucker
disclaims any beneficial interest in all of such shares.
31
<PAGE> 250
(4) Includes 26,332 shares held by children of Larry J. Tucker. Includes 20,000
shares issuable upon exercise of options granted by the Company.
(5) Theresa Stavisky, Aron Stavisky and Nellie Stavisky have sole voting and
dispositive power over 10,000; 23,000; and 13,000 shares, respectively.
Hedva Stavisky-Weiss, Jeremy Stavisky and Abigail Stavisky-Lipner share
voting power, and Eugene Roshwalb, Trustee for Halva Stavisky-Weiss, Jeremy
Stavisky and Abigail Stavisky-Lipner, has sole dispositive power, over
68,500 shares.
(6) Includes 16,000 shares issuable upon exercise of options granted by the
Company.
(7) Includes 14,800 shares issuable upon exercise of options granted by the
Company.
(8) Includes 8,000 shares issuable upon exercise of options granted by the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
W.P. Carr, Jr., a director of the Company, individually owns or did own
during the fiscal year interests in oil and gas properties which have been
developed or are operated by the Company or in which the Company has invested.
The Company bills Mr. Carr as other owners of interests in properties are billed
(on a current basis), or he is billed by operators of properties in which the
Company has invested, for his proportionate share of the development costs and
operating expenses of such properties. The aggregate indebtedness to the Company
of Mr. Carr did not exceed $60,000 at any time during the year ended March 31,
1996.
W.P. Carr, Jr., a director of the Company, or entities in which Mr. Carr
has a direct material interest, participated with the Company in certain oil and
gas exploration and production activities. Amounts paid to the Company by Mr.
Carr or entities in which Mr. Carr has a direct material interest for property
and services were not material to the Company. The Company participated in
exploration and production activities with entities in which W.P. Carr, Jr. has
a direct material interest. Amounts paid by the Company to entities in which Mr.
Carr has a direct material interest for property and services were not material
to such entities.
The Board of Directors has a policy as to participation by officers and
directors in oil and gas prospects with the Company. Under such policy, the
Company will limit participation of officers and directors to 25% in the
aggregate for each well, unless a higher participation has been approved by a
committee of disinterested directors, the majority of whom are not employees of
the Company. In addition, any such participation by officers and directors other
than W.P. Carr, Jr. in any Company well will be offered only on the same terms
as those offered to persons other than officers and directors. W.P. Carr, Jr.
will be offered participation on the same terms as those of the Company. Also,
officers and directors are not permitted to compete with the Company for the
acquisition, exploration and development of oil and gas properties.
During the fiscal year ended March 31, 1987, the Company entered into
indemnification agreements with each of the directors and officers of the
Company pursuant to which the Company agreed to indemnify each of the directors
and officers to the full extent permitted by Delaware law.
32
<PAGE> 251
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBITS
--------
<C> <C> <S>
3.1 -- Articles of Incorporation, incorporated by reference to Exhibit 3.1(d) of the
Company's annual report on Form 10-K for the year ended March 31, 1988.
3.2 -- Amended By-Laws dated April 15, 1986, incorporated by reference to Exhibit
3.1(e) of the Company's annual report on Form 10-K for the year ended March
31, 1988.
10.1 -- Severance Pay Agreement effective August 3, 1988 incorporated by reference to
the Company's Proxy Statement dated June 23, 1988.
10.2 -- Tucker Drilling Company, Inc. Incentive Stock Option Plan, incorporated by
reference to Exhibit 10.1 of the Company's annual report on Form 10-K for the
year ended March 31, 1988.
10.2 -- Tucker Drilling Company, Inc. 1994 Non Qualified Stock Option Plan,
incorporated by reference to the Registration Statement on Form S-8 filed with
the SEC on December 1, 1994.
10.3 -- Supplemental Executive Retirement Plan and Supplemental Executive Retirement
Trust Agreements effective April, 1991, incorporated by reference to the
Company's annual report on Form 10-K for the year ended March 31, 1992.
11.1 -- Statement re computation of per share earnings, filed herewith.
</TABLE>
Reports on Form 8-K
None
33
<PAGE> 252
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TUCKER DRILLING COMPANY, INC.
By: /s/ T. MARK TUCKER
---------------------------
T. Mark Tucker
Acting President
Dated: May 30, 1996
Pursuant the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on May 30, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ T. MARK TUCKER Acting President
- ------------------------------------- (Acting Principal Executive Officer) and Director
T. Mark Tucker
/s/ CHARLES B. MIDDLEKAUF Executive Vice President, Secretary and Treasurer
- ------------------------------------- (Principal Financial Officer, and Principal
Charles B. Middlekauf Accounting Officer) and Director
/s/ LARRY J. TUCKER President
- ------------------------------------- (Principal Executive Officer) and Director
Larry J. Tucker
/s/ BRUCE L. FLY Director
- -------------------------------------
Bruce L. Fly
/s/ MARCUS H. CHEANEY Director
- -------------------------------------
Marcus H. Cheaney
/s/ W.P. CARR, JR. Director
- -------------------------------------
W.P. Carr, Jr.
</TABLE>
34
<PAGE> 253
EXHIBIT 11.1
TUCKER DRILLING COMPANY, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1996
-------------
<S> <C>
Earnings per Share Assuming No Dilution
Net income................................................................... $1,479,947
==========
Weighted average number of shares outstanding.................................. 2,084,925
==========
Net income per share assuming no dilution.................................... $ .709832
==========
Assuming Full Dilution
Net income................................................................... $1,479,947
==========
Shares:
Weighted average number of shares outstanding............................. 2,084,925
Add -- Effect of outstanding options (as determined by application of the
treasury stock method)............................................. 51,394
----------
Weighted average number of shares outstanding, as adjusted................ 2,136,319
==========
Net income per share: Assuming full dilution................................... $ .692756(a)
==========
</TABLE>
- ---------------
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by APB Opinion No. 15 because it results
in dilution of less than 3%.
