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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
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)
</TABLE>
Registrant'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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 19, 1997 was $167,306,849, based upon the average bid
and asked prices on the Nasdaq National Market.
As of March 19, 1997, the registrant had outstanding 7,037,807 shares of
common stock, $.01 Par Value, its only class of voting stock.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III
of this Annual Report on Form 10-K: Definitive Proxy Statement for the
registrant's 1997 Annual Meeting of Stockholders.
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<PAGE> 2
PART I
"The Company" or "Patterson" is used in this report to refer to Patterson
Energy, Inc. and its consolidated subsidiaries. The Company may from time to
time make written or oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and its reports to stockholders. Items 1 and 2 contain forward-looking
statements and are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, statements relating to the drilling and completion of wells, well
operations, utilization rates of drilling rigs, reserve estimates (including
estimates for future net revenues associated with such reserves and the present
value of such future net reserves), business strategies and other plans and
objectives of the Company's management for future operations and activities and
other such matters. The words "believes," "budgeted," "plans," "intends,"
"strategy," or "anticipates" and similar expressions identify forward-looking
statements. The Company does not undertake to update, revise or correct any of
the forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading: "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995" beginning on page 13.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
OVERVIEW
The Company is engaged in onshore contract drilling for oil and natural gas
and, to a lesser extent, in the development, exploration, acquisition and
production of oil and natural gas. The Company's operations are conducted
primarily in Texas in the Permian Basin, the Austin Chalk Trend, South Texas and
the Hardeman Basin. The Company was organized as a Texas corporation in January
1978 and was reorganized as a Delaware corporation in October 1993. The Company
completed an initial public offering in December 1993. Since that time, the
Company has expanded its drilling rig fleet from 13 to 61 drilling rigs (53 of
which are currently operable) through assembly of one drilling rig during
September 1995 from existing equipment inventory and through a series of
strategic acquisitions. In January 1997, the Company completed a public offering
of 2,063,000 shares of its common stock resulting in net proceeds to the Company
of approximately $59,951,000.
CONTRACT DRILLING OPERATIONS. The Company is one of the leading providers
of domestic land drilling services to major and independent oil and natural gas
companies. The Company has established a reputation for reliability, high
quality equipment and well-trained crews. The Company continually seeks to
modify and upgrade its equipment to maximize the performance and capabilities of
its drilling rig fleet, which the Company believes provides it with a
competitive advantage. Additionally, the Company has the in-house capability to
design, manufacture, repair and modify its drilling rigs. Of the Company's
operable drilling rigs, 47 are capable of drilling to depths greater than 10,000
feet, including five that are capable of drilling to depths greater than 15,000
feet. During 1996, the Company drilled 464 wells for 95 different customers.
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 rig
fleet in good operating condition and retaining high quality, experienced
drilling supervisors. In addition, if favorable opportunities arise, the Company
may seek to further expand its drilling rig fleet through selected acquisitions.
OIL AND NATURAL GAS OPERATIONS. The Company's oil and natural gas
activities are designed to complement its land drilling operations. These
activities are focused in mature producing regions in the Austin Chalk Trend,
the Permian Basin and South Texas. Oil and natural gas operations comprised
approximately 12% of the Company's revenues for the year ended December 31,
1996. At December 31, 1996, the Company's proved developed reserves were
approximately 2,334,000 BOE and had a present value (discounted at 10% before
income taxes) of estimated future net revenues of approximately $17,893,000.
The Company's business strategy for its oil and gas operations is to
increase its oil and natural gas reserves primarily through development drilling
and selected acquisitions of producing properties for further
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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 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 believes that this business is not material
to its overall operations.
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 natural gas exploration, development, acquisition and production. The
contract drilling segment operated at a profit during each of the years in the
three-year period ended December 31, 1996. The oil and natural gas segment
operated at a profit for the year ended December 31, 1996 and at a loss for each
of the years ended December 31, 1994 and 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 12 of Notes
to Consolidated Financial Statements included as a part of Items 7 and 8,
respectively, of this report for financial information pertaining to these
industry segments.
RECENT ACQUISITIONS
During July 1996, the Company acquired Tucker Drilling Company, Inc., a
Texas corporation ("Tucker"), for common stock valued at $26,400,000. A total of
1,577,514 shares of the Company's common stock was issued to the stockholders of
Tucker pursuant to the merger, and an additional 74,592 shares of the Company's
common stock were reserved for issuance upon exercise of then outstanding Tucker
stock options. Tucker was engaged in onshore contract drilling in the Permian
and Hardeman Basins and, to a lesser extent, in the exploration, development and
production of oil and natural gas, primarily in the Permian Basin. At the time
of the merger, Tucker owned 13 operable drilling rigs which were added to
Patterson's drilling fleet upon completion of the merger.
During October 1996, the Company purchased six drilling rigs and related
assets through the acquisition of Gene Sledge Drilling Corporation ("Sledge").
The net purchase price for Sledge was approximately $8,900,000 which, in
addition to the drilling rigs, included an inventory of drilling equipment
valued by the Company at approximately $4,411,000. Sledge's contract drilling
operations were conducted in the Permian Basin. Five of the six drilling rigs
were operable at the time of the transaction and the sixth became operable in
November 1996.
During November and December 1996, in two separate transactions, the
Company acquired 15 drilling rigs and related assets. The consideration paid for
these assets was approximately $4,180,000, consisting of $2,350,000 cash, a
$400,000 promissory note and 52,000 shares of the Company's common stock valued
at approximately $1,430,000. Six of the drilling rigs were operable at the time
of the transactions and one other was placed into operation subsequently. The
eight remaining drilling rigs are expected to become operable during 1997. The
Company has budgeted approximately $7,500,000 to modify and upgrade the drilling
rigs acquired in these two transactions.
CONTRACT DRILLING OPERATIONS
GENERAL. The Company markets its contract drilling services to major oil
companies and independent oil and natural gas producers. The Company owns 61
drilling rigs, 53 of which are currently operable. Fourteen of the operable
drilling rigs are based in the Austin Chalk Trend and South Texas, 34 are based
in the Permian Basin and five are based in the Hardeman Basin. The drilling rigs
have rated maximum depth capabilities ranging from 7,000 feet to 22,000 feet.
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The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling. Wells drilled with Company drilling rigs in the Permian and
Hardeman Basins are primarily vertical wells. Both vertical and horizontal wells
are drilled with Company drilling rigs in the Austin Chalk Trend.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant importance to
prospective customers. The Company has and will continue to strive to maintain
its drilling fleet in good working condition. In addition to normal repair and
maintenance expenses, the Company spends significant funds each year on an
ongoing program of modifying and upgrading its drilling rigs. The Company also
strives to employ experienced and dedicated drilling supervisors for its various
drilling rigs in the field. The Company intends to continue its ongoing rig
maintenance program and to continue to retain high quality, experienced drilling
supervisors in order to build upon its reputation in the market place. In
addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
DRILLING CONTRACTS. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the Company generally does not incur any costs
due to "inhole" losses (such as time delays for various reasons, including stuck
drill strings and blow-outs).
Footage contracts usually require the Company to bear some of the drilling
costs in addition to providing the drilling rig. Under a footage contract, the
Company would normally determine the manner of drilling and type of equipment to
be used, subject to certain customer specifications, and would also bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems.
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Compensation is based on a rate-per-foot-drilled basis at completion of the
well. Prices of both footage and daywork contracts vary depending upon various
factors such as the location, depth, duration and complexity of the well to be
drilled, operating conditions and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling operation revenues attributable
to daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Daywork..................................................... 32% 51% 52%
Footage..................................................... 65 45 40
Turnkey..................................................... 3 4 8
</TABLE>
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have been in short supply from
time to time. As favorable buying opportunities arise, the Company stockpiles
bits and other drilling rig parts. Currently, there is a substantial shortage of
drill pipe in the contract drilling industry in the United States. This shortage
has caused the price of drill pipe to increase significantly over the past 36
months. In addition, new drill pipe must be placed on order at least 150 to 180
days in advance of expected use. See Item 7 -- "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, 1996 and 1995" for information concerning the impact of this
shortage on the Company's capital expenditures and 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.
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, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Number of wells drilled..................................... 460 395 464
Average rigs available for service.......................... 31 36 42
Average rig utilization rate ............................... 76% 69% 76%
</TABLE>
CUSTOMERS. For the year ended December 31, 1996, the Company drilled wells
for 95 nonaffiliated customers. This compares with 108 nonaffiliated customers
for the year ended December 31, 1995. No customer for contract drilling
accounted for 10% or more of the Company's consolidated revenues in the fiscal
year ended December 31, 1996. The Company does not believe that the loss of any
one customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included Burlington
Resources Oil & Gas Company, Chevron U.S.A., Enron Oil & Gas Company, IP
Petroleum Company, Inc., Louis Dreyfus Natural Gas Company, Mitchell Energy
Corporation, Mobil Exploration & Producing U.S., Inc., Snyder Oil Corporation,
Swift Energy Company, Union Pacific Resources, Co. and Union Oil Company of
California.
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As of December 31, 1996, the Company was drilling a total of 44 wells, 42
of which were for nonaffiliated customers. Twenty-eight of these total wells
were located in the Permian Basin, five were located in the Hardeman Basin and
11 were located in South and Southeast Texas, primarily in the Austin Chalk
Trend.
DRILLING RIGS AND RELATED EQUIPMENT. The following table provides certain
information concerning the drilling rigs owned by the Company as of the date of
this report:
<TABLE>
<CAPTION>
DEPTH RATING (FEET) MECHANICAL DIESEL ELECTRIC
------------------- ---------- ---------------
<S> <C> <C>
7,000 to 10,000.......................................... 6 --
10,000 to 15,000.......................................... 40(1) 7
15,000 to 22,000.......................................... 4(2) 4(3)
-- --
Totals............................................... 50 11
== ==
</TABLE>
- ---------------
(1) Includes five inoperable rigs.
(2) Includes one inoperable rig.
(3) Includes two inoperable rigs.
The Company owns 61 trucks and 84 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs. The Company is not
dependent upon third parties for these ancillary services, which contribute to
increased operating efficiencies and reduced expenses.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities in Snyder, LaGrange, Victoria, San
Angelo and Odessa, Texas. The Company believes that its operable drilling rigs
and related equipment are in good operating condition. In addition to normal
repair and maintenance expenses, the Company historically has spent significant
funds for its ongoing program of modifying and upgrading its equipment.
OIL AND NATURAL GAS OPERATIONS
GENERAL. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities are primarily concentrated in three operating areas
of Texas: (i) the Austin Chalk Trend, (ii) the Permian Basin and (iii) South
Texas. The Company has budgeted approximately $5,000,000 in capital expenditures
for development of these three areas during 1997.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. The oil and
natural gas operations complement the Company's land drilling operations by
providing supplemental cash flow during downturns in the land drilling market.
During the downturn in the land drilling market beginning in 1982, the Company's
oil and natural gas operations provided supplemental cash flow through
production and property sales. In addition, the oil and natural gas operations
generate opportunities for the Company to participate in wells for which it
serves as the land drilling contractor. At December 31, 1996, the Company was
the operator of 245 wells, of which it was the drilling contractor for 54 wells.
RECENT AND PROPOSED OPERATIONS. The Company has a significant concentration
of proved developed reserves in the fractured carbonates of the Austin Chalk
Trend, which is currently one of the most active oil and natural gas areas in
the U.S. The primary producing intervals in the Austin Chalk Trend are the
Austin Chalk, Buda and Georgetown formations. The Company's activities in the
Austin Chalk Trend encompass Brazos, Fayette, Grimes and Robertson Counties,
Texas. Since 1991, the Company has drilled and completed 20 horizontal wells in
the Austin Chalk Trend, 19 of which are still producing, including four in 1996.
One of the four wells is a re-entry of an existing well located in Robertson
County, Texas. The well is a 4,700 foot horizontal lateral that was drilled and
completed in the Georgetown formation during November 1996. Through March 11,
1997, the well produced 121,834 Bbls and was flowing naturally at a rate of
approximately 1,024 Bbls per day as of March 11, 1997. The Company plans to put
the well on artificial lift in the near future. The Company owns a 17.25%
working interest in the well and in approximately 25,000 gross acres in
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Robertson County surrounding the well. During January 1997, a confirmation
offset well was spudded and was flowing naturally at a rate of approximately
1,120 Bbls per day as of March 11, 1997. No assurance can be given as to future
rates of production from the wells or that any other well drilled on this
acreage will produce oil in commercial quantities. In addition to the leasehold
interests in the 25,000 gross acres in Robertson County, the Company has
acquired leasehold interests in approximately 35,000 gross acres in other
counties in the Austin Chalk Trend in order to provide flexibility in its
horizontal drilling activities. The Company currently plans to drill
approximately ten horizontal development wells in the Austin Chalk Trend in 1997
and has budgeted approximately $2,000,000 for this purpose. Some of these wells
may be drilled on the Company's Robertson County acreage. The Company's average
working interest in the acreage and horizontal wells, other than the Robertson
County well described above and related Robertson County acreage, varies from
approximately 15% to 25%.
In the Permian Basin, the Company's reserves are concentrated in Borden,
Dickens, Garza, Howard and Nolan Counties, Texas. During 1996, the Company
increased its ownership in the North Nena Lucia Unit in Nolan County from
approximately 18% to 40%. This unit is a waterflood project that covers 6,500
acres and is currently producing approximately 200 Bbls (gross) of oil per day
and 1.1 MMcf (gross) of natural gas per day. The Company is the operator of the
unit and plans to conduct a 3-D seismic survey across the unit beginning in the
first quarter of 1997 at a cost to the Company of approximately $200,000.
Depending on the results of the 3-D seismic survey, the Company anticipates
participating in the drilling of the unit on 20 acre spacing. During the last
half of 1995 and 1996, the Company completed three wells in the Happy Sprayberry
area that are producing the maximum rate allowable by the State of Texas (92
Bbls (gross) of oil per day). The Company completed an 11 square mile 3-D
seismic survey over its Happy Sprayberry area in 1996. The results of the
interpretation of the seismic data have been completed, and the Company plans to
drill a development well in the first quarter of 1997. Depending on the results
of this well, the Company will consider participating in the drilling of an
additional three to five wells in the Happy Sprayberry area during 1997. The
Company's average working interest in the Happy Sprayberry area is approximately
23%. In the Permian Basin, the Company has budgeted approximately $2,300,000 for
capital expenditures for 1997.
In 1995 and 1996, the Company acquired three 3-D seismic surveys covering
approximately 30 square miles in Jackson, Wharton and Victoria Counties of South
Texas. The primary production objectives for these surveys are the Miocene,
Frio, Yegua and Wilcox formations. The Company's acreage option position in
these areas covers approximately 21,000 gross acres. During 1996, the Company
participated in four Miocene, five Frio and one Yegua wells with an average
working interest to the Company of approximately 15% to 17%. Of those 10 wells,
eight wells were completed and seven are currently producing. The Company
currently plans to participate in 10 wells during the first half of 1997 in the
Miocene, Frio, Yegua or Wilcox formations and has budgeted approximately
$500,000. During January 1997 a natural gas well, in which the Company owns a
14.25% working interest, was completed in the Wilcox formation in Jackson
County, Texas. As of March 16, 1997, the well was producing at a rate of
approximately 3.5 MMcf of natural gas per day. The Company also owns a 14.25%
working interest in approximately 1,700 acres surrounding the well. An
offsetting confirmation well is planned on this acreage in the first half of
1997. No assurance can be given as to future rates of production from the well
or that the confirmation well or any other well drilled on the acreage will
produce natural gas in commercial quantities.
OIL AND NATURAL GAS RESERVES. The Company engaged M. Brian Wallace, P.E.
Dallas, Texas, an independent petroleum engineer, to estimate the Company's
proved developed reserves, projected future production and estimated future net
revenues from production of proved developed reserves on its properties as of
December 31, 1994, 1995 and 1996. Mr. Wallace's estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. In determining the estimates of the
reserve quantities that are economically recoverable, Mr. Wallace used oil and
natural gas prices and estimated average development and production costs
provided by the Company.
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The following table sets forth information as of the end of each of the
years in the three-year period ended December 31, 1996 derived from the reserve
reports of Mr. Wallace. The present values (discounted at 10% before income
taxes) of estimated future net revenues shown in the table are not intended to
represent the current market value of the estimated oil and natural gas reserves
owned by the Company. For further information concerning the present value of
estimated future net revenue from these proved developed reserves, see Note 14
of Notes to Consolidated Financial Statements included as a part of Item 8 of
this report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls)............................................ 600,069 756,942 1,062,427
Gas (Mcf)............................................. 3,769,248 5,269,924 7,626,763
Total (BOE)........................................... 1,228,277 1,635,263 2,333,554
Estimated future net revenue before income taxes (in
thousands).......................................... $ 8,627 $ 13,813 $ 25,637
Present value of estimated future net revenues before
income taxes, discounted at 10% (in thousands)...... $ 6,433 $ 10,295 $ 17,893
</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-K. In addition, the reserve data may be subject to upward or downward
revisions depending upon, among other factors, production history and prevailing
oil and natural gas prices. Oil and natural gas prices have fluctuated widely in
recent years. There is no assurance that prices will be higher or lower than
prices used in estimating the Company's reserves.
PRODUCTION. The Company's wells in the Austin Chalk Trend and South Texas
primarily produce natural gas and in the Permian Basin primarily produce oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Average net daily production:
Oil (Bbls)................................................ 340 524 641
Gas (Mcf)................................................. 2,356 3,731 4,586
Total (BOE)............................................... 733 1,146 1,406
Average sales prices:
Oil (per Bbl)............................................. $ 16.40 $ 17.48 $ 20.99
Gas (per Mcf)............................................. 1.68 1.51 2.01
Average production (lifting) costs (per BOE).............. 4.27 3.61 3.91
</TABLE>
PRODUCTIVE WELLS. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
December 31, 1996. One or more completions in the same well bore are counted as
one well.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
----- -----
<S> <C> <C>
Oil......................................................... 286 74.50
Gas......................................................... 63 12.62
--- -----
Total............................................. 349 87.12
=== =====
</TABLE>
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<PAGE> 9
DEVELOPED AND UNDEVELOPED ACREAGE. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of December 31, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- -----------------
LOCATION GROSS NET GROSS NET
-------- ------ ----- ------- ------
<S> <C> <C> <C> <C>
Austin Chalk Trend and South Texas...................... 8,546 1,389 21,996 3,113
Permian Basin........................................... 5,040 851 84,365 21,997
------ ----- ------- ------
Total......................................... 13,586 2,240 106,361 25,110
====== ===== ======= ======
</TABLE>
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
---------------------
PERIOD ENDING: GROSS NET
-------------- --------- --------
<S> <C> <C>
December 31, 1997........................................... 12,527 2,607
December 31, 1998........................................... 21,064 3,598
December 31, 1999 and later................................. 72,770 18,905
------- ------
Total............................................. 106,361 25,110
======= ======
</TABLE>
DRILLING ACTIVITIES. The following table set forth the results of the
Company's participation in the drilling of development and exploratory wells
during each of the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
---------------------------- --------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
YEAR ENDED ------------- ------------ ----------- ------------
DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
- ------------ ----- ----- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1994........................................... 23 2.88 6 .87 2 .45 12 1.64
1995........................................... 43 7.12 15 2.68 2 .24 4 .73
1996........................................... 29 4.35 16 3.87 1 .16 6 1.00
-- ----- -- ---- -- --- -- ----
Total................................... 95 14.35 37 7.42 5 .85 22 3.37
== ===== == ==== == === == ====
</TABLE>
MARKETING OF CRUDE OIL AND NATURAL GAS. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly-owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman of the Board and Chief
Executive Officer, is a first purchaser of most of the oil produced from
Company-operated leases. See Note 16 of Notes to Consolidated Financial
Statements included as a part of Item 8 of this report.
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1996.
TITLE TO OIL AND NATURAL GAS PROPERTIES. Title to the Company's oil and
natural gas properties is subject to royalty, overriding royalty, carried
working, and other similar interests and cost sharing arrangements
9
<PAGE> 10
customary in the oil and natural gas industry (including farmout agreements,
operating agreements and joint venture arrangements), liens for current taxes
not yet due, and to other minor defects and encumbrances. The Company believes
that such burdens do not materially detract from the value of such properties or
from the Company's interest therein or materially interfere with the operation
of the Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
COMPETITION
CONTRACT DRILLING OPERATIONS. Demand for drilling rigs and utilization has
improved from previous years. However, the contract drilling industry remains
highly competitive. Price is generally the most important competitive factor in
the drilling industry. Other competitive factors include the availability of
drilling equipment and experienced personnel at or near the time and place
required by customers, the reputation of the drilling contractor in the drilling
industry and its relationship with existing customers. The Company believes that
it competes favorably with respect to all of these factors. Competition is
usually on a regional basis, although drilling rigs are mobile and can be moved
from one region to another in response to increased demand. An oversupply of
drilling rigs in any region may result. Demand for land drilling equipment is
also dependent on the exploration and development programs of oil and natural
gas companies, which are in turn influenced primarily by the financial condition
of such companies, by general economic conditions, by prices of oil and natural
gas and, from time to time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of the Company, some of which have substantially greater resources and longer
operating histories than the Company. Also, in recent years, many drilling
companies have consolidated or merged with other companies as a result of the
downturn in the domestic contract drilling industry. Although this consolidation
has decreased the total number of competitors, management of the Company
believes that competition for drilling contracts will continue to be intense for
the foreseeable future.
OIL AND NATURAL GAS OPERATIONS. There is substantial competition for the
acquisition of oil and natural gas leases suitable for exploration and for the
hiring of experienced personnel. The Company's competitors in oil and natural
gas exploration, development and production include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies,
drilling and production purchase programs and individual producers and
operators. The ability of the Company to increase its holdings of oil and
natural gas reserves in the future is directly dependent upon the Company's
ability to select, acquire and develop suitable prospects in competition with
these companies. Many competitors have financial resources, staffs, facilities
and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated with compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material, and the Company could incur liability
for noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental
10
<PAGE> 11
hazards which would materially affect its operations, but it has not initiated
environmental due diligence associated with its recent acquisitions.
The contract drilling industry is dependent on demand for services from the
oil and natural gas exploration industry and, accordingly, is affected by
changing tax laws, price controls and other laws relating to the energy business
generally. The Company's business is affected generally by political
developments and by federal, state, foreign and local laws and regulations which
relate to the oil and natural gas industry. The adoption of laws and regulations
affecting the oil and natural 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 the Company has
utilized operating and disposal practices that were or are currently standard in
the industry, hydrocarbons and other materials may have been disposed of or
released in or under properties currently or formerly owned or operated by the
Company or its predecessors in interest. In addition, some of these properties
have been operated by third parties over whom the Company has no control as to
such entities' treatment of hydrocarbon and other materials and the manner in
which such materials may have been disposed of or released. The federal
Comprehensive Environmental Response Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986
(collectively, "CERCLA"), and comparable state statutes impose strict liability
on owners and operators of sites and on persons who disposed of, or arranged for
the disposal of, "hazardous substances" found at sites. The Federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes govern the
disposal of "hazardous wastes." Although CERCLA currently excludes petroleum
from the definition of "hazardous substances," and RCRA also excludes certain
classes of exploration and production wastes from regulation, such exemptions by
Congress under both CERCLA and RCRA may be deleted, limited or modified in the
future. If such changes are made to CERCLA and/or RCRA, the Company could be
required to remove and remediate previously disposed of materials (including
materials disposed of or released by prior owners or operators) from properties
(including ground water contaminated with hydrocarbons) and to perform removal
or remedial actions to prevent future contamination.
The Federal Water Pollution Control Act ("FWPCA") and the Oil Pollution Act
of 1990 ("OPA") and implementing regulations govern the prevention of
discharges, including oil and produced water spills, and liability for damages
into waters. The OPA is more comprehensive and stringent than previous oil
pollution liability and prevention laws and imposes strict liability for a
comprehensive and expansive list of damages from an oil spill into waters from
facilities. Liability may be imposed for oil removal costs and a variety of
public and private damages. Penalties may also be imposed for violation of
federal safety, construction and operating regulations, and for failure to
report a spill or to cooperate fully in a clean-up. The OPA also expands the
authority and capability of the federal government to direct and manage oil
spill clean-up and operations, plus requires operators to prepare oil spill
response plans in cases where it can reasonably be expected that substantial
harm will be done to the environment by discharges on or into navigable waters.
The Company has spill protection control countermeasure (SPCC) plans in place
for its oil and natural gas properties in each of the areas in which it
operates. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
actions. Although the liability for owners and operators is the same under the
FWPCA, the damages recoverable under the OPA are potentially much greater and
can include natural resource damages.
The operations of the Company are also subject to federal, state and local
regulations for the control 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.
11
<PAGE> 12
RISKS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including blow-outs, cratering, fires and explosions. These
hazards could cause personal injury or death, suspend drilling operations or
seriously damage or destroy the equipment involved and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damage to the environment, including property contamination
in the form of either soil or ground water contamination, could also result from
the Company's operations, particularly through oil or produced water spillage,
natural gas leaks and extensive, uncontrolled fires. In addition, the Company
could become subject to liability for reservoir damage. The occurrence of a
significant event, including pollution or environmental damage, could materially
affect the Company's operations and financial condition. As a protection against
operating hazards, the Company maintains insurance coverage considered by the
Company to be adequate, including all-risk physical damage, employer's
liability, commercial general liability and workers compensation insurance. The
Company currently has general liability insurance of $1,000,000 per occurrence
with an aggregate of $3,000,000 and excess liability and umbrella coverages of
up to $20,000,000 per occurrence with a $20,000,000 aggregate. The Company's
customers generally require the Company to have at least $1,000,000 of third
party liability coverage. Since April 1, 1992, the Company has carried workers'
compensation insurance, with a deductible of $100,000 per occurrence. If
multiple workers' compensation claims are filed, the Company could incur
significant expenses, which in turn could have a material adverse impact on its
financial condition and operations.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to or
loss of its drilling rigs; however, it does not carry insurance against loss of
earnings resulting from such damage or loss. In view of the difficulties that
may be encountered in renewing such insurance at reasonable rates, no assurance
can be given that the Company will be able to maintain the type and amount of
coverage that it considers adequate at reasonable rates or that any particular
types of coverage will be available.
HEADQUARTERS AND OTHER OFFICES
The Company's headquarters are located in Snyder, Texas. The Company also
has small offices in Austin, Houston and Midland, Texas and yard facilities in
Snyder, LaGrange, Victoria, Odessa, Midland, San Angelo and Wichita Falls,
Texas. The Company owns the headquarters, yards and a small office building in
Midland, and leases its other offices. The Company's headquarters are located on
approximately 64 acres in Snyder, Texas, and include an executive office
building, office and shop facilities and storage facilities.
EMPLOYEES
The number of personnel employed by the Company will fluctuate depending
upon the number of operable drilling rigs, the Company's rig utilization rate
and the related demand for the Company's contract drilling services. Currently,
the Company employs approximately 60 office personnel and approximately 850 to
1,000 field personnel. The Company believes its employee relations to be
satisfactory. None of the Company's employees is represented by a union.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings arising in the normal
course of its business. Management of the Company does not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
<PAGE> 13
---------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to the future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas, both with respect to its contract
drilling operations and its oil and gas operations. In recent years, oil and
natural gas prices and, therefore, the level of drilling, exploration,
development and production, have been extremely volatile. Prices are affected by
market supply and demand factors as well as actions of state and local agencies,
the U.S. and foreign governments and international cartels. All of these factors
are beyond the control of the Company. Any significant or extended decline in
oil and/or natural gas prices will have a material adverse effect on the
Company's financial condition and operations and could impair access to sources
of capital.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business is currently experiencing increased demand for drilling services due to
stronger oil and gas prices. However, the market for onshore contract drilling
services has generally been depressed since mid-1982, when crude oil and natural
gas prices began to weaken. A particularly sharp decline in demand for contract
drilling services occurred in 1986 because of the world-wide collapse in oil
prices (to approximately $10.00 per Bbl in April 1986 in the U.S.). Since this
time and except during the occasional upturns, there have been substantially
more drilling rigs available than necessary to meet demand in most operating and
geographic segments of the domestic drilling industry. As a result, drilling
contractors have had difficulty sustaining profit margins. In addition to
adverse effects that future declines in demand could have on the Company,
ongoing movement or reactivation of onshore drilling rigs or new construction of
drilling rigs could adversely affect rig utilization rates and pricing, even in
an environment of stronger oil and natural gas prices and increased drilling
activity. The Company cannot predict either the future level of demand for its
contract drilling services or future conditions in the contract drilling
industry.
SHORTAGE OF DRILL PIPE IN THE CONTRACT DRILLING INDUSTRY. There is a
growing shortage of drill pipe in the contract drilling industry in the U.S.
This shortage has caused the price of drill pipe to increase significantly over
the past 36 months and has required orders for new drill pipe to be placed at
least 150 to 180 days in advance of expected use. The price increase and the
delay in delivery has caused the Company to substantially increase capital
expenditures in its contract drilling segment over the past 36 months, primarily
with respect to new drill pipe purchases. In the event the shortage continues,
the Company may be unable to obtain the drill pipe required for its contract
drilling operations.
MANAGEMENT OF GROWTH. The Company has experienced rapid and substantial
growth over the past three years, particularly in its contract drilling segment,
and intends to further expand its drilling fleet through selected acquisitions.
Continued growth could strain the Company's management, operations, employees
and
13
<PAGE> 14
resources. There can be no assurance that the Company will be able to manage
growth effectively or that it will be successful in maintaining the market share
attributable to operable drilling rigs acquired by the Company. If the Company
is unable to manage its growth, its business, results of operations or financial
condition could be materially adversely affected.
ABILITY TO GROW THROUGH ACQUISITIONS. The Company's growth has been
enhanced materially by strategic acquisitions that have substantially increased
the Company's drilling rig fleet. One element of the Company's strategy is to
make acquisitions in markets in which it currently operates. While the Company
believes that the land drilling industry is highly fragmented and that
significant acquisition opportunities are available, there can be no assurance
that suitable acquisition candidates can be found, and the Company is likely to
face competition from other companies for available acquisition opportunities.
In addition, if the prices paid by buyers of drilling rigs remain at current
levels or continue to rise, the Company may find fewer acceptable acquisition
opportunities. There can be no assurance that the Company will have sufficient
capital resources to complete acquisitions, that acquisitions can be completed
on terms acceptable to the Company or that any completed acquisition would
improve the Company's financial condition, results of operations, business or
prospects in any material manner.
LABOR SHORTAGES. Increases in domestic drilling demand since mid-1995 and
recent increases in contract drilling activity have resulted in a shortage of
qualified drilling rig personnel in the industry. If the Company is unable to
attract and retain sufficient qualified personnel, its ability to market and
operate its drilling rigs will be restricted. Further, labor shortages could
result in wage increases, which could reduce the Company's operating margins.
RELIANCE ON KEY PERSONNEL. The Company is highly dependent upon its
executive officers and key employees. The unexpected loss of the services of any
of these individuals, particularly Cloyce A. Talbott or A. Glenn Patterson, the
Chief Executive Officer and the President of the Company, respectively, could
have a detrimental effect on the Company. The Company has no employment
agreements with any of its executive officers. The Company maintains key man
insurance on the lives of Messrs. Talbott and Patterson in the amount of $3
million each.
RISKS OF OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND PRODUCTION. The
search for oil and natural gas often results in unprofitable efforts, not only
from dry holes, but also from wells which, though productive, do not produce oil
or natural gas in sufficient quantities to return a profit on the costs
incurred. No assurance can be given that any oil or natural gas reserves located
by the Company in the future will be commercially productive. In addition, the
cost of drilling, completing and operating wells is often uncertain, and
drilling may be delayed or canceled as a result of many factors, including
unacceptably low oil and natural gas prices, oil and natural gas property title
problems, inclement weather conditions and financial instability of well
operators and working interest owners. Furthermore, the availability of a ready
market for the Company's oil and natural gas depends on numerous factors beyond
its control, including demand for and supply of oil and natural gas, general
economic conditions, proximity of natural gas reserves to pipelines, weather
conditions and government regulation.
COMPETITION. The Company encounters intense competition in its contract
drilling operations from other drilling contractors. The competitive environment
for contract drilling services involves such factors as drilling rates,
availability and condition of drilling rigs and equipment, reputation and
customer relations. The Company faces strong competition from major oil
companies, independent oil and natural gas companies and individual producers
and operators in acquiring oil and natural gas leases for exploration and
development. Many of the competitors in each of the Company's lines of business
have substantially greater financial and other resources than the Company.
OPERATING HAZARDS AND UNINSURED RISKS. Contract drilling and oil and
natural gas activities are subject to a number of risks and hazards which could
cause serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir
14
<PAGE> 15
damages. The occurrence of a significant event, including pollution or
environmental damage, could materially affect the Company's operations and
financial condition. Although the Company believes that it is adequately insured
against normal and foreseeable risks in its operations in accordance with
industry standards, such insurance may not be adequate to protect the Company
against liability from all consequences of well disasters, extensive fire damage
or damage to the environment. No assurance can be given that the Company will be
able to maintain adequate insurance in the future at rates it considers
reasonable or that any particular types of coverage will be available.
Furthermore, a portion of the Company's contract drilling is done on a turnkey
basis, which involves substantial economic risks.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. The Company's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells, including
laws and regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent years,
and may in certain circumstances impose strict liability, rendering a person
liable for environmental damage without regard to negligence or fault on the
part of such person. To date, the Company has not been required to expend
significant resources in order to comply with applicable environmental laws and
regulations nor has it incurred any fines or penalties for noncompliance.
However, compliance costs under existing legal requirements and under any new
requirements could become material, and the Company could incur liability in the
future for noncompliance. Additional matters subject to governmental regulation
include discharge permits for drilling operations, performance bonds, reports
concerning operations, spacing of wells, unitization and pooling of properties,
disposal of produced water and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. In addition, although the
Company performed visual inspections on three yards acquired by it during 1996,
the Company did not obtain Phase I environmental reports on any of the yards,
which reports, if obtained, may have revealed potential environmental
liabilities not otherwise apparent from the Company's visual inspection. The
Company typically does not have indemnifications from the respective sellers of
the yards for preclosing environmental liabilities. Accordingly, any loss
resulting from environmental liabilities from any of these yards, or from any
other properties acquired or sold by the Company or its predecessors in
interest, may be borne by the Company.
UNCERTAINTY OF OIL AND NATURAL GAS RESERVE ESTIMATES. Estimates of the
Company's proved developed reserves and future net revenues are based on
engineering reports prepared by an independent petroleum engineer based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. These estimates are based on several
assumptions that the Securities and Exchange Commission requires oil and natural
gas companies to use, including for example, constant oil and natural gas
prices. Such estimates are inherently imprecise indications of future net
revenues. Actual future production, revenues, taxes, production costs and
development costs may vary substantially from those assumed in the estimates.
Any significant variance could materially affect the estimates. In addition, the
Company's reserves might be subject to upward or downward adjustment based on
future production, results of future exploration and development, prevailing oil
and natural gas prices and other factors.
---------------------------------------------
15
<PAGE> 16
GLOSSARY
The following are definitions of certain industry terms used in this
report:
Bbls....................... Refers to barrels of 42 U.S. gallons and represents
the basic unit for measuring the production of
crude oil and condensate.
BOE........................ Refers to barrels of oil equivalent. In reference
to natural gas, natural gas equivalents are
determined using the rate of six Mcf of natural gas
(including natural gas liquids) to one Bbl of crude
oil or condensate.
Completion................. Those processes necessary before production occurs
from a well and after the drillers have reached the
producing formation.
Developed Acreage.......... Lease acres spaced or assigned to productive wells.
Development Well........... A well drilled within the proved area of an oil or
gas reservoir to a depth known to be productive.
Dry Hole................... An exploratory or development well found to be
incapable of producing either oil or gas in paying
quantities (i.e., proceeds of production exceed
operating expenses).
Exploratory Well........... A well drilled to find and produce oil and gas in
an unproved area, to find a new reservoir in a
field previously found to be productive of oil or
gas in another reservoir, or to extend a known
reservoir.
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.
Gross Acre................. An acre in which a working interest is owned. The
number of gross acres is the total number of acres
in which a working interest is owned.
Gross Well................. A well in which a working interest is owned. The
number of gross wells is the total number of wells
in which a working interest is owned.
Horizontal Drilling........ High angle directional drilling with lateral
penetration of one or more productive reservoirs.
Leasehold Interest......... Full or partial interest in oil and gas mineral
rights, fee rights, or other rights authorizing the
owner of such interest to drill for, produce, and
sell oil and gas upon payment of delay rentals,
bonuses, and/or royalties. Leases are generally
acquired from federal and state governments and
private landowners.
MBOE....................... Refers to 1,000 BOE.
MMcf....................... Refers to a volume of 1,000,000 cubic feet under
prescribed conditions of pressure and temperature.
Mcf........................ Refers to a volume of 1,000 cubic feet under
prescribed conditions of pressure and temperature
and represents the basic unit for measuring volumes
of produced gas.
Net Acre................... Deemed to exist when the sum of the fractional
ownership working interests in gross acres equals
one. The number of net acres is the sum of the
fractional ownership working interests owned in
gross acres expressed as whole numbers and
fractions thereof.
16
<PAGE> 17
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.
Productive Well............ A well that is found capable of producing oil
and/or gas in paying quantities.
Proved Reserves............ Estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and
engineering data demonstrate with reasonable
certainty to be recoverable in future years from
known reservoirs under existing economic
conditions; i.e., prices and costs as of the date
the estimate is made.
Proved Developed
Reserves................... Proved oil and gas reserves which can be expected
to be recovered through existing wells with
existing equipment and operating methods.
Rig Utilization Rate or
Utilization Rate......... Rig utilization is based on a 365-day year for rigs
available for service during the periods indicated.
A rig is utilized when it is operating or being
moved, assembled or dismantled under contract.
Undeveloped Acreage........ Leased acres on which wells have not been drilled
or completed to a point that would permit the
production of commercial quantities of oil and gas,
regardless of whether such acreage contains proved
reserves.
Working Interest........... The operating interest under a lease, the owner of
which has the right to explore for and produce oil
and gas covered by the lease. The full working
interest bears 100% of the costs of exploration,
development, production and operation, and is
entitled to the portion of the gross proceeds of
production which remains after proceeds allocable
to royalty and overriding royalty interests or
other lease burdens have been deducted.
3-D Seismic................ Seismic data that yields a three-dimensional
picture of the subsurface.
---------------------------------------------
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.01 per share is publicly traded on
the Nasdaq National Market and is quoted under the symbol "PTEN."
The following table sets forth the high and low sales prices of the
Company's common stock for the periods indicated:
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ------ ------
<S> <C> <C>
First quarter............................................... $ 7.75 $ 6.00
Second quarter.............................................. 10.25 7.00
Third quarter............................................... 13.88 9.25
Fourth quarter.............................................. 14.63 10.50
1996
----
First quarter............................................... $15.63 $11.25
Second quarter.............................................. 18.13 13.25
Third quarter............................................... 20.25 15.00
Fourth quarter.............................................. 30.25 17.50
</TABLE>
As of March 19, 1997, there were approximately 240 holders of record of the
Company's common stock.
The Company has not declared or paid cash dividends on its common stock in
the past and does not expect to declare or pay any cash dividends on its common
stock in the foreseeable future. The Company instead intends to retain its
earnings to support the operations and growth of its business. 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.
The following subparagraphs set forth information concerning equity
securities sold by the Company during 1996 but not registered under the
Securities Act of 1993, as amended (the "Act"):
(a) During November 1996, the Company issued a total of 20,000 shares of
its common stock to a consultant of the Company pursuant to the exercise by
the consultant of stock options previously granted to him as partial
compensation for public relation services rendered to the Company. The
exercise price for the shares was $9.625 per share or a total of $192,500.
No underwriter was involved in the transaction, and no sales commissions,
fees or similar compensation were paid to any person in connection with the
issuance of the shares. The Company believes that the issuance of the
shares was exempt from the registration requirements of Section 5 of the
Act by virtue of Section 4(2), as a transaction not involving a public
offering. More specifically, the Company believes that the consultant was
able to fend for himself with access to information upon which an
investment decision could be made.
(b) During July 1996, a total of 38,224 shares were issued to a total
of nine persons pursuant to the exercise of redeemable warrants initially
issued by the Company to the underwriters of the Company's initial public
offering ("IPO") in November 1993 (the "IPO Underwriters"). The
underwriters' warrants were transferred to each of the respective nine
persons by the underwriters in April 1994. The exercise price of the
redeemable warrants was $7.50 per share, and the exercise was effected on a
cashless basis. Each of the nine persons was an officer or otherwise
affiliated with one of the two IPO Underwriters at the time of the IPO. No
sales commissions, fees or similar compensation were paid to any person in
connection with the issuance of the shares. The registrant believes the
issuance of the shares was exempt from the registration requirements of
Section 5 of the Act by virtue of Section 4(2), as transactions not
involving a public offering. More specifically, each of the nine persons
was able to fend for himself with access to information upon which an
investment decision could be made.
18
<PAGE> 19
(c) During June and July 1996, options to purchase a total of 7,000
shares were granted under the Company's Non-Employee Directors' Stock
Option Plan to three of the Company's directors: Robert C. Gist -- options
to purchase 1,000 shares; Kenneth E. Davis -- options to purchase 1,000
shares; and Vincent A. Rossi, Jr. -- options to purchase 5,000 shares. No
sales commissions, fees or similar compensation were paid to any person in
connection with the grant of those options. The Company believes that the
grant of the options and the continuing offer of the shares underlying the
options was and is exempt from the registration requirements of Section 5
of the Act by virtue of Section 4(2) thereof, as transactions not involving
a public offering. More specifically, each of the optionees is a director
of the Company and is able to fend for himself with access to information
upon which an investment decision can be made.
(d) During December 1996, the Company issued a total of 52,000 shares
of its common stock and a $400,000 principal amount promissory note to
three privately-held corporations and a general partnership (collectively,
the "Sellers") as consideration for the purchase by the Company of three
drilling rigs. The market value of the shares on the date of issuance
thereof was $27.50 or an aggregate of $1,430,000. The names of the Sellers
were: Rig I Group, Inc. ("Rig I"), Phoenix Drilling, Inc., ("Phoenix"),
Welch & Howell Drilling, Inc. ("Welch & Howell") and Imperial Equipment Co.
("Imperial"). Each of the Sellers was located in California, with Rig I,
Phoenix and Welch & Howell being California corporations and Imperial a
California general partnership. The shares were variously issued to Rig I,
Phoenix and Imperial and the note was issued to Welch & Howell, in each
case based on the ownership of each of those entities in the three drilling
rigs. No underwriter was involved in the transaction and no sales
commissions, fees or similar compensation were paid to any person in
connection with the issuance of the shares and the note. The Company
believes that the issuance of the shares and the note was exempt from the
registration requirements of Section 5 of the Act by virtue of Rule 506
under Regulation D of the Act. A Form D relating to this transaction and
the issuance of the shares and the note was filed with the Securities and
Exchange Commission on or about December 18, 1996. The Company believes
that all conditions to reliance on Rule 506 were met.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1993, 1994, 1995 and 1996 and for each of the four years then ended were derived
from the consolidated financial statements of the Company which have been
audited by Coopers & Lybrand L.L.P., independent accountants. This financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial
Statements" and related notes thereto, included as Items 7 and 8, respectively,
of this report. The data presented as of December 31, 1992 and for the year then
ended has not been audited and was prepared by the Company using stand alone
audited financial statements of the Company and Tucker for that period. The
Company's previously reported data for the periods prior to 1996 have been
restated to reflect the Tucker merger under the pooling of interests method of
accounting.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1992 1993 1994 1995 1996
----------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling..................................... $34,417 $37,746 $54,823 $57,599 $73,590
Oil and gas.................................. 4,171 5,147 4,707 6,845 10,118
------- ------- ------- ------- -------
Total................................ 38,588 42,893 59,530 64,444 83,708
------- ------- ------- ------- -------
Operating costs and expenses:
Drilling..................................... 29,376 30,631 43,036 46,505 59,564
Oil and gas.................................. 1,800 1,920 2,654 2,828 4,014
Depreciation, depletion and amortization..... 4,338 4,655 4,912 7,523 9,960
General and administrative................... 3,686 4,014 4,793 5,063 5,416
------- ------- ------- ------- -------
Total................................ 39,200 41,220 55,395 61,919 78,954
------- ------- ------- ------- -------
Operating income (loss)........................ (612) 1,673 4,135 2,525 4,754
------- ------- ------- ------- -------
Other income (expense)......................... 595 66 679 (111) (2,737)
------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items.......................... (17) 1,739 4,814 2,414 2,017
Income tax expense (benefit)................... 391 123 (193) (787) (2,254)
------- ------- ------- ------- -------
Income (loss) before extraordinary items....... (408) 1,616 5,007 3,201 4,271
Extraordinary items............................ 458 -- -- -- --
------- ------- ------- ------- -------
Net income..................................... $ 50 $ 1,616 $ 5,007 $ 3,201 $ 4,271
======= ======= ======= ======= =======
Net income per common share:
Primary...................................... $ 0.02 $ 0.51 $ 1.24 $ 0.73 $ 0.86
======= ======= ======= ======= =======
Assuming full dilution....................... $ 0.02 $ 0.51 $ 1.24 $ 0.71 $ 0.85
======= ======= ======= ======= =======
Weighted average number of common shares
outstanding:
Primary...................................... 3,073 3,176 4,030 4,379 4,953
======= ======= ======= ======= =======
Assuming full dilution....................... 3,073 3,176 4,030 4,521 5,021
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Total assets................................... $27,877 $33,920 $49,509 $62,991 $87,913
Notes payable.................................. 4,374 2,459 6,886 13,816 25,849
Stockholders' equity........................... 17,044 23,385 30,310 37,656 43,482
</TABLE>
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<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Item 7 contains forward-looking statements which are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements relating to
liquidity, financing of operations, continued volatility of oil and natural gas
prices, estimates of, and budgets for, capital expenditures in the oil and
natural gas segment and upgrades for certain of the drilling rigs acquired by
the Company in 1996, source and sufficiency of funds required for capital needs
and additional rig acquisitions (if further opportunities arise), future
utilization of net operating loss carryforwards, impact of inflation on the
Company's financial position and impact of Statement of Financial Accounting
Standards No. 128 on the Company's earnings per share, and other such matters.
The words "believes," "budgeted," "expects" or "estimates" and similar
expressions identify forward-looking statements. The Company does not undertake
to update, revise or correct any of the forward-looking information. Readers are
cautioned that such forward-looking statements should be read in conjunction
with the Company's disclosures under the heading: "Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995" beginning on page 13.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, Patterson had working capital of approximately
$17,592,000 and cash and cash equivalents of approximately $3,494,000 as
compared to working capital of approximately $14,682,000 and cash and cash
equivalents of approximately $9,344,000 as of December 31, 1995. For the year
ended December 31, 1996, the Company generated net cash from operations of
approximately $4,654,000, borrowed additional funds in the amount of $17,469,000
and received approximately $914,000 from the exercise of stock options. These
funds, along with $3,156,000 of proceeds from the sale of property and equipment
and the maturity of investment securities, were used primarily to acquire
drilling and related equipment of approximately $19,867,000, to fund leasehold
acquisition, exploration and development of approximately $4,106,000, and to
reduce and payoff certain notes payable of $5,837,000. In 1995, the Company
generated net cash from operations of approximately $9,534,000 and received cash
from financing activities of $10,354,000. These funds, which included proceeds
from notes payable in the amount of $9,375,000, along with approximately
$2,602,000 of proceeds from the sale of property and equipment and the maturity
of investment securities, were used to acquire drilling equipment and other
related equipment of approximately $14,799,000, to fund oil and gas leasehold
acquisition, exploration and development of approximately $5,107,000 and to
reduce indebtedness for borrowed funds by approximately $2,444,000.
The Company's capital expenditures during 1994, 1995 and 1996 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Contract drilling:
Acquisitions........................................ $ 4,500 $ 5,256 $13,080
Modifications, upgrades and drill pipe purchases.... 4,149 9,543 6,787
Oil and natural gas................................... 2,968 5,107 4,106
------- ------- -------
Total....................................... $11,617 $19,906 $23,973
======= ======= =======
</TABLE>
Beginning in the third quarter of 1995, the Company accelerated its drill
pipe replacement program in response to anticipated shortages of drill pipe and
related increases in prices. During the two fiscal years ended December 31, 1996
the Company spent approximately $9,125,000 for new drill pipe, representing 26%
of total capital expenditures for contract drilling during that period.
During 1996, the Company's oil and natural gas segment incurred capital
expenditures of approximately $4,106,000 relating primarily to its activities in
the Austin Chalk Trend, South Texas and in the Permian Basin. The Company has
budgeted approximately $5,000,000 in capital expenditures for 1997, consisting
of approximately $2,000,000 for the development of its properties in the Austin
Chalk Trend, $500,000 in South Texas and $2,500,000 in the Permian Basin.
21
<PAGE> 22
Through several acquisitions, the Company has expanded its operable
drilling rig fleet, adding 48 drilling rigs (39 currently operable) in three
years, and has also enhanced its ability to upgrade and maintain its fleet using
the additional parts and equipment acquired in these transactions. In 1994, the
Company acquired certain assets of Questor Drilling Corp. for $6,375,000
consisting of $4,500,000 in cash and 250,000 shares of the Company's common
stock. These assets included nine drilling rigs. During October 1996, the
Company acquired Sledge for a net purchase price of $8,900,000. Included with
the six drilling rigs acquired in this transaction was an inventory of drilling
equipment valued by the Company at approximately $4,411,000. The Company
acquired 15 (six operable) additional drilling rigs and other related assets in
two separate transactions during the last two months of 1996 for a total
purchase price of approximately $4,180,000, consisting of approximately
$2,350,000 in cash, a $400,000 promissory note and 52,000 shares of the
Company's common stock. The Company has budgeted approximately $7,500,000 to
modify and upgrade these drilling rigs. See Items 1 and 2 "Business and
Properties -- Recent Acquisitions" and Note 2 of Notes to Consolidated Financial
Statements included as a part of Item 8 of this report for further discussion of
the Company's acquisitions.
During September 1996, the Company entered into a credit facility with The
CIT Group/Equipment Financing, Inc. ("CIT") under which the Company borrowed
approximately $22,000,000. The proceeds from the loan were used to repay loans
of approximately $3,800,000 and $7,700,000 to U.S. Bancorp Leasing and
Financing, Inc. and CIT, respectively, and to fund the cash portion of the
purchase price in the Sledge acquisition. Amounts outstanding under the CIT loan
were repaid in February 1997 with proceeds provided by the Company's equity
offering completed during January 1997. See Notes 5 and 17 of Notes to
Consolidated Financial Statements included as a part of Item 8 of this report.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations should be sufficient
to meet the Company's immediate capital needs. From time to time, the Company
reviews acquisition opportunities relating to its business segments. While the
Company has no definitive agreements to acquire additional assets, suitable
opportunities may arise in the future. The timing, size or success of any
acquisition and the associated capital commitments are unpredictable. Should
further opportunities for growth requiring additional capital arise, the Company
believes it would be able to satisfy these needs through a combination of
working capital, cash generated from operations and either debt or equity
financing. However, there can be no assurance that such capital will be
available.
RESULTS OF OPERATIONS
THE FOLLOWING RESULTS OF OPERATIONS IS BASED SOLELY ON HISTORICAL FINANCIAL
INFORMATION THAT HAS BEEN RESTATED TO REFLECT THE MERGER OF THE COMPANY AND
TUCKER ON JULY 30, 1996 UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
For the year ended December 31, 1996, contract drilling revenues were
approximately $73.6 million as compared to $57.6 million for the same period in
1995, an increase of 28%. Average rig utilization for the same comparative
periods increased by approximately 7% to 76% for the year ended December 31,
1996. Direct drilling costs for each of the years ended December 31, 1996 and
1995 were approximately $59.6 million and $46.5 million, respectively,
representing approximately 81% of related contract drilling revenues for each of
the two years. The increase in contract drilling revenues and direct drilling
costs was due primarily to the acquisition of 13 operable drilling rigs during
October, November and December of the fiscal year ended 1996 and the increase in
the average rig utilization rate attained during the year. General and
administrative expense for the contract drilling segment was approximately $4.0
million and $3.7 million for the years ended December 31, 1996 and 1995,
respectively. Depreciation expense was approximately $6.8 million for the year
ended December 31, 1996 as compared to $5.1 million in 1995. The increase in
depreciation expense was due primarily to the Company's significant purchases of
approximately $5.9 million of new drill pipe during the 15 months ended December
31, 1996 as well as, the aforementioned additions to the Company's operable
drilling rig fleet. These higher levels of depreciation expense will continue
for the foreseeable future. For the
22
<PAGE> 23
year ended December 31, 1996, income from operations of this segment was
approximately $3.9 million as compared to approximately $3.4 million in 1995.
Oil and natural gas revenues were approximately $8.3 million for the year
ended December 31, 1996, as compared to approximately $5.4 million in 1995. The
volume of crude oil and natural gas sold increased by 17% in 1996, as compared
to 1995. The average price per Bbl was $20.99 in 1996, as compared to $17.48 in
1995, and the average price per Mcf of natural gas was $2.01 in 1996 as compared
to $1.51 in 1995. Lease operating and production costs were $3.91 per BOE in
1996, as compared to $3.61 per BOE in 1995. General and administrative expense
for the oil and gas segment was approximately $1.4 million for each of the years
ended December 31, 1995 and 1996. Exploration costs increased by approximately
26% to approximately $466,000 for the year ended December 31, 1996 as a result
of the addition of an exploration office in West Texas as well as the Company's
continued utilization of 3-D seismic technology in its exploration and
production operations. Depreciation, depletion and amortization expense was
approximately $3.1 million in 1996, as compared to $2.4 million in 1995. This
increase was largely attributable to increased volumes of production as
described above. In 1996, impairment of certain of the Company's oil and gas
properties resulted in approximately $549,000 of expense as compared to $159,000
for the same period ended in 1995. Other revenues generated from the oil and
natural gas segment, consisting primarily of fees generated from the lease
operating activities of the segment, were approximately $1.8 million and $1.4
million at December 31, 1996 and 1995, respectively. For the year ended December
31, 1996, income from operations of the oil and gas segment was approximately
$1.6 million compared to a loss of approximately $51,000 for the same period in
1995.
For the year ended December 31, 1996, interest expense was approximately
$1.6 million as compared to $1.1 million in 1995. The increase was primarily
attributable to an approximate 92% increase in the average outstanding principal
balance of notes payable. Additional general corporate expense of approximately
$2.3 million was incurred during the year ended December 31, 1996 relative to
the acquisition of Tucker. In 1996, the Company recognized a net gain on the
sale of certain fixed assets of approximately $546,000 as compared to
approximately $374,000 recognized a year earlier. The increase was attributable
to the sale of six drilling rig generator sets and approximately 25,000 feet of
used drill pipe.
In 1996, the Company recorded net income tax benefits of approximately $2.3
million as compared to approximately $787,000 in 1995. The increase was
attributable to approximately $2.4 million of net deferred tax benefit generated
in the current year which was primarily a result of a 100% reduction of the
valuation allowance against existing deferred tax assets. The Company's deferred
tax assets consist primarily of net operating loss carryforwards which
management believes will be utilized in future periods to offset the net
earnings of those fiscal periods.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
For the year ended December 31, 1995, contract drilling revenues were
approximately $57.6 million as compared to $54.8 million for the same period in
1994, an increase of 5%. Direct contract drilling costs for 1995 and 1994 were
approximately $46.5 million and $43.0 million, respectively, representing
approximately 81% of contract drilling revenues in 1995 as compared to 78% in
1994. Average rig utilization was 69% in 1995 as compared to 76% in 1994. The
increase in contract drilling revenues and direct contract drilling costs was
due primarily to the increased number of drilling rigs included in the Company's
operating drilling fleet. The decrease in gross profit margin in 1995 was due to
a decrease in rig utilization and certain contracts being renegotiated from
footage to daywork contracts. The daywork contracts resulted in lower revenues
and costs per day and lower risk and profitability for the Company. General and
administrative expense for the contract drilling segment was approximately $3.7
million in 1995 as compared to approximately $3.6 million in 1994. The increase
in general and administrative expense was due primarily to the increase in lease
payments of the aircraft used by the Company, starting in January 1995, from
$4,500 to $9,200 per month, the increase in fuel costs due to increased usage of
the plane during 1995 and increased compensation payments made to one of the
Company's investor relations consultants. Depreciation expense for the contract
drilling segment was approximately $5.0 million in 1995 as compared to $3.5
million in 1994. The increase in depreciation expense was due primarily to the
Company's significant purchases of new drill pipe during the fourth quarter of
1995,
23
<PAGE> 24
the Questor acquisition in 1994 and the addition of three drilling rigs in 1995.
In 1995, income from this segment was approximately $3.4 million as compared to
approximately $5.5 million in 1994.
Oil and natural gas revenue was approximately $5.4 million in 1995 as
compared to approximately $3.6 million for 1994. The volume of crude oil and
natural gas sold increased by 54% and 58%, respectively, for 1995 as compared to
1994. The Company sold approximately 191,000 Bbls of oil in 1995 as compared to
124,000 Bbls in 1994 and approximately 1,362,000 Mcf of natural gas in 1995 as
compared to 860,000 Mcf of natural gas for 1994. The average price per Bbl was
$17.48 for 1995 as compared to $16.40 for 1994, and the average price per Mcf of
natural gas was $1.51 for 1995 as compared to $1.68 for 1994. Lease operating
and production costs were $3.61 per BOE in 1995 as compared to $4.27 per BOE in
1994. Depreciation, depletion and amortization for the oil and natural gas
segment was approximately $2.4 million in 1995 as compared to approximately $1.3
million in 1994. The increase was due primarily to increased production of oil
and natural gas as discussed above. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million in 1995 as compared
to $1.2 million in 1994. In 1995, the loss from the oil and natural gas segment
was approximately $51,000 as compared to $489,000 in 1994.
In 1995, interest expense was approximately $1.1 million as compared to
$366,000 in 1994. This increase was primarily attributable to a substantial
increase in the outstanding principal balance of the Company's notes payable as
compared to 1994.
In 1995, the Company recorded net income tax benefits of approximately
$787,000 as compared to approximately $193,000 in 1994. The increase was due
primarily from a deferred tax benefit of approximately $1.0 million which was
the result of revisions in management's estimates with regard to the Company's
deferred tax assets, which are primarily comprised of net operating loss
carryforwards. The deferred tax benefit in 1995 exceeded that of 1994 by
approximately $594,000.
INCOME TAXES
At December 31, 1996, the Company had tax net operating loss ("NOL")
carryforwards of approximately $7,090,000. These NOL carryforwards expire at
various dates from 1998 through 2012, subject to certain limitations. Prior to
August 3, 1995, the Company realized substantial federal income tax savings due
to the NOL carryforwards. The utilization of these NOL carryforwards prior to
that date effectively reduced the current federal income tax rate from
approximately 34% to approximately 2.5%. During 1995, the Company's NOL
carryforwards became subject to an annual limitation due to a change of over 50%
in the stock ownership of the Company as defined in Internal Revenue Service
Code Section 382(g). Such limitations have been imposed upon the net earnings of
the Company excluding any contribution from the operations acquired in
Patterson's merger with Tucker and separately imposed upon the net earnings
generated from the operations of the Tucker assets acquired in the merger. The
NOL carryforwards that can now be utilized to offset Patterson income in any
year will be equal to approximately $1,808,000, which is determined by the value
of Patterson's equity on August 2, 1995, the day prior to ownership change,
times 5.88%, the federal long-term exempt rate on that date as published by the
U.S. Treasury Department. Similarly, the NOL carryforwards that can now be
utilized to offset Tucker income will be limited to approximately $1,540,000
which is determined by the value of Tucker's equity on July 29, 1996, the day
prior to consummation of the merger, times 5.78%, the federal long-term exempt
rate on that date.
During 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes." The Company recognized
the benefit of deferred income taxes of approximately $407,000 during 1994,
which increased to approximately $1,000,000 during 1995, and further increased
to approximately $2,428,000 in 1996. The benefit of deferred income taxes during
each of these periods represented management's estimate of future benefits to be
received by the Company primarily from its NOL carryforwards. Deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
year in which those temporary differences are expected to be recovered or
settled. As a result of the Company's recognizing the benefit of its deferred
income taxes, in the future, as these benefits
24
<PAGE> 25
are utilized, the Company will incur deferred income tax expense in a like
amount. This deferred income tax expense will significantly increase the income
tax expense of the Company and adversely affect the Company's net income.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENT ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
128") which is effective for the Company's fiscal year beginning January 1,
1997. Statement 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Some of the changes made to current
EPS standards include: (i) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (ii) eliminating
the modified treasury stock method and the three percent materiality provisions,
and (iii) revising the contingent share provisions and the supplemental EPS data
requirements. Statement 128 also requires dual presentation of basic and diluted
EPS on the face of the income statement, as well as a reconciliation of the
numerator and denominator used in the two computations of EPS. Basic EPS is
defined by Statement 128 as net income from continuing operations divided by the
average number of common shares outstanding without the consideration of common
stock equivalents which may be dilutive to EPS. The Company's current
methodology for computing its fully diluted EPS will not change in future
periods as a result of its adoption of Statement 128. Implementation of
Statement 128 is not expected to have a material effect on the Company's EPS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are filed as a part of this report at the end of Part
IV hereof beginning at page F-1, Index to Consolidated Financial Statements and
are incorporated herein by this reference.
ITEM 9. 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 1997 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-K and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
25
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1 of this report.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
financial statements or notes thereto.
(a)(3) 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 -- Restated Certificate of Incorporation of the
Registrant(13)
3.2 -- Bylaws of the Registrant(1)
4.1 -- Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock
and Preferred Stock.(14)
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 -- 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.(7)
10.4.1 -- Revolving Line of Credit Promissory Note dated December
1, 1995.(7)
10.4.2 -- 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.(7)
10.4.3 -- 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.(7)
10.5 -- Aircraft Lease, dated February 15, 1995, (effective
January 1, 1995) between Talbott Aviation, Inc. and
Patterson Energy, Inc.(3)
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C>
10.5.1 -- Aircraft Lease, dated January 15, 1997, (effective
January 1, 1997) between Talbott Aviation, Inc. and
Patterson Energy, Inc.
10.6 -- Plan and Agreement of Merger, dated as of April 21, 1995,
by and between Navajo Rigs, Inc. and Patterson Energy,
Inc.(6)
10.7 -- 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.(6)
10.8 -- Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(6)
10.8.1 -- Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(8)
10.9 -- Crude Oil Purchase Contract, dated October 19, 1994,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(7)
10.9.1 -- Crude Oil Purchase Contract, dated October 24, 1995,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(8)
10.10 -- Patterson Energy, Inc. 1993 Stock Incentive Plan.(7)
10.11 -- Patterson Energy, Inc. Non-Employee Director's Stock
Option Plan.(7)
10.12 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and
Shimmerlik Corporate Communications, Inc.(8)
10.13 -- Extended Consulting Agreement, dated as of April 1, 1995,
between Patterson Energy, Inc. and Shimmerlik Corporate
Communications, Inc.(8)
10.14 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(8)
10.15 -- Consulting and Stock Option Agreement, dated as of
February 15, 1995, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(8)
10.16 -- Consulting and Stock Option Agreement, dated as of August
2, 1995, between Patterson Energy, Inc. and E. Peter
Hoffman, Jr.(8)
10.17 -- Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(9)
10.17.1 -- Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(10)
10.18 -- Loan Agreement, dated September 27, 1996, among The CIT
Group/Equipment Financing, Inc., Patterson Drilling
Company and Patterson Energy, Inc.(11)
10.18.1 -- Secured Promissory Note of Patterson Drilling Company,
dated September 27, 1996.(11)
10.18.2 -- Security Agreement, dated September 27, 1996, between
Patterson Drilling Company and The CIT Group/Equipment
Financing, Inc.(11)
10.18.3 -- Guaranty, dated September 27, 1996, by Patterson Energy,
Inc. in favor of The CIT Group/Equipment Financing,
Inc.(11)
10.19 -- Stock Purchase Agreement, dated October 23, 1996, among
Patterson Drilling Company and H. Gene Sledge, Joyce A.
Sledge, David W. Sledge and Michael G. Sledge.(12)
10.19.1 -- Consulting Agreement dated October 23, 1996, between
Patterson Drilling Company and David W. Sledge.(12)
10.19.2 -- Consulting Agreement dated October 23, 1996, between
Patterson Drilling Company and Michael G. Sledge.(12)
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
10.19.3 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and Michael G.
Sledge.(12)
10.19.4 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and H. Gene
Sledge.(12)
10.19.5 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and David W.
Sledge.(12)
10.19.6 -- Asset Purchase Agreement dated October 23, 1996, by and
between Sledge Ranches, Ltd. and Sledge Cattle Company,
Inc.(12)
10.20 -- Asset Purchase Agreement, dated November 23, 1996,
between Patterson Drilling Company and Hondo Drilling
Company.
10.21 -- Asset Purchase Agreement, dated December 5, 1996 among
and between Patterson Energy, Inc., Patterson Drilling
Company, Rig I Group, Inc., Phoenix Drilling, Inc., Welch
& Howell Drilling, Inc., and Imperial Equipment Co.
10.21.1 -- Promissory Note dated December 5, 1996, by and between
Patterson Drilling Company and Welch and Howell Drilling,
Inc.
11.1 -- Statement re computation of per share earnings.
21.1 -- List of Subsidiaries of Patterson Energy, Inc.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule.
</TABLE>
28
<PAGE> 29
- ---------------
(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 10-KSB for the year ended December 31, 1994.
(4) 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.
(5) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated September 15, 1994 and filed on November 11, 1994.
(6) 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).
(7) Incorporated by reference to Item 5. "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(8) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(9) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.
(10) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.
(11) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated September 27, 1996 and filed on October 4, 1996.
(12) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996 and filed on November 6, 1996.
(13) Incorporated by reference to Item 6. "Exhibits and Reports on Form 8-K" to
Form 10-Q dated June 30, 1996 and filed on August 12, 1996.
(14) Incorporated by reference to Item 16. "Exhibits" to a Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.
(b) Reports on Form 8-K.
Current reports on Form 8-K filed during the quarter ended December 31,
1996 related to:
(i) The loan agreement, secured promissory note, security agreement
and guaranty executed on September 27, 1996, by and between The CIT
Group/Equipment Financing, Inc., Patterson Energy, Inc. and Patterson
Drilling Company,
(ii) The stock purchase agreement and asset purchase agreements
together with related consulting and non compete agreements, among and
between Patterson Drilling Company, Sledge Ranches, Ltd., Sledge Cattle
Company, Inc. and related parties thereto, dated October 23, 1996 and
(iii) The announcement of Patterson Energy, Inc.'s equity offering
filed with the Securities and Exchange Commission on December 18, 1996.
29
<PAGE> 30
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 21, 1997 By: /s/ CLOYCE A. TALBOTT
----------------------------------
Cloyce A. Talbott
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 21, 1997.
<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
/s/ VINCENT A. ROSSI, JR. Director
- -----------------------------------------------------
Vincent A. Rossi, Jr.
</TABLE>
30
<PAGE> 31
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants; Coopers & Lybrand
L.L.P..................................................... F-2
Report of Independent Public Accountants; Arthur Andersen
LLP....................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and
1996................................................... F-4
Consolidated Statements of Income for each of the years
ended
December 31, 1994, 1995 and 1996....................... F-5
Consolidated Statements of Stockholders' Equity for each
of the years ended
December 31, 1994, 1995 and 1996....................... F-6
Consolidated Statements of Cash Flows for each of the
years ended
December 31, 1994, 1995 and 1996....................... F-7
Notes to Consolidated Financial Statements................ F-9
</TABLE>
F-1
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
We have audited the consolidated balance sheets of Patterson Energy, Inc.
and Subsidiaries as of December 31, 1995 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1994 and 1995 financial statements of Patterson
Drilling Company (formerly Tucker Drilling Company, Inc.) which reflect 30
percent of consolidated total assets as of December 31, 1995 and 41 and 28
percent of consolidated total operating revenues in 1994 and 1995, respectively.
Those financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Patterson Drilling Company, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
March 10, 1997
F-2
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Tucker Drilling Company, Inc.
We have audited the balance sheet of Tucker Drilling Company, Inc. (a
Delaware corporation) as of March 31, 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the two
years in the period ended March 31, 1996, prior to the restatement (and,
therefore, are not presented herein) for the pooling of interests as described
in Note 2 to the consolidated financial statements of Patterson Energy, Inc.,
and Subsidiaries included in the Annual Report on Form 10-K. 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 the results of its operations and its cash flows
for each of the two years in the period ended March 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
May 16, 1996
F-3
<PAGE> 34
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9,344,494 $ 3,493,626
Marketable securities..................................... 524,323 543,867
Accounts receivable:
Trade.................................................. 12,619,673 23,742,631
Oil and gas sales...................................... 712,497 999,458
Costs of uncompleted drilling contracts in excess of
related billings....................................... -- 273,785
Deferred income taxes..................................... 1,058,947 1,483,000
Undeveloped oil and natural gas properties held for
resale................................................. 2,122,112 4,670,157
Other current assets...................................... 351,579 274,928
----------- -----------
Total current assets.............................. 26,733,625 35,481,452
----------- -----------
Property and equipment, at cost, net........................ 34,799,022 51,308,119
Deferred income taxes....................................... 347,892 --
Deposits on workers' compensation insurance policy.......... 343,760 412,001
Other assets................................................ 766,546 711,733
----------- -----------
Total assets...................................... $62,990,845 $87,913,305
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable....................... $ 909,634 $ 116,667
Accounts payable:
Trade.................................................. 7,115,697 11,696,766
Revenue distribution................................... 1,686,626 2,431,901
Other.................................................. 297,184 965,905
Accrued expenses.......................................... 2,042,254 2,678,202
----------- -----------
Total current liabilities......................... 12,051,395 17,889,441
----------- -----------
Deferred income taxes....................................... -- 96,038
Deferred liabilities........................................ 376,746 713,786
Notes payable, less current maturities...................... 12,906,473 25,731,923
----------- -----------
13,283,219 26,541,747
----------- -----------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock -- par value $.01; authorized 1,000,000
shares, no shares issued............................... -- --
Common stock -- par value $.01; authorized 5,000,000
shares with 4,747,083 shares issued at December 31,
1995 and authorized 9,000,000 shares with 4,943,591
issued at December 31, 1996............................ 47,471 49,436
Additional paid-in capital................................ 19,047,037 21,358,447
Retained earnings......................................... 18,561,723 22,074,234
----------- -----------
Total stockholders' equity........................ 37,656,231 43,482,117
----------- -----------
Total liabilities and stockholders' equity........ $62,990,845 $87,913,305
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 35
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Drilling.......................................... $54,822,766 $57,599,180 $73,590,367
Oil and gas sales................................. 3,593,786 5,399,536 8,299,477
Well operation fees............................... 979,756 1,296,257 1,499,331
Other............................................. 133,240 148,976 318,655
----------- ----------- -----------
59,529,548 64,443,949 83,707,830
----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs............................. 43,035,526 46,504,502 59,563,904
Lease operating and production.................... 1,141,391 1,509,206 2,011,968
Impairment of oil and gas properties.............. -- 159,403 548,838
Exploration costs................................. 233,547 369,133 466,315
Dry holes and abandonments........................ 1,279,133 791,221 986,917
Depreciation, depletion and amortization.......... 4,911,929 7,522,695 9,959,638
General and administrative........................ 4,793,484 5,062,940 5,416,448
----------- ----------- -----------
55,395,010 61,919,100 78,954,028
----------- ----------- -----------
Operating income.................................... 4,134,538 2,524,849 4,753,802
----------- ----------- -----------
Other income (expense):
Net gain on sale of assets........................ 611,009 373,567 545,526
Interest income................................... 408,945 545,463 477,807
Interest expense.................................. (366,152) (1,064,523) (1,612,114)
Non-recurring acquisition costs................... -- -- (2,268,331)
Other............................................. 25,020 34,946 119,964
----------- ----------- -----------
678,822 (110,547) (2,737,148)
----------- ----------- -----------
Income before income taxes.......................... 4,813,360 2,414,302 2,016,654
----------- ----------- -----------
Income tax expense (benefit):
Current........................................... 213,349 213,560 173,972
Deferred.......................................... (406,515) (1,000,324) (2,428,395)
----------- ----------- -----------
(193,166) (786,764) (2,254,423)
----------- ----------- -----------
Net income.......................................... $ 5,006,526 $ 3,201,066 $ 4,271,077
=========== =========== ===========
Net income per common share:
Primary........................................... $ 1.24 $ 0.73 $ 0.86
=========== =========== ===========
Assuming full dilution............................ $ 1.24 $ 0.71 $ 0.85
=========== =========== ===========
Weighted average number of common shares
outstanding:
Primary........................................... 4,029,669 4,379,236 4,952,702
=========== =========== ===========
Assuming full dilution............................ 4,029,669 4,520,588 5,021,416
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 36
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>
December 31, 1993.................... 4,166,760 $41,668 253,604 $(681,120) $13,670,143 $10,354,131 $23,384,822
Issuance of common stock............. 250,000 2,500 -- -- 1,872,500 -- 1,875,000
Retirement of treasury stock......... (253,604) (2,536) (253,604) 681,120 (678,584) -- --
Exercise of stock options............ 5,476 55 -- -- 43,395 -- 43,450
Net income........................... -- -- -- -- -- 5,006,526 5,006,526
--------- ------- --------- --------- ----------- ----------- -----------
December 31, 1994.................... 4,168,632 41,687 -- -- 14,907,454 15,360,657 30,309,798
Issuance of common stock and
warrants........................... 97,500 975 -- -- 721,275 -- 722,250
Conversion of 853,748 redeemable
warrants........................... 426,874 4,269 -- -- 2,991,015 -- 2,995,284
Conversion of 75,315 redeemable
warrants........................... 35,577 355 -- -- 280,353 -- 280,708
Exercise of stock options............ 18,500 185 -- -- 146,940 -- 147,125
Net income........................... -- -- -- -- -- 3,201,066 3,201,066
--------- ------- --------- --------- ----------- ----------- -----------
December 31, 1995.................... 4,747,083 47,471 -- -- 19,047,037 18,561,723 37,656,231
Issuance of common stock............. 52,000 520 -- -- 1,429,480 -- 1,430,000
Exercise of stock options............ 106,284 1,063 -- -- 882,312 -- 883,375
Conversion of 75,315 redeemable
warrants........................... 38,224 382 -- -- (382) -- --
Net income........................... -- -- -- -- -- 4,271,077 4,271,077
Adjustment to conform fiscal years
(see Note 2)....................... -- -- -- -- -- (758,566) (758,566)
--------- ------- --------- --------- ----------- ----------- -----------
December 31, 1996.................... 4,943,591 $49,436 -- $ -- $21,358,447 $22,074,234 $43,482,117
========= ======= ========= ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 37
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 5,006,526 $ 3,201,066 $ 4,271,077
Adjustments to reconcile net income to net cash
from operating activities:
Abandonment of oil and gas properties.............. 399,694 108,867 121,272
Depreciation, depletion and amortization........... 4,911,929 7,522,695 9,959,638
Impairment of oil and gas properties............... -- 159,403 548,838
Net gain on sale of assets......................... (611,009) (373,567) (545,526)
Deferred income tax benefit........................ (406,515) (1,000,324) (2,428,395)
Change in current assets and liabilities:
(Increase) decrease in trade accounts
receivable................................. (4,666,120) 1,680,215 (10,557,550)
Increase in oil and gas sales receivable...... (47,110) (258,561) (512,431)
Increase in undeveloped oil and gas properties
held for resale............................ (549,440) (736,331) (2,548,045)
Increase in other current assets.............. (70,067) (25,777) (99,390)
Increase (decrease) in trade accounts
payable.................................... 2,825,111 (1,761,828) 4,300,919
Increase in revenue distribution payable...... 181,459 699,235 828,092
Increase in other current payables............ 1,107,299 53,495 967,101
Increase in deferred compensation liabilities...... 182,701 52,096 348,636
Net change in deposits on workers' compensation
insurance policy................................ (22,901) 213,104 --
------------ ------------ ------------
Net cash provided by operating
activities............................... 8,241,557 9,533,788 4,654,236
------------ ------------ ------------
Cash flows from investing activities:
Net sales (purchases) of investment securities..... (1,685,929) 2,046,136 1,927,018
Purchases of property and equipment................ (11,617,225) (19,906,204) (23,973,206)
Sales of property and equipment.................... 1,315,491 555,878 1,229,153
Change in other assets............................. -- (83,844) (99,424)
------------ ------------ ------------
Net cash used in investing activities...... (11,987,663) (17,388,034) (20,916,459)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable........................ 5,000,000 9,375,000 17,469,187
Payments on notes payable.......................... (573,456) (2,444,437) (5,836,704)
Issuance of common stock and redeemable warrants... -- 3,275,993 --
Proceeds from exercise of stock options............ 43,450 147,125 913,999
------------ ------------ ------------
Net cash provided by financing
activities............................... 4,469,994 10,353,681 12,546,482
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. 723,888 2,499,435 (3,715,741)
Cash and cash equivalents at beginning of period..... 6,121,171 6,845,059 7,209,367(1)
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 6,845,059 $ 9,344,494 $ 3,493,626
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest........................................ $ 344,487 $ 992,651 $ 1,656,857
Income taxes.................................... 75,679 270,095 173,629
</TABLE>
- ---------------
(1) Amount does not agree to cash and cash equivalents as presented as a result
of conforming reporting periods (See Note 2).
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
F-7
<PAGE> 38
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Noncash investing and financing activities:
During the year ended December 31, 1994, the Company issued 250,000
shares of common stock to Questor Drilling Corp. for certain assets valued
at $1,875,000 (See Notes 2 and 7).
During the year ended December 31, 1994, the Company retired 253,604
shares of common stock that were held in treasury (See Note 7).
During the year ended December 31, 1995, the Company acquired three
drilling rigs and related equipment from a non-affiliated person. The
purchase price for the rigs consisted of $367,500 cash, 97,500 shares of
the Company's common stock, valued for purposes of this transaction at
$682,500, and warrants to purchase an additional 75,000 shares at an
exercise price of $9.00 per share, valued at $39,750 for this transaction
(See Note 7).
During the year ended December 31, 1996, 75,315 redeemable warrants
relative to the Underwriter's Warrant Agreement dated November 2, 1993, as
amended on November 15, 1994 and June 18, 1996, were converted in which
38,224 shares of the Company's common stock were issued and 37,091 shares
of such common stock were forfeited to the Company in lieu of a cash
payment (See Note 7).
During the year ended December 31, 1996, the Company acquired three
drilling rigs from a non-affiliated entity. The related purchase price
consisted of $100,000 cash, a promissory note of $400,000 payable to the
seller and the issuance of 52,000 shares of the Company's common stock
valued at $1,430,000 (See Notes 2, 5 and 7).
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 39
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies follows:
Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson Energy, Inc. ("Patterson") and its
wholly-owned subsidiaries, Patterson Drilling Company, Patterson Petroleum,
Inc., Patterson Petroleum Trading Company, Inc. and Patterson Drilling
Programs, Inc. (collectively referred to herein as the "Company"). All
significant intercompany accounts and transactions have been eliminated.
Description of business -- The Company engages in onshore contract
drilling of oil and gas wells and, to a lesser extent, the development,
exploration, acquisition and production of oil and natural gas. The Company
provides contract drilling services to major oil and gas companies and
independent producers primarily in Texas in the Permian and Hardeman Basins
and the Austin Chalk Trend.
Management estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Drilling operations -- The Company follows the
percentage-of-completion method of accounting for day work and footage
drilling arrangements. Under this method all drilling revenues, direct
costs and appropriate portions of indirect costs, related to the contracts
in progress, are recognized as contract drilling services are performed.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs
and appropriate portions of indirect costs (including maintenance, repairs and
depreciation) related to the contracts in progress are deferred and recognized
as revenues and expenses in the period the contracts are completed.
Provisions for losses are made on incomplete contracts when significant
losses are anticipated.
Undeveloped oil and gas properties held for resale -- Undeveloped oil and
gas properties held for resale represent leasehold interests in unproven oil and
natural 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
the lower of cost or net realizable value. The Company recognizes gains or
losses upon disposition or impairment of the properties.
(a) Property and equipment -- Property and equipment (other than oil and
gas) -- Depreciation is provided on the straight-line method over the estimated
useful lives as follows:
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Drilling rigs and equipment................................. 2-15
Office furniture............................................ 3-10
Buildings................................................... 5-20
Automotive equipment........................................ 2-7
Other....................................................... 3-7
</TABLE>
(b) Oil and natural 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
(continued)
F-9
<PAGE> 40
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capitalized. Exploration costs which do not result directly in discovering oil
and gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease and well equipment, lease acquisition costs and intangible
development costs are depreciated, depleted and amortized on the
units-of-production method, based on petroleum engineer estimates of recoverable
proved developed oil and natural gas reserves of each respective field.
During the first calendar quarter of 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("Statement
121"). The Company implemented the accounting standards of Statement 121 in its
assessment and determination of the potential impairment of its long-lived
assets. At December 31, 1995 and 1996, the net capitalized costs of certain oil
and natural gas properties exceeded the respective discounted future net
revenues, on a field basis, as determined by an outside, independent reserve
engineer, resulting in approximately $159,000 and $549,000, respectively, of
impairment to such properties. The Company recognizes impairment of its
long-lived assets as an expense in the period in which the related assets are
deemed to be impaired. Correspondingly, the net carrying value of the related
assets are reduced to reflect an amount which is expected to be recovered
through the future cash flows generated by the use of the assets and their
eventual disposition.
(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 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 disposition of such.
The unamortized cost of the property or group of properties, a part of which was
sold or otherwise disposed of, is apportioned to the interest sold and the
interest retained on the basis of the fair value of those interests.
Income per common share -- Income per common share of stock is based on
the weighted average number of shares outstanding during the year. Common stock
equivalents are included for the years ended December 31, 1995 and 1996 because
their effect is dilutive on earnings per share and excluded for the year ended
December 31, 1994 because their effect is antidilutive on the Company's earnings
per share.
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.
Deferred tax assets and liabilities are determined based on the temporary
differences between financial statement and tax basis of assets and liabilities
using enacted rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets (net of a valuation allowance) primarily result
from net operating loss carryforwards, certain accrued but unpaid insurance
losses, unpaid state income taxes, alternative minimum tax credit carryforwards
and investment tax credit carryforwards.
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.
(continued)
F-10
<PAGE> 41
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock based compensation -- The Company grants stock options under
stock-based incentive compensation plans, (the "Plans"). The Company applies APB
Opinion 25 and related Interpretations in accounting for the Plans. In 1995, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("Statement 123") which if fully adopted by the Company, would change the
methods the Company applies in recognizing the cost of the Plans. Adoption of
the cost recognition provisions of Statement 123 is optional and the Company has
decided not to elect these provisions. However, pro forma disclosures as if the
Company adopted the cost recognition provisions of Statement 123 in 1995 are
required by Statement 123 and are presented in Note 8.
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 90 days or less.
Reclassifications -- Certain reclassifications have been made to the 1994
and 1995 consolidated financial statements in order for them to conform with the
1996 presentation. The reclassifications had no effect on net income or
stockholders' equity for these years.
2. MERGER AND ACQUISITIONS
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company executed the Agreement and Plan of Merger among Patterson
Energy, Inc., Patterson Drilling Company ("Patterson Drilling") and Tucker
Drilling Company, Inc. ("Tucker") (the "Merger Agreement") providing for the
merger of Patterson Drilling with and into Tucker. The merger was consummated on
July 30, 1996 after a required approval of the stockholders of both Patterson
and Tucker, with Tucker as the surviving corporation, wholly-owned by Patterson
and operating under the assumed name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock, as adjusted by the Exchange Ratio, upon the
terms of the governing stock option plans. A total of 1,577,514 shares of
Patterson common stock was issued pursuant to the merger and an additional
74,592 shares of Patterson common stock were reserved for issuance under the
outstanding Tucker stock options.
The merger was treated as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended, and was accounted for
as a pooling of interests for financial accounting purposes.
The consolidated financial statements give retroactive effect to the merger
which encompasses, among other things, combining the Company's previous
historical consolidated financial statements as of December 31, 1995 and for
each of the years ended December 31, 1995 and 1994 with the previous historical
financial statements of Tucker as of March 31, 1996 and for each of the years
ended March 31, 1996 and 1995. Certain adjustments were made in those years to
conform the previous accounting policies of Tucker with those of the Company. As
of January 1, 1996, the consolidated financial statements are presented using
the same fiscal periods. Consequently, the operations of Tucker for the three
months ended March 31, 1996 are reflected in the consolidated financial
statements of the Company for each of the years ended December 31, 1995 and
1996.
(continued)
F-11
<PAGE> 42
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS (CONTINUED)
A corresponding stockholders' equity adjustment has been recorded at
December 31, 1996 as a result of including Tucker's operations for the three
months ended March 31, 1996 with Patterson's operations for each of the years
ended December 31, 1995 and 1996. Selected unaudited information related to the
operations of Tucker for the three months ended March 31, 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues.................................................... $3,972
Operating loss.............................................. (218)
Net income.................................................. 759
</TABLE>
Questor Drilling Corp. -- On July 15, 1994, Patterson acquired certain
assets of Questor Drilling Corp. ("Questor"), a non-affiliated Delaware
corporation wholly-owned by Phibro Energy USA, Inc. ("Phibro"), pursuant to the
terms of an Asset Purchase Agreement between Patterson and Questor, dated July
8, 1994. The assets acquired consisted of: (i) nine drilling rigs and related
equipment, consisting primarily of 16 rig hauling trucks, and (ii) a yard
facility consisting of approximately 11 acres of real estate and improvements
located thereon. The purchase price for the assets consisted of a cash payment
of $4,500,000 and 250,000 shares of Patterson's common stock. The total value of
the transaction was $6,375,000. The operating results of the acquired assets
have been included in the consolidated operations of the Company since the date
of acquisition.
Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling
Corporation -- During October 1996, the Company executed a Stock Purchase
Agreement (the "Purchase Agreement") with the owners of 100% of the outstanding
stock of Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling Corporation
("Sledge"), a non-affiliated contract drilling company. The Purchase Agreement
included, among other things, the acquisition of six oil and gas drilling rigs,
related drilling equipment and inventory, three rig hauling trucks and one yard
and shop facility for a purchase price of $14,728,000. The acquisition was
funded by a cash payment of $4,303,000 and proceeds of $10,425,000 provided by a
credit facility maintained with The CIT Group/Equipment Financing, Inc. (See
Note 5). At the date of acquisition, Sledge had working capital of approximately
$4,300,000 and immediately following consummation of the Purchase Agreement,
certain assets, unrelated to the oil and gas industry, were sold back to the
previous owners of Sledge for $1,728,000.
The operating results of this acquisition are included in the Company's
consolidated statements of income from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if Sledge had been acquired as of the beginning of 1995, after giving effect to
certain adjustments, including the elimination of certain revenues and other
income and expenses attributed to the assets not acquired from Sledge, and
increased interest expense on the acquisition debt and related income tax
effects.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
------- -------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $73,271 $90,806
Net income.................................................. 3,291 4,078
Net income per share........................................ .73 .81
</TABLE>
(continued)
F-12
<PAGE> 43
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS (CONTINUED)
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisition
been made as of the date indicated. 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.
Other Asset Acquisitions -- During November and December 1996, in two
separate transactions with non-affiliated entities, the Company acquired 15 oil
and gas drilling rigs and other related equipment. The total consideration paid
for these assets was $4,180,000 consisting of $2,350,000 cash, a $400,000
promissory note payable and the issuance of 52,000 shares of the Company's
common stock, valued for purposes of the transaction at $1,430,000 (See Notes 5
and 7).
3. CASH
Included in cash as of December 31, 1995 and 1996 was approximately
$1,687,000 and $2,432,000, respectively, of monthly oil and gas sales to be
distributed to revenue owners subsequent to year-end.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Drilling rigs and related equipment..................... $ 69,041,682 $ 86,795,987
Producing oil and gas properties........................ 15,387,584 18,071,086
Undeveloped oil and natural gas properties.............. 251,500 251,365
Other equipment......................................... 430,911 678,882
Buildings............................................... 2,743,138 3,176,618
Land.................................................... 361,248 884,886
------------ ------------
88,216,063 109,858,824
Less accumulated depreciation, depletion and
amortization.......................................... (53,417,041) (58,550,705)
------------ ------------
$ 34,799,022 $ 51,308,119
============ ============
</TABLE>
5. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Loan agreement with The CIT Group/Equipment Financing,
Inc. entered into September 1996, with a revolving
credit facility of $22,000,000; monthly payments bearing
interest at the one month London Interbank Offered Rate
(5.53% at December 31, 1996) plus 2.75%; revolving
credit facility converts to a 60-month term loan August
31, 1997; principal and interest monthly installments
commencing September 30, 1997; collateralized by certain
of the Company's drilling rigs and related drilling
equipment; matures August 31, 2002...................... $ 7,000,000 $21,849,187
</TABLE>
(continued)
F-13
<PAGE> 44
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Note payable entered into July 1994 in the original amount
of $5,000,000 to U.S. Bancorp Leasing and Financial; 84
monthly installments 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. This note was paid prior to its
maturity in 1996........................................ 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 was amended and restated in June and December
1995; and further amended and restated in June 1996
increasing the facility to $4,000,000; monthly payments
of interest only at the Wall Street Journal prime rate
(8.25% at December 31, 1996); collateralized by certain
of the Company's oil and gas properties; matures
December 1, 1997........................................ 1,999,403 3,599,403
Line of credit with Financial Services Partnership of
Snyder, Texas, an entity affiliated with the Company's
Chairman of the Board/Chief Executive Officer and the
Company's President/ Chief Operating Officer; bearing
interest at 8% payable monthly; collateralized by
accounts receivable and other intangibles; matures
December 1997. The note was paid prior to its maturity
in 1996................................................. 609,000 --
Promissory note payable dated December 5, 1996 in the
original principal amount of $400,000 payable to a
non-affiliated entity; uncollateralized, non-interest
bearing; monthly principal payments of $66,666; matures
June 1997............................................... -- 400,000
----------- -----------
13,816,107 25,848,590
Less current maturities................................. (909,634) (116,667)
----------- -----------
$12,906,473 $25,731,923
=========== ===========
</TABLE>
On September 27, 1996, the Company replaced its existing credit facility
with The CIT Group/Equipment Financing, Inc. ("CIT") with a new loan agreement
from CIT (the "Loan Agreement") providing for an increased facility of the
lesser of 68% of the fair market value of the Company's assets pledged as
collateral or $22,000,000. The Company's 40 drilling rigs and other related
drilling equipment owned at the date the Loan Agreement was executed as well as
other drilling rigs and related equipment acquired using proceeds from the Loan
Agreement are pledged as collateral. The Loan Agreement allows for advances to
be made to the Company until August 31, 1997, at which time the Loan Agreement
will be converted into a 60-month term loan. The Loan Agreement calls for
monthly installments of $50,000 plus interest through January 31, 1997 and
monthly installments of $100,000 plus interest from February 28, 1997 through
August 31, 1997. Beginning September 30, 1997, the Company is required to pay
monthly principal and
(continued)
F-14
<PAGE> 45
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
interest payments in an amount necessary to amortize 75% of the outstanding
balance under the Loan Agreement over the aforementioned 60-month amortization
period. The final installment on August 31, 2002 will include a balloon payment
sufficient to pay all remaining accrued principal and interest amounts then
outstanding. The outstanding principal balance under the Loan Agreement shall
bear interest equal to the one month London Interbank Official Rate plus 2.75%.
During October 1996, the Company retired amounts then outstanding under the
existing loan agreements with CIT and U.S. Bancorp Leasing and Financial ("U.S.
Bancorp") of approximately $7,700,000 and $3,746,000, respectively. The Company
incurred approximately $110,000 of expense relative to a prepayment penalty
(approximately $75,000) assessed by U.S. Bancorp and accelerated amortization
expense (approximately $35,000) for the remaining unamortized commitment fee on
the U.S. Bancorp obligation.
On December 5, 1996, in connection with the acquisition of three drilling
rigs from a non-affiliated entity (See Note 2), the Company executed an
unsecured, non-interest bearing promissory note in the amount of $400,000
payable in six equal monthly installments commencing January 1, 1997. Given the
short-term nature of the promissory note, an imputed interest amount would not
be material to the financial condition or results of operations of the Company
at December 31, 1996.
The CIT Loan Agreement and the Norwest Bank Texas, Wichita Falls, N.A.
("Norwest") line of credit contain a number of representations, warranties and
covenants, the breach of which, at the election of CIT or Norwest, would
accelerate the maturity date of the loans.
The covenants include:
- Maintenance on a quarterly basis of a consolidated cash flow coverage
ratio of at least 2:1 (CIT) and 1.5:1 (Norwest) (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
$36,000,000 (CIT) and $20,000,000 (Norwest).
- Maintenance on a consolidated basis of a ratio of total liabilities to
tangible net worth not to exceed 1.25:1 (CIT) and 1.75:1 (Norwest).
- Without written consent of CIT and/or Norwest, the Company cannot
conduct any business not being conducted by the Company on September
27, 1996 (CIT) or March 14, 1995 (Norwest), 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.
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, 1996, the
Company was in compliance with all loan covenants.
The estimated fair value of the Company's short and long-term debt
obligations approximate their related carrying value because of the frequency of
their repricing.
(continued)
F-15
<PAGE> 46
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
Unused credit available under existing loan and line of credit agreements
totaled approximately $550,000 at December 31, 1996.
A commercial bank has issued a letter of credit to the Company's workers'
compensation insurance carrier on behalf of the Company in the amount of
$150,000 which is fully collateralized by a certificate of deposit.
Additionally, the Company maintains a letter of credit in the amount of $475,000
with a bank for the benefit of an insurance company as collateral for
retrospective premiums and retained losses which could become payable under the
terms of the Company's insurance contract which existed prior to consummation of
the merger with Tucker. This letter of credit expires on November 30, 1997, but
provides for an indefinite number of annual extensions of the expiration date.
The Company has pledged as collateral against the letter of credit a U.S.
Treasury bill, maturing on March 13, 1997, with a book value of approximately
$544,000 as of December 31, 1996. No amounts have been drawn under either letter
of credit.
Substantially all of the notes payable outstanding as of December 31, 1996
have been classified as noncurrent. The amount reflected as noncurrent at that
date was paid in its entirety subsequent to December 31, 1996 using proceeds
provided by the Company's issuance of common stock (See Note 17 for further
discussion of the Company's equity offering).
6. COMMITMENTS AND CONTINGENCIES
Commitments -- On July 15, 1994, the Company issued 250,000 shares of
common stock as part of the purchase price of certain assets. The terms of the
transaction included a registration rights agreement that, among other matters,
provided in the event the holder of the shares ("Holder") still held the shares
on April 1, 1996, but prior to April 1, 1997, at the request of the Holder,
during such period, the Company would use its best efforts to arrange for the
purchase of the shares at the best available price; provided, however, that if
the price were less than $7.50 per share (before deduction of any brokerage
commission), the Company would pay to the Holder the difference between $7.50
per share and the consideration received by the Holder (See Note 7).
During September 1995, the Holder sold the 250,000 shares of common stock
to Metropolitan Life Insurance Company, Separate Account EN ("MetLife"). At the
time of the sale to MetLife, MetLife and the Company amended and restated the
registration rights agreement ("Amended and Restated Agreement") in its
entirety. The Amended and Restated Agreement provides that the Company, upon
written notice from MetLife, or any transferee of the 250,000 shares, on or
after February 1, 1996, shall file, at the Company's expense, a "shelf"
registration statement with the commission and keep the registration statement
effective until the earlier to occur of (i) such time as all of the registered
shares have been sold, (ii) two years from the effective date of the
registration statement, or (iii) the date on which such shares become available
for resale under Rule 144(k) of the Securities Act of 1933. The provision
relating to the $7.50 price guarantee was eliminated.
Supplemental Executive Retirement Plan -- Effective April 1, 1991 the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan (the
"Plan") was established for certain officers and key employees. Pursuant to
agreements, as amended on April 22, 1996 and May 16, 1996 with related
participants of the Plan, the Company was obligated to pay each participant, or
the designated beneficiary, a lump sum at such participant's death, disability
or retirement. The amount to be paid to each participant was equal to the
participant's vested benefit at such date, limited, however, to related benefits
received from underlying insurance policies as described below. As of December
31, 1996, the Company incurred approximately
(continued)
F-16
<PAGE> 47
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$330,000 of expense to recognize the Company's ultimate possible obligation
under the Plan of approximately $568,000.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants and an annuity from which future premiums
on the life insurance policies will be paid. These assets are included as other
assets at a book value of approximately $568,000 at December 31, 1996 and 1995.
The insurance company, which is the issuer of the life insurance and
annuity contracts owned by the Company, is currently under the supervision of
the Michigan Commissioner of Insurance pursuant to an Order of Rehabilitation.
Although the insurance company has continued to pay death benefits and scheduled
annuity benefits, cash surrender values reflected above may be subject to change
and access to such cash surrender values may be limited pending the negotiation
of assumption reinsurance agreements.
Contingencies -- 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 $3,000,000 of aggregate and
excess liability and umbrella coverages up to $20,000,000 per occurrence with a
$20,000,000 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.
The Company is 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 financial condition of the Company.
7. STOCKHOLDERS' EQUITY
In July 1994, the Company acquired certain assets of Questor pursuant to
the terms of an asset purchase agreement between the Company and Questor, dated
July 8, 1994. The purchase price for the assets consisted of a cash payment of
$4,500,000 and 250,000 shares of the Company's common stock, par value $0.01 per
share. The total value of the transaction was $6,375,000.
In September 1994, the Board of Directors of the Company approved a
resolution that all shares of common stock, par value $.01 per share, of the
Company then issued but not outstanding (the "Treasury Stock") be retired. The
Board of Directors further approved a resolution that the Treasury Stock resume
the status of authorized and unissued shares of common stock.
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,
(continued)
F-17
<PAGE> 48
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
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) 0.196 times
the average monthly trading volume of the Company's common stock on the Nasdaq
National Market over the preceding 12 calendar months and (b) the right to join
the registrable securities in any registration statements filed by the Company
with the Commission. During October 1996, the Company registered certain
securities with the Commission on a Form S-3 Registration Statement which
included the aforementioned 97,500 shares.
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. The remaining 3,002 redeemable warrants were
redeemed for a nominal amount. 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 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 1996, pursuant to the terms of the Underwriters' Warrant Agreement
dated November 2, 1993 as amended on November 15, 1994 and June 18, 1996, the
Company issued 38,224 shares of common stock upon the conversion of 75,315
warrants. In lieu of a cash payment for the exercise of such warrants, the
respective warrant holders elected to forfeit 37,091 shares of common stock back
to the Company.
In July 1996, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation providing for an increase of 4,000,000
shares in the total number of authorized shares of the Company's common stock
and the issuance of 1,577,514 of such shares in connection with the Company's
merger with Tucker (See Note 2).
In December 1996, the Company acquired three drilling rigs from a
non-affiliated party. The purchase price for the rigs consisted of $100,000
cash, a $400,000 promissory note and the issuance of 52,000 shares of the
Company's common stock valued at $1,430,000 (See Note 2).
At December 31, 1996, the Company has 4,943,591 shares of common stock
issued and outstanding and no shares of preferred stock issued or outstanding.
8. STOCK OPTIONS AND WARRANTS
Employee Stock Incentive Plan -- In August 1993, the Company adopted the
Patterson Energy, Inc. 1993 Stock Incentive Plan (the "Stock Incentive Plan").
The purpose of the Stock Incentive Plan is to provide continuing incentives to
the Company's key employees, which may include, but shall not necessarily be
limited to, members of the Board of Directors (excluding members of the
Compensation Committee) and officers of the Company. The Stock Incentive Plan
provides for an authorization of 175,000 shares of common
(continued)
F-18
<PAGE> 49
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
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, 1995 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 granted to the employees vest either (i) 20% a year, beginning on
the grant date and 20% for the next four anniversaries of the date of grant, or
(ii) 11.2% for the first five years, beginning on the grant date, and 22% on
each of the next two anniversaries of the grant date. No options granted under
the Stock Incentive Plan have been exercised as of December 31, 1996.
In March 1983, the Board of Directors of Tucker approved and implemented an
Incentive Stock Option Plan which was amended in 1988 to allow for granting of
nonqualified stock options and in 1991 was further amended to eliminate stock
appreciation rights. The purpose of the plan was to attract and retain key
employees and directors and to provide such persons with a proprietary interest
in Tucker through the granting and exercise of stock options. The maximum number
of shares of common stock available for issuance under the plan was 126,910
shares. The proceeds from the sale of common stock pursuant to the plan were to
be added to the general funds of Tucker and used for general corporate purposes.
In June 1994 the Board of Directors of Tucker adopted the Tucker Drilling
Company, Inc. 1994 Non-Qualified Stock Option Plan. Officers and directors were
not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan was 20,720 shares.
Each of the plans provide that options may be granted to purchase shares at
prices not less than the fair market value at date of grant. The exercise period
is governed by option agreements, but in no event may the exercise period extend
beyond ten years from the date of grant. As discussed at Note 2, existing stock
options and other employee incentive plans of Tucker became plans to purchase or
receive common stock of the Company upon consummation of the merger of the
Company and Tucker.
Non-Employee Directors' Stock Option Plan -- In June 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan (the "Outside Directors'
Plan"). The purpose of the Outside Directors' Plan is to encourage and provide
incentive for high level performance by non-employee directors of the Company.
An aggregate of 30,000 shares of common stock are reserved for issuance under
the Outside Directors' Plan to directors who are not employees of the Company.
The exercise price of options will be the fair market value of stock on the
date of grant. Outside directors are automatically granted options to purchase
5,000 shares 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
(continued)
F-19
<PAGE> 50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
the event of a change of control (as defined in the Outside Directors' Plan) of
the Company. On June 6, 1995, each of the outside directors of the Company was
automatically granted an option covering 5,000 shares with an exercise price of
$9.00 per share and on June 6, 1996, an additional 1,000 options was granted to
each of the two outside directors with an exercise price of $17.25 per share.
Concurrent with the addition of a member to the Company's Board of Directors in
July 1996, 5,000 options were granted with an exercise price of $17.50 per
share.
A summary of the status of the Company's stock options issued under the
Stock Incentive Plan and the Outside Directors' Plan as of December 31, 1995 and
December 31, 1996 and the changes during each of the two years then ended is
presented below:
<TABLE>
<CAPTION>
1995 1996
------------------------------ ------------------------------
NO. OF SHARES WEIGHTED NO. OF SHARES WEIGHTED
OF UNDERLYING AVERAGE OF UNDERLYING AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year...... -- $ -- 176,000 $10.07
Granted at the money.................... 175,000 10.05 7,000 16.07
Granted at a premium.................... 1,000 13.50 -- --
------- ------ ------- ------
Total granted................... 176,000 10.07 7,000 16.07
------- ------ ------- ------
Exercised............................... -- -- -- --
Forfeited............................... -- -- -- --
Expired................................. -- -- -- --
------- ------ ------- ------
Outstanding at end of year................ 176,000 $10.07 183,000 $10.30
======= ====== ======= ======
Exercisable at end of year................ 30,360 $ 9.91 71,120 $ 9.80
======= ====== ======= ======
Weighted average fair value of options
granted at the money.................... N/A $ 4.56 N/A $ 7.40
======= ====== ======= ======
Weighted average of fair value of options
granted at a premium.................... N/A $ 5.03 N/A $ --
======= ====== ======= ======
Weighted average fair value of options
granted during the year................. N/A $ 4.57 N/A $ 7.40
======= ====== ======= ======
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1995 and 1996, respectively; dividend
yield of 0.00% for both years; risk-free interest rates are different for each
grant and range from 5.65% to 7.02%; the expected lives of options are estimated
and range from 5 to 7 years; and a volatility of 38.68% for all grants.
(continued)
F-20
<PAGE> 51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options outstanding
as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/96 LIFE (YEARS) PRICE 12/31/96 PRICE
- ---------------- ----------- ------------ -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 7.25 to $12.00 85,000 8.02 $ 7.46 40,000 $ 7.69
$12.01 to $17.50 98,000 8.63 $12.77 31,120 $12.51
- ---------------- ------- ---- ------ ------ ------
$ 7.25 to $17.50 183,000 8.35 $10.30 71,120 $ 9.80
</TABLE>
Public Relations Services Stock Options -- During November 1994, February
1995 and July 1995, the Company issued options covering a total of 125,000
shares of common stock to two consultants as partial compensation for public
relations services rendered to the Company. All options granted to the
consultants have an exercise price no less than the fair market value of the
stock at date of grant. The respective options were fully exercisable upon grant
date. In November 1994, 32,500 options were granted at $7.50 per share and
12,500 options were granted at $8.50 per share. In February 1995, 20,000 options
were granted at $8.775 per share which had a fair value of $2.249 per option and
in July 1995, 60,000 options were granted at $9.625 per share which had a fair
value of $4.1665 per option. At December 31, 1996, 20,000 options with an
exercise price of $9.625 per share have been exercised. The options expire five
years from date of grant and the unexercised options outstanding at December 31,
1996 have a weighted-average remaining contractual life of 8.37 years.
The fair values of these options were determined using the following
assumptions: dividend yield of 0.00%; risk-free interest rates of 7.74% and
5.92%, for January 1 and July 1, respectively; expected lives of 5 years; and
volatility of 38.68%.
Pro Forma Net Income and Net Income Per Common Share -- Had the
compensation cost for the Company's stock-based compensation plans been
determined consistent with Statement 123, the Company's net income and net
income per common share for 1995 and 1996 would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------- -----------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Statement 123 charge net of income
tax................................ $ -- $ 202,730 $ -- $ 162,081
APB 25 charge........................ $ -- $ -- $ -- $ --
Net income........................... $3,201,066 $2,998,336 $4,271,077 $4,108,996
========== ========== ========== ==========
Net income per common share:
Primary............................ $ .73 $ .68 $ .86 $ .82
========== ========== ========== ==========
Assuming full dilution............. $ .71 $ .66 $ .85 $ .81
========== ========== ========== ==========
</TABLE>
The effects of applying Statement 123 in this pro forma disclosure are not
indicative of future amounts. Statement 123 does not apply to awards prior to
1995.
Underwriters' Warrants -- In November 1993, the underwriters of the
Company's initial public offering were issued warrants as partial consideration
for their underwriting services for the initial public offering. The warrants
give the underwriters the right to purchase 75,315 shares of the Company's
common stock at a price
(continued)
F-21
<PAGE> 52
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
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. In July 1996 the
remaining 75,315 warrants were exercised in which 38,224 shares of the Company's
common stock were issued (See Note 7).
Stock Purchase Warrants -- In May 1995, the Company issued 75,000 warrants
exercisable at $9.00 per share as partial consideration for the purchase of
three drilling rigs and related equipment (See Note 7). The warrants were
exercisable upon issuance and expire on December 31, 1997. No warrants have been
exercised at December 31, 1996.
The following table contains information concerning stock options and
warrants:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
GRANTED SHARES EXERCISE PRICE
------- ------- --------------
<S> <C> <C> <C>
1994................................................... 53,880 $ 7.86
1995................................................... 331,000 9.67
1996................................................... 7,000 17.43
</TABLE>
<TABLE>
<CAPTION>
EXERCISED
---------
<S> <C> <C> <C>
1994................................................... 5,476 $ 7.93
1995................................................... 56,158 7.62
1996................................................... 144,508 8.41
</TABLE>
<TABLE>
<CAPTION>
SURRENDERED
-----------
<S> <C> <C> <C>
1994................................................... 444 $ 8.28
1995................................................... 1,776 8.28
1996................................................... 37,091 8.68
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING AT
YEAR END
- --------------
<S> <C> <C> <C>
1994................................................... 278,223 $ 8.10
1995................................................... 551,289 9.08
1996................................................... 376,690 9.54
</TABLE>
<TABLE>
<CAPTION>
EXERCISABLE AT
YEAR END
- --------------
<S> <C> <C> <C>
1994................................................... 259,131 $ 8.09
1995................................................... 401,385 8.76
1996................................................... 270,090 9.21
</TABLE>
9. LEASES
Rent expense for office space and certain tools and equipment under monthly
rental agreements and operating leases in 1994, 1995 and 1996 was approximately
$793,000, $1,042,000 and $1,797,000, respectively.
For the year ended December 31, 1994, the Company paid $13,800 in lease
payments for the use of certain drilling rigs owned in part by Navajo Rigs, Inc.
("Navajo"), an affiliated entity. 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 for
a purchase price of $433,875 in cash pursuant to a merger of Navajo into the
Company. The acquired interests were leased by the Company on a month-to-month
basis prior to the acquisition.
(continued)
F-22
<PAGE> 53
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current.................................... $ 105,019 $ 138,825 $ 51,828
Deferred income tax benefit................ (406,515) (1,000,324) (2,428,395)
--------- ----------- -----------
(301,496) (861,499) (2,376,567)
State:
Current.................................... 108,330 74,735 122,144
--------- ----------- -----------
Total income tax benefit........... $(193,166) $ (786,764) $(2,254,423)
========= =========== ===========
</TABLE>
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1994, 1995 and 1996:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- ------
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 34.0%
Net operating loss carryforwards........................... (34.0) (34.0) --
Reduction of valuation allowance........................... (8.5) (41.4) (151.8)
State income taxes......................................... 2.3 3.1 6.1
Alternative minimum taxes.................................. 2.2 5.8 --
----- ----- ------
Effective tax rate......................................... (4.0)% (32.5)% (111.7)%
===== ===== ======
</TABLE>
There is $51,810 of accrued Federal income taxes in accrued expenses at
December 31, 1995. There is $32,885 of prepaid Federal income taxes in other
current assets at December 31, 1996. There are $135,642 and $122,144 of accrued
state income taxes in accrued expenses at December 31, 1995 and 1996,
respectively.
As of January 1, 1994, the deferred tax asset valuation allowance of
approximately $6,009,000 was due primarily to net operating loss ("NOL")
carryforwards which were not expected to be utilized before their respective
expiration dates or which benefits the Company was unable to predict would more
likely than not be realized. During each of the years in the three year period
ended December 31, 1996, the Company changed its estimate with respect to its
net deferred tax assets and, accordingly, reduced the related valuation
allowance in each of those years by approximately $407,000, $1,000,000 and
$2,095,000, respectively. To the extent the valuation allowance was reduced, the
related tax benefit was credited to income tax expense.
(continued)
F-23
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES (CONTINUED)
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,
1994 CHANGE 1995 CHANGE 1996 CHANGE 1996
---------- ------- ---------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards......... $ 5,561 $(2,001) $ 3,560 $ (891) $ 2,669 $ (258) $ 2,411
Investment tax credit
carryforwards......... 469 -- 469 -- 469 (94) 375
AMT credit
carryforwards......... 103 103 206 76 282 -- 282
Depletion
carryforwards......... 556 (143) 413 199 612 (218) 394
Property and equipment... 38 21 59 (59) -- -- --
Other.................... 148 137 285 (13) 272 (18) 254
------- ------- ------- ------- ------- ------- -------
6,875 (1,883) 4,992 (688) 4,304 (588) 3,716
Valuation allowance...... (6,009) 2,223 (3,786) 1,691 (2,095) 2,095 --
------- ------- ------- ------- ------- ------- -------
Deferred tax assets... 866 340 1,206 1,003 2,209 1,507 3,716
Deferred tax liabilities:
Property and equipment
basis difference...... (866) 67 (799) (3) (802) (1,527) (2,329)
------- ------- ------- ------- ------- ------- -------
Net deferred tax
asset............... $ -- $ 407 $ 407 $ 1,000 $ 1,407 $ (20) $ 1,387
======= ======= ======= ======= ======= ======= =======
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $7,090,000 and alternative minimum tax ("AMT") NOL carryforwards
of approximately $4,437,000 at December 31, 1996. In addition, the Company had
AMT credit carryforwards of $282,000 and statutory depletion carryforwards of
approximately $1,159,000 at December 31, 1996, 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 2012. During the years ended December 31, 1994, 1995 and 1996, the
Company utilized approximately $5,891,000, $2,481,000 and $2,184,000,
respectively, of NOL carryforwards. The Company had investment tax credit
carryforwards of approximately $375,000 at December 31, 1996 which, if unused,
will expire at various dates through 2001.
During 1995, the Company's NOL carryforwards became subject to an annual
limitation due to a change of over 50% in the stock ownership of the Company as
defined in Internal Revenue Service Code Section 382(g). Such limitations have
been imposed upon the net earnings of the Company excluding any contribution
from the operations acquired in the Merger ("Patterson Income") and separately
imposed upon the net earnings generated from the operations of the Tucker assets
acquired in the Merger ("Tucker income"). The NOL carryforwards that can now be
utilized to offset Patterson income in any year will be equal to approximately
$1,808,000, which is determined by the value of Patterson's equity on August 2,
1995, the day prior to ownership change, times 5.88%, the Federal long-term
exempt rate on that date as published by the U.S. Treasury Department.
Similarly, the NOL carryforwards that can now be utilized to offset Tucker
income will be limited to approximately $1,540,000 which is determined by the
value of Tucker's equity on July 29, 1996, the day prior to consummation of the
Merger, times 5.78%, the Federal long-term exempt rate on that date.
(continued)
F-24
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES (CONTINUED)
During the year ended December 31, 1996, the Company began recording
non-cash Federal deferred income taxes based primarily on the relationship
between the amount of the Company's unused Federal NOL carryforwards and the
temporary differences between the book basis and tax basis in the Company's
assets.
11. EMPLOYEE BENEFITS
Profit Sharing Plan -- Effective January 1, 1992, the Company established a
401(k) profit sharing plan for all eligible employees. Company contributions are
discretionary. In February 1996, the Company approved a contribution of
approximately $100,000, which was accrued at December 31, 1995. In March 1997,
the Company contributed $181,256 to the plan. The amount of the contribution was
included in accrued expenses at December 31, 1996.
12. BUSINESS SEGMENTS
The Company is engaged in contract drilling of oil and gas wells and oil
and gas exploration, development and production. Total revenues by business
segment include sales to affiliated customers. Information concerning the
Company's business segments for the years ended December 31, 1994, 1995 and 1996
is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Contract drilling......................... $54,822,766 $57,599,180 $73,590,367
Oil and gas............................... 4,706,782 6,844,769 10,117,463
----------- ----------- -----------
Total revenues.............................. $59,529,548 $64,443,949 $83,707,830
=========== =========== ===========
Income (loss) from operations:
Contract drilling......................... $ 5,475,358 $ 3,383,605 $ 3,868,837
Oil and gas............................... (489,263) (50,554) 1,550,455
----------- ----------- -----------
4,986,095 3,333,051 5,419,292
----------- ----------- -----------
General corporate expense(a).............. -- -- (2,268,331)
Interest income........................... 193,417 145,774 477,807
Interest expense.......................... (366,152) (1,064,523) (1,612,114)
----------- ----------- -----------
Income before income taxes................ $ 4,813,360 $ 2,414,302 $ 2,016,654
=========== =========== ===========
Identifiable assets:
Contract drilling......................... $39,345,133 $52,642,402 $63,505,797
Oil and gas............................... 10,163,670 10,348,443 24,407,508
----------- ----------- -----------
Total assets................................ $49,508,803 $62,990,845 $87,913,305
=========== =========== ===========
Depreciation, depletion and amortization:
Contract drilling......................... $ 3,646,246 $ 5,106,317 $ 6,836,448
Oil and gas............................... 1,265,683 2,416,378 3,123,190
----------- ----------- -----------
Total depreciation, depletion and
amortization.............................. $ 4,911,929 $ 7,522,695 $ 9,959,638
=========== =========== ===========
Capital expenditures:
Contract drilling......................... $10,319,698 $15,676,879 $23,353,285
Oil and gas............................... 2,968,625 5,106,895 4,105,921
----------- ----------- -----------
Total capital expenditures.................. $13,288,323 $20,783,774 $27,459,206
=========== =========== ===========
</TABLE>
- ---------------
(a) The general corporate expense for 1996 is comprised entirely of
non-recurring acquisition costs. All other general corporate revenues and
expenses, except for interest income and interest expense, have been
allocated to the business segments of the Company.
(continued)
F-25
<PAGE> 56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS SEGMENTS (CONTINUED)
No customer accounted for more than 10% of the Company's consolidated
revenues for the years ended December 31, 1994, 1995 and 1996.
13. OIL AND GAS EXPENDITURES
Gross oil and gas expenditures by the Company for the years ended December
31, 1994, 1995 and 1996 are summarized below:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs..................... $ 860,759 $1,186,859 $ 665,727
Exploration costs.............................. 2,332,926 3,736,937 3,683,690
Development costs.............................. 967,933 1,385,130 2,174,325
---------- ---------- ----------
$4,161,618 $6,308,926 $6,523,742
========== ========== ==========
</TABLE>
The aggregate amount of capitalized costs of oil and gas properties as of
December 31, 1994, 1995 and 1996 is comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Proved properties.......................... $11,215,663 $15,387,584 $ 18,071,086
Accumulated depreciation, depletion and
amortization............................. (7,445,261) (9,009,244) (11,412,586)
----------- ----------- ------------
Net proved properties...................... $ 3,770,402 $ 6,378,340 $ 6,658,500
=========== =========== ============
</TABLE>
(continued)
F-26
<PAGE> 57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION AND RELATED DATA (UNAUDITED)
The following table sets forth information with respect to quantities of
net proved developed oil and natural gas reserves and changes in those reserves
for the years ended December 31, 1994, 1995 and 1996. The quantities were
estimated by an independent petroleum engineer for the years ended December 31,
1994, 1995 and 1996. The Company's proved developed oil and natural 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.
OIL AND GAS RESERVE QUANTITIES
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ----------
<S> <C> <C>
Estimated quantity, January 1, 1994......................... 346,773 2,522,614
Revision in previous estimates.............................. 125,485 468,746
Extensions, discoveries and other additions................. 299,623 1,872,512
Purchases................................................... 27,400 181,495
Sales of reserves-in-place.................................. (75,193) (416,328)
Production.................................................. (124,019) (859,791)
--------- ----------
Estimated quantity, January 1, 1995......................... 600,069 3,769,248
Revision in previous estimates.............................. (59,429) 549,322
Extensions, discoveries and other additions................. 405,364 2,272,738
Purchases................................................... 2,280 40,386
Sales of reserves-in-place.................................. -- --
Production.................................................. (191,342) (1,361,770)
--------- ----------
Estimated quantity, January 1, 1996......................... 756,942 5,269,924
Revision in previous estimates.............................. 39,004 463,943
Extensions, discoveries and other additions................. 215,307 1,971,749
Purchases................................................... 289,402 1,686,655
Sales of reserves-in-place.................................. (3,506) (87,045)
Production.................................................. (234,722) (1,678,463)
--------- ----------
Estimated quantity, January 1, 1997......................... 1,062,427 7,626,763
========= ==========
</TABLE>
(continued)
F-27
<PAGE> 58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. 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,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Oil and gas sales.............................. $3,593,786 $5,399,536 $8,299,477
Gain (loss) on sale of oil and gas
properties................................... 151,287 38,394 (101,809)
Gain on sale of undeveloped properties......... 48,506 66,755 --
---------- ---------- ----------
3,793,579 5,504,685 8,197,668
---------- ---------- ----------
Costs and expenses (benefit):
Production costs............................. 1,150,590 1,715,155 2,128,729
Exploration expenses......................... 1,493,676 1,137,557 1,453,232
Depreciation, depletion and amortization..... 1,192,328 2,289,070 3,003,190
Impairment of oil and gas properties......... -- 159,403 548,838
Income tax expense (benefit)................. (20,745) 69,190 361,651
---------- ---------- ----------
3,815,849 5,370,375 7,495,640
---------- ---------- ----------
Results of operations for oil and gas producing
activities................................... $ (22,270) $ 134,310 $ 702,028
========== ========== ==========
</TABLE>
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Future gross revenues................................. $15,336 $22,436 $42,930
Future development and production costs............... 6,772 8,623 17,293
Future income tax expense(a).......................... 1,055 2,158 6,581
------- ------- -------
Future net cash flows................................. 7,509 11,655 19,056
Discount at 10% per annum............................. (1,943) (2,987) (5,756)
------- ------- -------
Standardized measure of discounted future net cash
flows............................................... $ 5,566 $ 8,668 $13,300
======= ======= =======
</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-28
<PAGE> 59
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. 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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure at beginning of year................. $ 4,009 $ 5,566 $ 8,668
Sales and transfers of oil and gas produced, net of
production costs........................................ (2,337) (3,891) (6,288)
Net changes in sales price and future production and
development costs....................................... (1,516) 807 2,015
Extensions, discoveries and improved recovery, less
related costs........................................... 4,070 6,278 9,505
Sales of minerals-in-place................................ (727) -- --
Revision of previous quantity estimates................... 2,226 667 1,249
Accretion of discount..................................... 401 574 631
Changes in production rates and other..................... (71) (230) 1,943
Net change in income taxes................................ (489) (1,103) (4,423)
------- ------- -------
Standardized measure at end of year....................... $ 5,566 $ 8,668 $13,300
======= ======= =======
</TABLE>
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of demand deposits, temporary
cash investments and trade receivables.
The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
1995 and 1996, the Company's demand deposits and temporary cash investments
consisted of the following:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under $100,000
and cash on hand.......................................... $ 563,743 $1,398,936
Deposit in FDIC and SIPC-insured institutions over $100,000
and cash on hand.......................................... 4,984,675 6,222,517
Mutual fund collateralized by U.S. Treasury obligations and
repurchase agreements which are collateralized by U.S.
Treasury securities....................................... 6,664,034 --
---------- ----------
12,212,452 7,621,453
Less outstanding checks and other reconciling
items........................................... (2,867,958) (4,127,827)
---------- ----------
Cash and cash equivalents................................... 9,344,494 3,493,626
Investment in U.S. Treasury securities...................... 524,323 543,867
---------- ----------
$9,868,817 $4,037,493
========== ==========
</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, 1995 and 1996. Included in
general and administrative expense for the periods
(continued)
F-29
<PAGE> 60
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. CONCENTRATIONS OF CREDIT RISK (CONTINUED)
ended December 31, 1995 and 1996 are provisions for doubtful receivables of
$137,757 and $126,596, respectively.
The carrying values of cash and cash equivalents, marketable securities and
trade receivables approximate fair value due to the short-term maturity of these
assets.
16. RELATED PARTY TRANSACTIONS
Use of Assets -- The Company leases a 1981 Beech King-Air 90 airplane owned
by an affiliate of the Company's Chairman of the Board/Chief Executive Officer.
Under the terms of the lease, the Company pays a monthly rental of $9,200 and
the costs of fuel, insurance, taxes and maintenance of the aircraft. From July
1992, until January 1995, the Company and another affiliate of the Chairman of
the Board/Chief Executive Officer were co-lessees of the aircraft. Under the
agreement the Company paid a monthly rental of $4,500 plus the Company's
proportionate share of fuel and shares the insurance, taxes and maintenance
equally with co-lessee. The Company paid approximately $126,497, $174,455 and
$267,001 for the lease of the airplane during 1994, 1995 and 1996, respectively.
Purchase of Oilfield Equipment and Related Parts -- In October 1994, the
Company purchased oilfield equipment and parts from an entity currently owned
50% by an affiliate of the Company's Chairman of the Board/Chief Executive
Officer and 50% by the President/Chief Operating Officer. The amount of the
purchase was $150,000 and the Company had a related accounts payable of $125,000
to this entity at December 31, 1994.
Contract Drilling Services -- A company owned in part by a relative of the
Chairman of the Board/Chief Executive Officer, contracted drilling services from
the Company during 1994, 1995 and 1996. Revenues for 1994, 1995 and 1996 include
approximately $338,000, $597,700 and $919,743 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 and 1996. Sales of oil to that
entity, both royalty and working interest (including the Company) were
approximately $5,870,000 and $19,564,000 for 1995 and 1996, respectively.
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 $2,765,303, $3,907,116 and $6,346,426 from these properties in
1994, 1995 and 1996, respectively, to the aforementioned persons or entities.
These persons or entities reimbursed the Company for joint operating costs of
$2,347,547, $5,174,970 and $5,336,443 in 1994, 1995 and 1996, respectively.
Common Ownership in Navajo Rigs -- Certain officers, directors and
stockholders of the Company were also shareholders in Navajo Rigs (See Note 9).
Note Payable to Related Parties -- Note payable to related parties is
described in Note 5.
17. SUBSEQUENT EVENTS
On January 2, 1997, the Company's Board of Directors adopted a
Stockholder's Rights Plan (the "Plan"). The Plan stipulates that one preferred
stock purchase right ("Right") will be created and issued for each share of
common stock of the Company held as of the close of business on January 7, 1997.
The Rights
(continued)
F-30
<PAGE> 61
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS (CONTINUED)
distributed under the Plan will expire on January 2, 2007, subject to earlier
redemption by the Board of Directors.
Each Right issued under the Plan will entitle stockholders to buy one
one-hundredth of a share of Series A Participating Preferred Stock of the
Company at an exercise price of $166. The Rights will not be exercisable until
the earlier of (i) the acquisition by a person or group of 15% or more of the
outstanding common stock or (ii) ten days after the commencement of, or
announcement of an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of persons of 15% or more of the outstanding common stock. The term
"Acquiring Person" means any person who, or which, together with all of the
affiliates and associates, shall be the beneficial owner of 15% or more of the
outstanding common stock (other than the Company or any Subsidiary of the
Company, any employee benefit plan of the Company or any Subsidiary). Until the
occurrence of one of the events described above, the Rights will be transferred
only with the common stock.
In January 1997, the Company completed a public offering of 1,763,000
shares of common stock at a price of $30.75 per share. Also in February 1997,
the underwriters of the Company's public offering exercised their overallotment
option to purchase 300,000 additional shares of common stock. Net proceeds from
the offering totaled approximately $59,401,000 to the Company. The proceeds were
used to pay, prior to maturity, notes payable and accrued interest of
approximately $25,768,000 and prepayment penalties of approximately $191,000.
The remaining funds are to be used for the refurbishment of certain rigs
acquired in November and December 1996 and for general corporate purposes.
The following unaudited pro forma consolidated financial position data
assumes the Company's common stock offering and use of proceeds had occurred on
December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
AS PRO FORMA
REPORTED (UNAUDITED)
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............. $ 3,494 $ 37,164
Other current assets.................. 31,987 31,987
------- --------
Total current assets.......... 35,481 69,151
Other assets.......................... 52,432 52,363
------- --------
Total assets.................. $87,913 $121,514
======= ========
Liabilities and stockholders' equity:
Current maturities of notes payable... $ 117 $ 117
Other current liabilities............. 17,772 17,772
------- --------
Total current liabilities..... 17,889 17,889
Notes payable, less current
maturities......................... 25,732 --
Other liabilities..................... 810 810
Stockholders' equity.................. 43,482 102,815
------- --------
Total liabilities and
stockholders' equity........ $87,913 $121,514
======= ========
</TABLE>
(continued)
F-31
<PAGE> 62
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("Statement
128") which is effective for the Company's fiscal year beginning January 1,
1997. Statement 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Some of the changes made to current
EPS standards include: (i) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (ii) eliminating
the modified treasury stock method and the three present materiality provisions,
and (iii) revising the contingent share provisions and the supplemental EPS data
requirements. Statement 128 also requires dual presentation of basic and diluted
EPS on the face of the income statement, as well as a reconciliation of the
numerator and denominator used in the two computations of EPS. Basic EPS is
defined by Statement 128 as net income from continuing operations divided by the
average number of common shares outstanding without the consideration of common
stock equivalents which may be dilutive to EPS. The Company's current
methodology for computing its fully diluted EPS will not change in future
periods as a result of its adoption of Statement 128. Implementation of
Statement 128 is not expected to have a material effect on the Company's EPS.
F-32
<PAGE> 63
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
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 -- Restated Certificate of Incorporation of the
Registrant(13)
3.2 -- Bylaws of the Registrant(1)
4.1 -- Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock
and Preferred Stock.(14)
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 -- 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.(7)
10.4.1 -- Revolving Line of Credit Promissory Note dated December
1, 1995.(7)
10.4.2 -- 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.(7)
10.4.3 -- 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.(7)
10.5 -- Aircraft Lease, dated February 15, 1995, (effective
January 1, 1995) between Talbott Aviation, Inc. and
Patterson Energy, Inc.(3)
10.5.1 -- Aircraft Lease, dated January 15, 1997, (effective
January 1, 1997) between Talbott Aviation, Inc. and
Patterson Energy, Inc.
10.6 -- Plan and Agreement of Merger, dated as of April 21, 1995,
by and between Navajo Rigs, Inc. and Patterson Energy,
Inc.(6)
10.7 -- 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.(6)
10.8 -- Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(6)
10.8.1 -- Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(8)
10.9 -- Crude Oil Purchase Contract, dated October 19, 1994,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(7)
10.9.1 -- Crude Oil Purchase Contract, dated October 24, 1995,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(8)
10.10 -- Patterson Energy, Inc. 1993 Stock Incentive Plan.(7)
10.11 -- Patterson Energy, Inc. Non-Employee Director's Stock
Option Plan.(7)
10.12 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and
Shimmerlik Corporate Communications, Inc.(8)
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.13 -- Extended Consulting Agreement, dated as of April 1, 1995,
between Patterson Energy, Inc. and Shimmerlik Corporate
Communications, Inc.(8)
10.14 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(8)
10.15 -- Consulting and Stock Option Agreement, dated as of
February 15, 1995, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(8)
10.16 -- Consulting and Stock Option Agreement, dated as of August
2, 1995, between Patterson Energy, Inc. and E. Peter
Hoffman, Jr.(8)
10.17 -- Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(9)
10.17.1 -- Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(10)
10.18 -- Loan Agreement, dated September 27, 1996, among The CIT
Group/Equipment Financing, Inc., Patterson Drilling
Company and Patterson Energy, Inc.(11)
10.18.1 -- Secured Promissory Note of Patterson Drilling Company,
dated September 27, 1996.(11)
10.18.2 -- Security Agreement, dated September 27, 1996, between
Patterson Drilling Company and The CIT Group/Equipment
Financing, Inc.(11)
10.18.3 -- Guaranty, dated September 27, 1996, by Patterson Energy,
Inc. in favor of The CIT Group/Equipment Financing,
Inc.(11)
10.19 -- Stock Purchase Agreement, dated October 23, 1996, among
Patterson Drilling Company and H. Gene Sledge, Joyce A.
Sledge, David W. Sledge and Michael G. Sledge.(12)
10.19.1 -- Consulting Agreement dated October 23, 1996, between
Patterson Drilling Company and David W. Sledge.(12)
10.19.2 -- Consulting Agreement dated October 23, 1996, between
Patterson Drilling Company and Michael G. Sledge.(12)
10.19.3 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and Michael G.
Sledge.(12)
10.19.4 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and H. Gene
Sledge.(12)
10.19.5 -- Non-Competition Agreement, dated October 23, 1996, by and
between Patterson Drilling Company and David W.
Sledge.(12)
10.19.6 -- Asset Purchase Agreement dated October 23, 1996, by and
between Sledge Ranches, Ltd. and Sledge Cattle Company,
Inc.(12)
10.20 -- Asset Purchase Agreement, dated November 23, 1996,
between Patterson Drilling Company and Hondo Drilling
Company.
10.21 -- Asset Purchase Agreement, dated December 5, 1996 among
and between Patterson Energy, Inc., Patterson Drilling
Company, Rig I Group, Inc., Phoenix Drilling, Inc., Welch
& Howell Drilling, Inc., and Imperial Equipment Co.
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.21.1 -- Promissory Note dated December 5, 1996, by and between
Patterson Drilling Company and Welch and Howell Drilling,
Inc.
11.1 -- Statement re computation of per share earnings.
21.1 -- List of Subsidiaries of Patterson Energy, Inc.
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule.
</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 10-KSB for the year ended December 31, 1994.
(4) 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.
(5) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated September 15, 1994 and filed on November 11, 1994.
(6) 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).
(7) Incorporated by reference to Item 5. "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(8) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(9) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.
(10) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.
(11) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated September 27, 1996 and filed on October 4, 1996.
(12) Incorporated by reference to Item 7. "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996 and filed on November 6, 1996.
(13) Incorporated by reference to Item 6. "Exhibits and Reports on Form 8-K" to
Form 10-Q dated June 30, 1996 and filed on August 12, 1996.
(14) Incorporated by reference to Item 16. "Exhibits" to a Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
December 18, 1996.
<PAGE> 1
EXHIBIT 10.5.1
AIRCRAFT LEASE
By this Aircraft Lease TALBOTT AVIATION, INC., a Texas corporation
("Lessor"), whose address is P.O. Drawer 1416, Snyder, Texas 79550, leases to
PATTERSON ENERGY, INC., a Delaware corporation ("Lessee"), whose address is
P.O. Box 410, Snyder, Texas 79550, the aircraft described below, on the
following terms and conditions:
1. Description of Aircraft. The property leased under this agreement
is a 1981 Beech King-Air 90 airplane, manufacturer's serial No. LA-121 and
Department of Transportation, Federal Aviation Administration No. N182CA.
2. Term of Lease. The term of this Lease is for a period of one (1)
year, commencing as of January 1, 1997 and terminating on December 31, 1997.
3. Rental Payments. Lessee agrees to pay Lessor as rent for the use
of the aircraft a total sum of $9,200.00 per month, payable in advance on the
first day of each month during the term of this Lease, beginning January 1,
1997.
Rental payments shall be made at Lessor's address as set forth above
or at any other place that may be designated by Lessor or its assignees. Any
rental payment not made by Lessee within ten (10) days of its due date shall by
subject to a late charge of five percent (5%) of the amount not paid when due
for each ten days the amount remains unpaid.
4. Delivery of Aircraft. Lessor agrees to deliver the aircraft to
Lessee at Scurry County Airport, Snyder, Texas. At delivery to Lessee on
January 1, 1997, the aircraft shall be in an airworthy condition and registered
in the name of Lessor with the Secretary of Transportation, pursuant to Section
1401, Title 49 of the United States Code, and shall be covered by a Certificate
of Airworthiness issued by the Federal Aviation Administration.
5. Maintenance. During the term of the Lease, Lessee shall at its
own expense maintain the aircraft, including the airframe, engines, propellers,
instruments, equipment, appliances, and accessories in fully operable
condition, and in compliance with all applicable maintenance and safety
requirements of the Federal Aviation Administration and the Federal Aviation
Administration approved 1981 Beech King-Air airplane maintenance manual (the
"Maintenance Manual"). All maintenance and repair work shall be performed by
personnel duly certified to perform such work by the Federal Aviation
Administration. Work shall be in accordance with minimum standards of the
Federal Aviation Administration and in accordance with standards set forth in
the Maintenance Manual.
Dated this 15th day of January, 1997.
LESSOR: LESSEE:
TALBOTT AVIATION, INC. PATTERSON ENERGY, INC.
/s/ CLOYCE A. TALBOTT /s/ GLENN PATTERSON
- ---------------------------- --------------------------
CLOYCE A. TALBOTT, PRESIDENT GLENN PATTERSON, PRESIDENT
<PAGE> 1
EXHIBIT 10.20
ASSET PURCHASE AGREEMENT
BETWEEN
PATTERSON DRILLING COMPANY
AND
HONDO DRILLING COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
THE ASSET PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1 The Asset Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.2 Authority; Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HONDO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3.1 Organization, Standing and Power. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3.2 Authority; Non-Contravention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 3.3 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3.4 Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.5 Drilling Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.7 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.8 Normal Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.9 Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 4.1 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 4.2 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.4 Use of Office Space . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.5 PDC Assumption of Drilling Contracts; Hondo Invoicing of Direct Costs . . . . . . . . 6
SECTION 4.6 Sales and Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 4.7 Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE V
CONDITIONS PRECEDENT TO THE ASSET PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 5.1 Conditions to Each Party's Obligation to Effect the Asset Purchase . . . . . . . . . 6
SECTION 5.2 Conditions to Obligation of Hondo to Effect the Asset Purchase . . . . . . . . . . . 7
SECTION 5.3 Conditions to Obligations of PDC to Effect the Asset Purchase . . . . . . . . . . . . 7
ARTICLE VI
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 6.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.4 Entire Agreement; No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . 10
SECTION 6.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6.8 Enforcement of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
ii
<PAGE> 4
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated November __, 1996 (this "Agreement"),
among PATTERSON DRILLING COMPANY ("PDC"), a Delaware corporation and a
wholly-owned subsidiary of Patterson Energy, Inc. ("PEC"), and HONDO DRILLING
COMPANY, a New Mexico corporation ("Hondo").
WITNESSETH:
WHEREAS, Hondo owns 12 drilling rigs, related drilling equipment and
certain vehicles (collectively, the "Drilling Rigs, Equipment and Vehicles"),
and an office building and parking lot in Midland, Texas, and a yard in Odessa,
Texas (collectively, the "Real Property"), all as more particularly described
on Annex 1, in the case of the Drilling Rigs, Equipment and Vehicles and Annex
2, in the case of the Real Property;
WHEREAS, PDC desires to purchase, and Hondo desires to sell, all of
Hondo's right, title and interest in the Drilling Rigs, Equipment and Vehicles
and in the Real Property (the "Asset Purchase") for the consideration set forth
and provided for herein; and
WHEREAS, PDC, on the one hand, and Hondo, on the other, desire to make
certain representations, warranties and agreements in connection with the Asset
Purchase.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
I
THE ASSET PURCHASE
.1 The Asset Purchase. Upon the terms and subject to the conditions of
this Agreement, at the Closing (as defined in Section 1.3 below) provided
herein, PDC shall purchase from Hondo and Hondo shall sell to PDC, all of
Hondo's right, title and interest in and to the Drilling Rigs, Equipment and
Vehicles and in and to the Real Property.
.2 Purchase Price. PDC agrees to pay to Hondo at the Closing a total
of $2,250,000 (the "Purchase Price") for all of Hondo's right, title and
interest in and to the Drilling Rigs, Equipment and Vehicles and in and to the
Real Property. The Purchase Price shall be paid as follows: (i) delivery by
PDC to Hondo of a cashier's check in the amount of $1,915,000, and (ii)
delivery by Stubbeman McRae Sealy Laughlin & Browder, Inc. ("Stubbeman") to
Hondo of the $235,000 currently being held by Stubbeman as Escrow Agent for
Hondo and PDC.
<PAGE> 5
.3 Closing. The closing of the Asset Purchase (the "Closing") shall
take place at 9:00 a.m., local time, on the date of this Agreement at the
offices of Patterson Energy, Inc., in Snyder, Texas or at such other time and
place as PDC and Hondo shall agree.
II
REPRESENTATIONS AND WARRANTIES OF PDC
PDC represents and warrants to Hondo as follows:
.1 Organization, Standing and Power. PDC 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.
.2 Authority; Non-Contravention. PDC has all requisite power and
authority to enter into this Agreement and to consummate the Asset Purchase.
The execution and delivery by PDC of this Agreement and the consummation by PDC
of the Asset Purchase have been duly authorized by all necessary corporate
action on the part of PDC. This Agreement has been duly executed and delivered
by PDC and (assuming the valid authorization, execution and delivery of this
Agreement by Hondo) constitutes a valid and binding obligation of PDC
enforceable against PDC 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). 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 Agency") is required
by or with respect to PDC in connection with the execution and delivery of this
Agreement by PDC or is necessary for the consummation by PDC of the Asset
Purchase and the other transactions contemplated by this Agreement.
III
REPRESENTATIONS AND WARRANTIES OF HONDO
.1 Organization, Standing and Power. Hondo is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of New Mexico and has the requisite corporate power and authority to carry on
its business as now being conducted.
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<PAGE> 6
.2 Authority; Non-Contravention. Hondo has all requisite power and
authority to enter into this Agreement and to consummate the Asset Purchase.
This Agreement has been duly executed and delivered by Hondo and (assuming the
valid authorization, execution and delivery of this Agreement by PDC)
constitutes a valid and binding obligation of Hondo enforceable against it 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 Asset Purchase and compliance with the provisions
hereof will not, conflict with, or result in any violation of, or default (with
or without notice of 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, charges or encumbrances upon any of the properties or assets of Hondo
under, any provision of (i) the Articles of Incorporation or Bylaws of Hondo
(true and complete copies of which as of the date hereof have been delivered to
PDC), (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to Hondo or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Hondo or any of its respective
properties or assets. No filing or registration with, or authorization,
consent or approval of, any Governmental Entity is required by or with respect
to Hondo in connection with the execution and delivery of this Agreement by
Hondo is necessary for the consummation by Hondo of the Asset Purchase.
.3 Environmental Matters.
(a) 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 Hondo, to the actual knowledge of Hondo:
(i) Hondo 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 Hondo 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 Hondo of the transactions
contemplated hereby or the operation of the business of Hondo on the
date of the Closing;
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<PAGE> 7
(iii) Hondo has not received any Environmental Claim, nor
has any Environmental Claim been threatened against Hondo;
(iv) Hondo 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;
(v) there are no circumstances that are reasonably likely
to give rise to liability under any agreements with any person
pursuant to which Hondo 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 Hondo 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 Hondo 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 Hondo under any
Environmental Law.
"Environmental Permits" means all permits, licenses,
registrations, exemptions and other governmental authorizations
required under Environmental Laws for Hondo 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
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<PAGE> 8
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.
"Material Adverse Effect" means any change or effect that is
or, as far as can reasonably be determined, is likely to be materially
adverse to the assets, properties, conditions (financial or
otherwise), business or results of operations of Hondo.
.4 Title. Set forth in Annex 1 and Annex 2 is a description of the
Drilling Rigs, Equipment and Vehicles and of the Real Property, respectively,
which description is accurate and complete in all material respects. Hondo has
good and, in the case of the Real Property, indefeasible title to a 100%
interest in the Drilling Rigs, Equipment and Vehicles and in the Real Property,
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. For purposes of this
Agreement "Liens" means liens, mortgages, pledges, security interests,
encumbrances, claims or charges of any kind.
.5 Drilling Contracts. Set forth in Annex 3 is a true and correct list
of all drilling contracts (collectively, the "Drilling Contracts") to which
Hondo is a party as of the date of this Agreement. A copy of each of the
Drilling Contracts has previously been delivered to PDC.
.6 Litigation. There is no suit, action, investigation or proceeding
pending or, to the knowledge of Hondo, threatened against Hondo 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.
.7 Brokers. Other than Webster & Co., no broker, investment banker or
other person 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 Hondo. Any fee or commission
payable to Webster & Co. shall be paid by Hondo.
.8 Normal Operations. All wells currently being drilled by Hondo under
the Drilling Contracts are drilling under normal operations.
.9 Management. No member of Hondo's management is a stockholder of
Hondo, directly or indirectly.
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<PAGE> 9
IV
ADDITIONAL AGREEMENTS
.1 Fees and Expenses. All costs and expenses incurred by PDC in
connection with this Agreement and the transactions contemplated hereby shall
be paid by PDC; such costs and expenses incurred by Hondo shall be paid by
Hondo.
.2 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 Asset Purchase and the other transactions
contemplated by this Agreement and the prompt satisfaction of the conditions
hereto.
.3 Public Announcements. Unless otherwise required by law or the rules
and regulations of the Securities and Exchange Commission, neither PDC, PEC nor
Hondo shall issue any such press release or make any public statement with
respect to the Asset Purchase prior to Closing.
.4 Use of Office Space. PDC agrees that for a period of up to 150 days
following the Closing, Hondo may use the computer, without charge, and share
office space in the Hondo office building on a rent-free basis, both for the
purpose of winding up Hondo's operations.
.5 PDC Assumption of Drilling Contracts; Hondo Invoicing of Direct
Costs. Effective as of 7:00 a.m. Midland, Texas time on the date of this
Agreement ("Effective Time of Assumption"), PDC shall assume all obligations
and rights and benefits of Hondo under each of the Drilling Contracts. In
addition, within 30 days following Closing, Hondo shall invoice PDC for all
direct costs incurred by Hondo under each of the Drilling Contracts prior to
the Effective Time of Assumption, which invoices shall be paid to Hondo by PDC
within 30 days of receipt by PDC.
.6 Sales and Transfer Taxes. Hondo agrees to pay any and all sales
and/or transfer taxes due with respect to the Asset Purchase.
.7 Real Estate Taxes. Hondo and PDC agree that any special assessments
or other charges the Real Property shall be prorated between Hondo and PDC to
the date of Closing.
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<PAGE> 10
V
CONDITIONS PRECEDENT TO THE ASSET PURCHASE
.1 Conditions to Each Party's Obligation to Effect the Asset Purchase.
The respective obligations of each party to effect the Asset Purchase shall be
subject to the fulfillment or waiver (where permissible) at or prior to the
Closing Date of each of the following conditions:
(a) 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 Asset Purchase or any of the other
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.
(b) Consents. Hondo shall have received written consents
of the other party or parties to each of the Drilling Contracts for the
assumption thereof by PDC pursuant to the provisions of Section 4.6 of this
Agreement and delivered copies thereof to PDC.
.2 Conditions to Obligation of Hondo to Effect the Asset Purchase. The
obligation of Hondo to effect the Asset Purchase shall be subject to the
fulfillment at or prior to the Closing of the following additional conditions;
provided that Hondo may waive any of such conditions in its sole discretion:
(a) Performance of Obligations; Representations and
Warranties. PDC shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed on or prior to
the Closing, each of the representations and warranties of PDC contained in
this Agreement shall be true and correct on and as of the Closing.
(b) Officers' Certificate. PDC shall have furnished to
Hondo a certificate, dated the Closing, signed by the appropriate officers of
PDC, certifying to the effect that to the best of the knowledge and belief of
PDC, the conditions set forth in Section 5.1 and this Section 5.2(a) have been
satisfied in full.
(c) Payment of Purchase Price. PDC shall have made
delivery of the Purchase Price as provided in Section 1.2 of this Agreement.
.3 Conditions to Obligations of PDC to Effect the Asset Purchase. The
obligations of PDC to effect the Asset Purchase shall be subject to the
fulfillment at or prior to the Closing of the following additional conditions,
provided that PDC may waive any such conditions in its sole discretion:
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<PAGE> 11
(a) Performance of Obligations; Representations and
Warranties. Hondo shall have performed in all material respects each of its
agreements contained in this Agreement required to be performed on or prior to
the Closing, each of the respective representations and warranties of Hondo
contained in this Agreement shall be true and correct on and as of the Closing
shall be true in all material respects on and as of the Closing.
(b) Officers' Certificate. Hondo shall have furnished to
PDC a certificate, dated the Closing, certifying to the effect that to the best
of the knowledge and belief of Hondo, the conditions set forth in Section 5.1
and this Section 5.3(a) have been satisfied.
(c) Opinion of Counsel. PDC shall have received an
opinion of counsel from Stubbeman, McRae, Sealy, Laughlin & Browder, Inc.,
Midland, Texas, counsel to Hondo, dated the Closing, substantially to the
effect that:
(i) The incorporation, existence and good standing of
Hondo are as stated in this Agreement.
(ii) This Agreement has been duly authorized, executed and
delivered by Hondo, and (assuming the due and valid authorization,
execution and delivery by PDC) constitutes the legal, valid and
binding agreement of Hondo enforceable against Hondo 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 Hondo of this
Agreement will not violate the Articles of Incorporation or Bylaws of
Hondo 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 Hondo is a party or to which it or any of its
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 Hondo 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 Hondo for
consummation of the transactions contemplated by this Agreement.
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<PAGE> 12
In rendering such opinion, counsel for Hondo may rely as to matters of fact
upon the representations of officers of Hondo contained in any certificate
delivered to such counsel and certificates of public officials.
Such opinion shall be limited to the laws of the United States of
America and the State of Texas.
(d) Bill of Sale and Assignment. Hondo shall have
executed and delivered the Bill of Sale and Assignment covering the Drilling
Rigs, Equipment and Vehicles in the form attached hereto as Exhibit A.
(e) General Warranty Deeds. Hondo shall have executed
and delivered the respective General Warranty Deeds in the respective forms
attached hereto as Exhibit B (Hondo office building and parking lot) and
Exhibits C and D (Hondo yard).
(f) Title Insurance. PDC shall have obtained title
commitments for title insurance on the Real Property.
(g) Titles. Hondo shall have endorsed and delivered the
title certificates to the motor vehicles described in Annex 1.
VI
GENERAL PROVISIONS
.1 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):
(a) if to PDC, to:
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1416
Snyder, Texas 79549
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
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<PAGE> 13
with copies to:
Thomas H. Maxfield, Esq.
Baker & Hostetler
303 East 17th Avenue, Suite 1100
Denver, Colorado 80203-1264
(b) if to Hondo, to:
Rike Tipton, President
Hondo Drilling Company
Post Office Drawer 2516
Midland, Texas 79702-2516
with copies to:
Allen G. Harvey, Esq.
Stubbeman, McRae, Sealy, Laughlin
& Browder, Inc.
Fasken Center, Tower Two
550 West Texas Avenue, Suite 800
Midland, Texas 79702-2516
.2 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."
.3 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.
.4 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) is not intended to confer upon any person other than the parties any
rights or remedies hereunder; provided, however, that legal counsel for Hondo
hereto may
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<PAGE> 14
rely upon the representations and warranties of Hondo contained herein and in
the certificates delivered pursuant to Sections 5.3(b) and (c).
.5 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Texas, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws
thereof.
.6 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. 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.
.7 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.
.8 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.
IN WITNESS WHEREOF, PDC and Hondo have executed this Agreement as of
the date first written above.
PDC:
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
_______________________
Cloyce A. Talbott
Chief Executive Officer
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<PAGE> 15
Attest:
/s/ JAMES C. BROWN
____________________________________
James C. Brown, Secretary
HONDO:
HONDO DRILLING COMPANY
By: /s/ RIKE TIPTON
_____________________
Rike Tipton
President
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<PAGE> 16
ANNEX 1
TO
ASSET PURCHASE AGREEMENT
DESCRIPTION OF DRILLING RIGS, EQUIPMENT
AND VEHICLES
<PAGE> 17
ANNEX 2
TO
ASSET PURCHASE AGREEMENT
DESCRIPTION OF REAL PROPERTY
VII. Hondo Office Building:
410 North Loraine, Midland, Texas
North 100 feet of the NW/4 of Block 8, Original Town, Midland
County, Texas
VIII. Parking Lot:
South 50 feet of the NW/4 of Block 8, Original Town, Midland
County, Texas
IX. Odessa Yard:
Lot 1, Block 1, Hondo Subdivision, Ector County, Texas,
containing 1.033 acres.
Section 35, Block 42, Township 2 South, T&P Ry. Co. Survey,
Tract No. 87A, Ector County, Texas, containing 7.367 acres.
Section 35, Block 42, Township 2 South, T&P Ry. Co. Survey,
Tract No. 87B, Ector County, Texas, containing 2.500 acres
<PAGE> 18
ANNEX 3
TO
ASSET PURCHASE AGREEMENT
LIST OF DRILLING CONTRACTS
<PAGE> 19
EXHIBIT A
BILL OF SALE AND ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS, that, pursuant to that certain
asset purchase agreement, dated of even date herewith ("Asset Purchase
Agreement") between PATTERSON DRILLING COMPANY ("PDC"), a Delaware corporation,
and HONDO DRILLING COMPANY ("HONDO"), A New Mexico corporation (HONDO is
referred to herein as the "Assignor"), the Assignor, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby grants, bargains, sells, conveys and transfers unto PDC (the
"Assignee"), all of the assignor's right, title and interest in and to (i) the
drilling rigs, equipment and vehicles set forth in Appendix I attached hereto
and incorporated herein by this reference; and (ii) the drilling contracts
described in Appendix II attached hereto and incorporated herein by this
reference.
TO HAVE AND TO HOLD the same unto the Assignee and the
Assignee's successors and assigns forever. The Assignor hereby covenants and
agrees that it has the full right, power and authority to sell, convey and
transfer the foregoing property to the assignee pursuant to this bill of sale
and assignment.
IN WITNESS WHEREOF, the Assignor has caused this bill of sale
and assignment to be duly executed by its duly authorized officer as of the
____ day of November, 1996.
HONDO DRILLING COMPANY
BY: ______________________
Rike Tipton
PRESIDENT
A-1
<PAGE> 20
APPENDIX I
TO
BILL OF SALE AND ASSIGNMENT
FROM
HONDO DRILLING COMPANY
TO
PATTERSON DRILLING COMPANY
(List of Assets Assigned)
[See ANNEX I]
A-2
<PAGE> 21
APPENDIX II
TO
BILL OF SALE AND ASSIGNMENT
FROM
HONDO DRILLING COMPANY
TO
PATTERSON DRILLING COMPANY
(List of Drilling Contracts Assigned)
<PAGE> 1
EXHIBIT 10.21
ASSET PURCHASE AGREEMENT
AMONG
PATTERSON ENERGY, INC.
PATTERSON DRILLING COMPANY
AND
RIG I GROUP, INC.
PHOENIX DRILLING, INC.
WELCH & HOWELL DRILLING, INC.
AND
IMPERIAL EQUIPMENT CO.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
THE ASSET PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1 The Asset Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 Purchase Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.3 Sales Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.4 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PEC AND PDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.2 PEC Capital Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2.3 Authority; Non-Contravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 3.1 Representations and Warranties of Rig I, Phoenix and Welch & Howell. . . . . . . . . . 3
SECTION 3.2 Representations and Warranties of Rig I . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 3.3 Representations and Warranties of Phoenix . . . . . . . . . . . . . . . . . . . . . . 5
SECTION 3.4 Representations and Warranties of Welch & Howell . . . . . . . . . . . . . . . . . . . 6
SECTION 3.5 Representations and Warranties of Imperial . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV
ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.1 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.2 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.5 Sellers' Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V
CONDITIONS PRECEDENT TO THE ASSET PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
SECTION 5.1 Conditions to Each Party's Obligation to Effect the Stock Purchase . . . . . . . . . 10
SECTION 5.2 Conditions to Obligation of the Sellers to Effect the Asset Purchase . . . . . . . . 10
SECTION 5.3 Conditions to Obligations of PEC and PDC to Effect the Asset Purchase . . . . . . . 11
ARTICLE VI
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 6.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 6.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 6.4 Entire Agreement; No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . 14
SECTION 6.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6.6 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6.8 Enforcement of This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6.9 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6.10 Facsimile Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
-ii-
<PAGE> 4
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of December ___, 1996 (this
"Agreement"), among Patterson Energy, Inc. ("PEC"), a Delaware corporation,
Patterson Drilling Company ("PDC"), a Delaware corporation and a wholly-owned
subsidiary of PEC, and Rig I Group, Inc. ("Rig I"), a California corporation,
Phoenix Drilling, Inc. ("Phoenix"), a California corporation, Welch & Howell
Drilling, Inc. ("Welch & Howell"), a California corporation and Imperial
Equipment Co. ("Imperial"), a California general partnership (Rig I, Phoenix,
Welch & Howell, and Imperial are collectively referred to herein as the
"Sellers").
WITNESSETH:
WHEREAS, Rig I, Phoenix and Welch & Howell as a group own
three drilling rigs, known respectively, as Rig 2, Rig 4, and Rig 11 (Rig 2,
Rig 4 and Rig 11, together with the related drilling equipment, are
collectively referred to herein as the "Drilling Rigs") and Imperial owns
certain cranes, trucks and miscellaneous equipment (collectively referred to
herein as "Equipment"), all as more particularly described on Annex 1 in the
case of the Drilling Rigs and Annex 2 in the case of the Equipment;
WHEREAS, PDC desires to purchase, and the respective Sellers
desire to sell, all of the right, title and interest of Rig I, Phoenix and
Welch & Howell in the Drilling Rigs and of Imperial in the Equipment (the
"Asset Purchase") for the consideration set forth and provided for herein; and
WHEREAS, PEC and PDC, on the one hand, and the Sellers, on the
other, desire to make certain representations, warranties and agreements in
connection with the Asset Purchase.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
I
THE ASSET PURCHASE
.1 The Asset Purchase. Upon the terms and subject to the conditions of
this Agreement, at the Closing (as defined in Section 1.3 below) provided
herein, PDC shall purchase from the Sellers and the Sellers shall sell to PDC,
all of their respective rights, title and interests in and to the Drilling Rigs
and the Equipment "as is, where is," which interests shall total 100%.
-1-
<PAGE> 5
.2 Purchase Consideration. PEC and PDC agree to pay the following
consideration to the Sellers at the Closing for all of the rights, title and
interests of the Sellers in and to the Drilling Rigs and the Equipment: (a)
$100,000 cash; (b) $400,000 aggregate principal amount promissory notes of PDC
in the form attached hereto as Exhibit A (the "Notes"); and (c) 52,000 shares
of PEC Common Stock (the cash, Notes and PEC Common Stock are collectively
referred to herein as the "Purchase Consideration"). The Purchase Consideration
shall be issued or paid to the respective Sellers in the amounts and for their
respective interests in the Drilling Rigs and the Equipment as set forth in the
following table:
<TABLE>
<CAPTION>
AMOUNT OF PURCHASE PRICE
---------------------------------------
PRINCIPAL NUMBER OF
INTERESTS IN AMOUNT OF SHARES OF PEC
NAME OF SELLER DRILLING RIGS/EQUIPMENT CASH NOTE COMMON STOCK
-------------- ----------------------- ---- -------- ------------
<S> <C> <C> <C> <C>
Rig I . . . . . . . . . . Drilling Rigs(1) $ - $ - 4,250
Phoenix . . . . . . . . . Drilling Rigs(1) $ - $ - 28,000
Welch & Howell . . . . . Drilling Rigs(1) $ - $ 400,000 -
Imperial . . . . . . . . Equipment(2) $ 100,000 $ - 19,750
</TABLE>
__________
(1) 100% interest.
(2) 100% interest.
.3 Sales Tax. Sellers agree to pay any and all sales tax due with
respect to the Asset Purchase.
.4 Closing. The closing of the Asset Purchase (the "Closing") shall take
place at 9:00 a.m., local time, on December 5, 1996, at the offices of PEC, in
Snyder, Texas or at such other time and place as PDC and the Sellers shall
agree.
II
REPRESENTATIONS AND WARRANTIES OF PEC AND PDC
PEC and PDC represent and warrant to the Sellers as follows:
.1 Organization, Standing and Power. Each of PEC and PDC 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.
-2-
<PAGE> 6
.2 PEC Capital Structure. The authorized capital stock of PEC consists
of 9,000,000 shares of Common Stock ("PEC Common Stock") and 1,000,000 shares
of Preferred Stock ("PEC Preferred Stock"). At the close of business on
November 15, 1996, (i) 4,828,449 shares of PEC Common Stock were validly issued
and outstanding, fully paid and nonassessable and free of preemptive rights,
(ii) 383,910 shares of PEC Common Stock were reserved for issuance upon
exercise of then outstanding options and warrants, and (iii) no shares of PEC
Preferred Stock were issued or outstanding. All shares of PEC Common Stock to
be issued in the Asset Purchase as provided in Section 1.2 above will be, when
so issued, duly authorized, validly issued, fully paid and nonassessable and
free of preemptive rights.
.3 Authority; Non-Contravention. Each of PEC and PDC has all requisite
power and authority to enter into this Agreement and to consummate the Asset
Purchase. The execution and delivery by PEC and PDC of this Agreement and the
consummation by PEC and PDC of the Asset Purchase have been duly authorized by
all necessary corporate action on the part of PEC and PDC. This Agreement has
been duly executed and delivered by PEC and PDC and (assuming the valid
authorization, execution and delivery of this Agreement by the Sellers)
constitutes a valid and binding obligation of PEC and PDC enforceable against
PEC and PDC 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). 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 Agency") is required by or with
respect to PEC or PDC in connection with the execution and delivery of this
Agreement by PEC and PDC or is necessary for the consummation by PEC and PDC of
the Asset Purchase and the other transactions contemplated by this Agreement.
III
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
.1 Representations and Warranties of Rig I, Phoenix and Welch & Howell.
(a) Title. Set forth in Annex 1 is a description of each
of the Drilling Rigs. Rig I, Phoenix and Welch & Howell, as a group, have good
and indefeasible title to a 100% interest in each of the Drilling Rigs 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.
-3-
<PAGE> 7
.2 Representations and Warranties of Rig I. Rig I represents and
warrants to PEC and PDC as follows:
(a) Organization, Standing and Power. Rig I is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California and has the requisite corporate power and
authority to carry on its business as now being conducted.
(b) Capital Structure; Ownership of Rig I Stock. The
authorized capital stock of Rig I consists of 1,000,000 shares of Common Stock,
of which 220,000 shares are issued and outstanding, fully paid and
nonassessable and free of preemptive rights. Annex 3.2 to this Agreement sets
forth a true and correct list of the ownership of the capital stock of Rig I by
the stockholders of Rig I.
(c) Authority; Non-Contravention. Rig I has all requisite
power and authority to enter into this Agreement and to consummate the Asset
Purchase. This Agreement has been duly executed and delivered by Rig I and
(assuming the valid authorization, execution and delivery of this Agreement by
PEC and PDC) constitutes a valid and binding obligation of Rig I enforceable
against it 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 Asset Purchase and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice of 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, charges or encumbrances upon any of the properties or assets
of Rig I under, any provision of (i) the Articles of Incorporation or Bylaws of
Rig I, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise or license
applicable to Rig I or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Rig I or any of its properties or
assets. No filing or registration with, or authorization, consent or approval
of, any Governmental Entity is required by or with respect to Rig I in
connection with the execution and delivery of this Agreement by Rig I or is
necessary for the consummation by Rig I of the Asset Purchase.
(d) Litigation. There is no suit, action, investigation
or proceeding pending or, to the knowledge of Rig I, threatened against Rig I
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.
-4-
<PAGE> 8
(e) Brokers. Except as set forth in Schedule 3.2(e), no
broker, investment banker or other person 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
Rig I.
.3 Representations and Warranties of Phoenix. Phoenix represents and
warrants to PEC and PDC as follows:
(a) Organization, Standing and Power. Phoenix is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California and has the requisite corporate power and
authority to carry on its business as now being conducted.
(b) Capital Structure; Ownership of Phoenix Stock. The
authorized capital stock of Phoenix consists of 5,000,000 shares of Common
Stock, of which 535,000 shares are issued and outstanding, fully paid and
nonassessable and free of preemptive rights. Annex 3.3 to this Agreement sets
forth a true and correct list of the ownership of the capital stock of Phoenix
by the stockholders of Phoenix.
(c) Authority; Non-Contravention. Phoenix has all
requisite power and authority to enter into this Agreement and to consummate
the Asset Purchase. This Agreement has been duly executed and delivered by
Phoenix and (assuming the valid authorization, execution and delivery of this
Agreement by PEC and PDC) constitutes a valid and binding obligation of Phoenix
enforceable against it 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 Asset Purchase and
compliance with the provisions hereof will not, conflict with, or result in any
violation of, or default (with or without notice of 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, charges or encumbrances upon any of
the properties or assets of Phoenix under, any provision of (i) the Articles of
Incorporation or Bylaws of Phoenix, (ii) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Phoenix or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to
Phoenix or any of its properties or assets. No filing or registration with, or
authorization, consent or approval of, any Governmental Entity is required by
or with respect to Phoenix in connection with the execution and delivery of
this Agreement by Phoenix or is necessary for the consummation by Phoenix of
the Asset Purchase.
-5-
<PAGE> 9
(d) Litigation. There is no suit, action, investigation
or proceeding pending or, to the knowledge of Phoenix, threatened against
Phoenix 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.
(e) Brokers. Except as set forth in Schedule 3.2(e), no
broker, investment banker or other person 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
Phoenix.
.4 Representations and Warranties of Welch & Howell. Welch & Howell
represents and warrants to PEC and PDC as
follows:
(a) Organization, Standing and Power. Welch & Howell is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California and has the requisite corporate power and
authority to carry on its business as now being conducted.
(b) Capital Structure; Ownership of Welch & Howell Stock.
The authorized capital stock of Welch & Howell consists of 1,000,000 shares of
Common Stock, of which 1,500 shares are issued and outstanding, fully paid and
nonassessable and free of preemptive rights. Annex 3.4 to this Agreement sets
forth a true and correct list of the ownership of the capital stock of Welch &
Howell by the stockholders of Welch & Howell.
(c) Authority; Non-Contravention. Welch & Howell has all
requisite power and authority to enter into this Agreement and to consummate
the Asset Purchase. This Agreement has been duly executed and delivered by
Welch & Howell and (assuming the valid authorization, execution and delivery of
this Agreement by PEC and PDC) constitutes a valid and binding obligation of
Welch & Howell enforceable against it 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
Asset Purchase and compliance with the provisions hereof will not, conflict
with, or result in any violation of, or default (with or without notice of
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,
charges or encumbrances upon any of the properties or assets of Welch & Howell
under, any provision of (i) the Articles of Incorporation or Bylaws of Welch &
Howell, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise or license
applicable to Welch & Howell, or (iii) any judgment, order, decree, statute,
law,
-6-
<PAGE> 10
ordinance, rule or regulation applicable to Welch & Howell or any of its
respective properties or assets. No filing or registration with, or
authorization, consent or approval of, any Governmental Entity is required by
or with respect to Welch & Howell in connection with the execution and delivery
of this Agreement by Welch & Howell or is necessary for the consummation by
Welch & Howell of the Asset Purchase.
(d) Litigation. Except as set forth in Schedule 3.4(d),
there is no suit, action, investigation or proceeding pending or, to the
knowledge of Welch & Howell, threatened against Welch & Howell 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.
(e) Brokers. Except as set forth in Schedule 3.2(e), no
broker, investment banker or other person 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
Welch & Howell.
.5 Representations and Warranties of Imperial. Imperial represents and
warrants to PEC and PDC as follows:
(a) Organization and Ownership. Imperial is a general
partnership under the laws of the State of California and has the requisite
power and authority to carry on its business as now being conducted. Annex 3.5
to this Agreement sets forth a true and correct list of the ownership of
Imperial.
(b) Authority; Non-Contravention. Imperial and its
partners have all requisite power and authority to enter into this Agreement
and to consummate the Asset Purchase. This Agreement has been duly executed and
delivered by Imperial and its partners and (assuming the valid authorization,
execution and delivery of this Agreement by PEC and PDC) constitutes a valid
and binding obligation of Imperial and its partners enforceable against them 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 Asset Purchase and compliance with the provisions hereof
will not, conflict with, or result in any violation of, or default (with or
without notice of 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, charges or encumbrances upon any of the properties or assets of
Imperial under, any provision of (i) the Partnership Agreement of Imperial,
(ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license
applicable to Imperial or
-7-
<PAGE> 11
either of its partners or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Imperial or either of its partners
or any of their respective properties or assets. No filing or registration
with, or authorization, consent or approval of, any Governmental Entity is
required by or with respect to Imperial or either of its partners in connection
with the execution and delivery of this Agreement by Imperial or either of its
partners or is necessary for the consummation by Imperial or either of its
partners of the Asset Purchase.
(c) Title. Set forth in Annex 2 is a description of the
Equipment, complete in all material respects. Imperial has good and
indefeasible title to a 100% interest in the Equipment, 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.
(d) Litigation. There is no suit, action, investigation
or proceeding pending or, to the knowledge of Imperial or either of its
partners, threatened against Imperial or either of its partners 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.
(e) Brokers. Except as set forth in Schedule 3.2(e), no
broker, investment banker or other person 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
Imperial or either of its partners.
IV
ADDITIONAL AGREEMENTS
.1 Fees and Expenses. All costs and expenses incurred by PEC and PDC in
connection with this Agreement and the transactions contemplated hereby shall
be paid by PEC and PDC; such costs and expenses incurred by the respective
Sellers shall be paid by the Sellers.
.2 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 Asset Purchase and the other transactions
contemplated by this Agreement and the prompt satisfaction of the conditions
hereto.
-8-
<PAGE> 12
.3 Public Announcements. None of the Sellers shall issue any press
release or make any public statement with
respect to the Asset Purchase without the prior written consent of PDC.
SECTION 4.4 Taxable Transaction; No Liquidation or Dissolution of Rig
I or Phoenix. The Sellers acknowledge and agree that PEC and PDC intend that
the Asset Purchase constitute a taxable purchase of assets for income tax
purposes and that the Asset Purchase not qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"). As a result, none of the Sellers shall take any action inconsistent
with such intent and neither Rig I nor Phoenix shall: (a) adopt a plan of
reorganization within the meaning of Sections 361 and 368 of the Code or
Section 1.368-2(g) of the Treasury Regulations; (b) dissolve, liquidate, or
distribute all of its properties (or treat the undistributed assets as if they
had been distributed and then contributed to the capital of a new corporation)
during the 12-month period following the Closing or such longer period as may
be necessary to cause Rig I and Phoenix to violate the distribution requirement
of Code Section 368(a)(2)(G)(i); (c) request, under Code Section
368(a)(2)(G)(ii), a waiver of such distribution requirement; or (d) otherwise
take any action to cause the Asset Purchase to qualify (or be treated) as a
reorganization within the meaning of Code Section 368(a).
SECTION 4.5 Sellers' Indemnification.
(a) After the Closing, Rig I and Phoenix shall severally,
and William J. Nasif ("Nasif") and William P. Mason ("Mason") shall jointly and
severally, indemnify and hold PEC and PDC harmless against and in respect of
all actions, suits, demands, judgments, losses, costs and expenses, attorneys'
fees of PEC or PDC relating to: (i) any misrepresentation, breach of any
representation or warranty or breach or non-fulfillment of any agreement on the
part of Rig I or Phoenix under this Agreement; or (ii) the failure of the Asset
Purchase to be a taxable transaction for income tax purposes rather than a
reorganization within the meaning of Code Section 368(a) as a result of
misrepresentations, breach of any representation or warranty or breach or
non-fulfillment of any agreement on the part of Rig I or Phoenix under this
Agreement. Without limiting the generality of the foregoing, a "loss" resulting
from a breach by Rig I or Phoenix of the agreement contained in Section 4.4 and
a "loss" resulting from the failure of the Asset Purchase to be a taxable
transaction as described in Section 4.5(a)(ii) hereof would include any loss
incurred by PEC or PDC as a result of the inability to claim a cost basis in
the Drilling Rigs and Equipment equal to the Purchase Consideration (rather
than a carryover basis) for federal and state income tax purposes. The
indemnification provided for in Section 4.5(a)(i) hereof shall terminate and be
of no further force and effect two years from the Closing and the
indemnification provided for in Section 4.5(a)(ii) hereof shall be of no
further force or effect upon expiration of the applicable statutes of
limitations on assessment of any federal or state income taxes resulting from
the disallowance of a cost basis in Drilling Rigs and Equipment (as described
above in this paragraph), except as to any claim for indemnification for a
written notice of such claim has been given to Rig I or Phoenix and Nasif and
Mason prior to the
-9-
<PAGE> 13
expiration of such two-year period or the expiration of such statutes of
limitations (as the case may be).
(b) After the Closing, Welch & Howell and Imperial shall
severally, and David J. Howell ("D Howell") and Frank J. Welch ("F Welch")
shall jointly and severally, indemnify and hold PEC and PDC harmless against
and in respect of all actions, suits, demands, judgments, losses, costs and
expenses, attorneys' fees of PEC or PDC, relating to any misrepresentation,
breach of any representation or warranty or breach or non-fulfillment of any
agreement on the part of Welch & Howell or Imperial under this Agreement. This
indemnification provided for in this Section 4.5(b) shall terminate and be of
no further force and effect two years from the Closing, except as to any
representation or warranty as to which a written notice of claim for
indemnification has been given to D Howell and F Welch prior to the expiration
of such two-year period.
V
CONDITIONS PRECEDENT TO THE ASSET PURCHASE
.1 Conditions to Each Party's Obligation to Effect the Stock Purchase.
The respective obligations of each party to effect the Asset Purchase shall be
subject to the fulfillment or waiver (where permissible) at or prior to the
Closing of each of the following conditions:
(a) 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 Asset Purchase; 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.
.2 Conditions to Obligation of the Sellers to Effect the Asset Purchase.
The obligation of the Sellers to effect the Asset Purchase shall be subject to
the fulfillment at or prior to the Closing of the following additional
conditions; provided that the Sellers may waive any of such conditions in their
sole discretion:
(a) Performance of Obligations; Representations and
Warranties. PEC and PDC shall have performed in all material respects each of
their respective agreements contained in this Agreement required to be
performed on or prior to the Closing, each of the representations and
warranties of PEC and PDC contained in this Agreement shall be true and correct
on and as of the Closing.
-10-
<PAGE> 14
(b) Officers' Certificate. PEC and PDC shall have
furnished to the Sellers a certificate, dated the Closing, signed by the
appropriate officers of PEC and PDC, certifying to the effect that to the best
of the knowledge and belief of PEC and PDC, the conditions set forth in Section
5.1 and this Section 5.2(a) have been satisfied in full.
(c) Payment and Issuance of Purchase Consideration. PEC
and PDC shall have made delivery of the Purchase Consideration as provided in
Section 1.2 of this Agreement.
(d) Registration Rights Agreement. PEC shall have
executed and delivered the Registration Rights Agreement in the form attached
hereto as Exhibit B.
.3 Conditions to Obligations of PEC and PDC to Effect the Asset
Purchase. The obligations of PEC and PDC to effect the Asset Purchase shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, provided that PEC and PDC may waive any such conditions
in their sole discretion:
(a) Performance of Obligations; Representations and
Warranties. The Sellers shall have performed in all material respects each of
their agreements contained in this Agreement required to be performed on or
prior to the Closing, each of the respective representations and warranties of
the Sellers contained in this Agreement shall be true and correct on and as of
the Closing.
(b) Officers' or Partners' Certificate. Each of the
Sellers shall have furnished to PEC and PDC a certificate, dated the Closing,
certifying to the effect that to the best of its knowledge and belief, the
conditions set forth in Section 5.1 and this Section 5.3(a) have been
satisfied.
(c) Opinion of Counsel. PEC and PDC shall have received
an opinion of counsel from Howell Moore & Gough LLP, Santa Barbara, California,
counsel to the respective Sellers, dated the Closing, substantially to the
effect that:
(i) The incorporation, existence, good standing and
capitalization of the respective corporate Sellers are as stated in
this Agreement.
(ii) This Agreement has been duly authorized, executed and
delivered by each of the Sellers, and (assuming the due and valid
authorization, execution and delivery by PEC and PDC) constitutes the
legal, valid and binding agreement of such Seller enforceable against
such Seller 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
-11-
<PAGE> 15
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 Sellers of this
Agreement will not violate the Articles of Incorporation or Bylaws of
the respective corporate Sellers or the Partnership Agreement in the
case of Imperial 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 any of the Sellers is a party or
to which they or any of their properties or assets may be bound.
(iv) To the knowledge of such counsel, other than as set
forth in Schedule 3.4(d), there are no actions, suits or proceedings,
pending or threatened against or affecting any of Sellers 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 any of
the Sellers for consummation of the transactions contemplated by this
Agreement.
In rendering such opinion, counsel for the Sellers may rely as to matters of
fact upon the representations of officers or partners of the Sellers contained
in any certificate delivered to such counsel and certificates of public
officials.
Such opinion shall be limited to the laws of the United States of
America and the State of California.
(d) Bill of Sale. The respective Sellers shall have
executed and delivered the respective Bill of Sale and Assignments in the form
attached hereto as Exhibits C-1 and C-2, as the case may be.
(e) Investment Representation Letters. Each of the
Sellers and the stockholders or partners of the Sellers shall have executed and
delivered an investment representation letter substantially in the form
attached hereto as Exhibits D-1 and D-2.
VI
GENERAL PROVISIONS
-12-
<PAGE> 16
.1 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):
(a) if to PEC or PDC, to
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1416
Snyder, Texas 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, Colorado 80203-1264
(b) if to Welch & Howell or Imperial, to
David J. Howell
Frank J. Welch
c/o Welch & Howell Drilling, Inc.
P.O. Box 1851
El Centro, California 92244
with copies to:
Weldon U. Howell, Jr., Esq.
Howell Moore & Gough LLP
812 Presidio Avenue
Santa Barbara, California 93101
(c) if to Phoenix, to
William J. Nasif
-13-
<PAGE> 17
c/o Nasif, Hicks, Harris & Co.
1111 Garden Street, Suite 200
Santa Barbara, California 93101
with copies to:
Weldon U. Howell, Jr., Esq.
Howell Moore & Gough LLP
812 Presidio Avenue
Santa Barbara, California 93101
(d) if to Rig I, to:
William P. Mason
c/o Gilford Securities Incorporated
500 C. Newport Center Drive
Newport Beach, California 92661
with copies to:
Weldon U. Howell, Jr., Esq.
Howell Moore & Gough LLP
812 Presidio Avenue
Santa Barbara, California 93101
.2 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."
.3 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.
-14-
<PAGE> 18
.4 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) is not intended to confer upon any person other than the parties any
rights or remedies hereunder; provided, however, that legal counsel for the
Sellers hereto may rely upon the representations and warranties of the
respective Sellers contained herein and in the certificates delivered pursuant
to Sections 5.3(b) and (c).
.5 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof.
.6 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. 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.
.7 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.
.8 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.
.9 Attorneys' Fees. Should any action or proceeding be necessary to
construe or enforce the terms or conditions of this Agreement, or the
application or validity thereof, then the party prevailing in such action shall
be entitled to recover its reasonable attorneys' fees and other court costs,
together with any costs and attorneys' fees incurred in enforcing any judgment
entered therein.
-15-
<PAGE> 19
.10 Facsimile Signatures. Signatures of the parties to this Agreement or
on any document or instrument delivered pursuant to this Agreement shall be
deemed to be original signatures and shall be sufficient to bind the parties.
Each party covenants to deposit the original, manually signed document for
delivery by courier or by registered or certified mail to the party to whom
such facsimile signature was transmitted within two business days after the
date of any such facsimile transmission.
IN WITNESS WHEREOF, PEC, PDC and each of the Sellers have
executed this Agreement as of the date first written above.
PEC:
PATTERSON ENERGY, INC.
By: /s/ CLOYCE A. TALBOTT
------------------------
Cloyce A. Talbott
Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- -------------------------
James C. Brown, Secretary
PDC:
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
------------------------
Cloyce A. Talbott
Chief Executive Officer
Attest:
/s/ JAMES C. BROWN
- -------------------------
James C. Brown, Secretary
SELLERS:
RIG I GROUP, INC.
-16-
<PAGE> 20
By: /s/ WILLIAM P. MASON
--------------------------
William P. Mason
President
PHOENIX DRILLING, INC.
By: /s/ WILLIAM J. NASIF
--------------------------
William J. Nasif
President
WELCH & HOWELL DRILLING, INC.
By: /s/ DAVID J. HOWELL
--------------------------
David J. Howell
President
IMPERIAL EQUIPMENT CO.
By: /s/ DAVID J. HOWELL
--------------------------
David J. Howell, Partner
By: /s/ FRANK J. WELCH
--------------------------
Frank J. Welch, Partner
THE UNDERSIGNED, BEING OFFICERS, DIRECTORS AND STOCKHOLDERS OF RIG I
GROUP, INC. AND PHOENIX DRILLING, INC. AGREE TO BE BOUND BY THE
INDEMNIFICATION PROVISIONS OF SECTION 4.5(a) OF THIS AGREEMENT.
/s/ WILLIAM J. NASIF
-----------------------------
William J. Nasif
-17-
<PAGE> 21
/s/ WILLIAM P. MASON
---------------------------
William P. Mason
THE UNDERSIGNED PERSONS, BEING THE SOLE STOCKHOLDERS OF WELCH & HOWELL
DRILLING, INC. AND THE SOLE PARTNERS OF IMPERIAL EQUIPMENT CO. HEREBY AGREE TO
BE BOUND BY THE INDEMNIFICATION PROVISIONS OF SECTION 4.5(b) OF THIS AGREEMENT.
/s/ DAVID J. HOWELL
---------------------------
David J. Howell
/s/ FRANK J. WELCH
---------------------------
Frank J. Welch
-18-
<PAGE> 22
ANNEX 1
TO
ASSET PURCHASE AGREEMENT
<PAGE> 23
ANNEX 2
TO
ASSET PURCHASE AGREEMENT
DESCRIPTION OF EQUIPMENT
<TABLE>
<CAPTION>
LICENSE VIN
<S> <C> <C>
CRANES
82 ton 71 Linkbelt 1LRE853 18H A335
50 ton Hydro 81 Linkbelt 2EMX372 36H 1774
MISC EQUIPMENT
Superior 700 drawworks w/ (2) 3412 Cat engines
Gardner Denver 37 1/2" rotary table
TRUCKS
93 Freightliner 9C15047 1FUYDXYB9PP47 9258
91 Freightliner 4E61203 1FUYDXYB4MP50 2813
91 Freightliner 4E61204 1FUYDXYB6MP50 2814
91 Freightliner 4E61202 1FUYDXYB2MP50 2815
81 AutoCar 3DAP300 1WBRCCJEXBU09 3469
80 International 3Y21653 AA185KHA1 6222
</TABLE>
<PAGE> 24
<TABLE>
<S> <C> <C>
TRAILERS
48' lowboy '81 Leffler 1UC8168 OTCN07 9085
48' lowboy '81 Leffler 1UC8216 OTCN21 1790
48' lowboy '81 Hercules 1US3548 1HZL48308B100 2855
40' float '81 Nuttal XU5070 NMC5 0218
40' float '81 Nuttal XU5071 NMC5 0215
40' float '81 Nuttal XU5072 NMC5 0216
LICENSE VIN
40' float '81 Nuttal XU5073 NMC5 0217
40' float '81 Nuttal XU5074 NMC5 0214
40' flatbed '81 Lufkin UX7133 1Lo1B4027B105 8113
40' flatbed '66 Fruehauf XC8460 VVG35 1904
40' flatbed '78 Aztec XM8419 HT1 9991
40' flatbed '82 Aztec XP5901 1AZBG1A12B101 2516
40' flatbed '82 Aztec XP5902 1AZBG1A14B101 2517
40' flatbed '82 Aztec XP5903 1AZBG1A16B101 2518
35' lowboy '75 Fruehauf XT4283 FWS66 8107
</TABLE>
<PAGE> 25
ANNEX 3.2
TO
ASSET PURCHASE AGREEMENT
RIG I STOCKHOLDER LIST
<TABLE>
<CAPTION>
SHARES STOCKHOLDER SHARES STOCKHOLDER
------ ----------- ------ -----------
<S> <C> <C> <C>
20,000 C. Kenneth Grailer 12,500 Ralph Worthington IV
1 Ironside Street, #7 One E. 60th Street
Marina del Rey, CA 90291 New York, NY 10022
TIN: ###-##-#### TIN: ###-##-####
12,500 H. Robert Holmes 48,500 Robert G. Worrall
401 S. LaSalle Street, Suite 900 Sole and Separate Property
Chicago, IL 60605 c/o Bonnie Ross
TIN: ###-##-#### 1112 Berkeley Street
Santa Monica, CA 90403
TIN: ###-##-####
40,000 Eugene F. Zannon 28,500 Suzanne D. Worrall
1387 School House Road Single Woman
Santa Barbara, CA 93108 17278 Avenida De La
TIN: ###-##-#### Herradura
Pacific Palisades, CA 90272
TIN: ###-##-####
25,000 William P. Mason 10,000 William J. Nasif
1830 Old Ranch Road 1111 Garden Street, Suite 200
Los Angeles, CA 90049 Santa Barbara, CA 93101
TIN: ###-##-#### TIN: ###-##-####
25,000 John D. Nichols
900 Mount Pleasant Road
Winnetka, IL 60093
TIN: ###-##-####
</TABLE>
Page 1 of 1
<PAGE> 26
SCHEDULE 3.2(e)
TO
ASSET PURCHASE AGREEMENT
Sellers may compensate selected representative(s) of Sellers for their
services in arranging the transaction contemplated by the Agreement. Sellers
are solely responsible for such compensation and shall indemnify and hold PDC
and PEC harmless from any liability for such obligation.
Page 1 of 1
<PAGE> 27
ANNEX 3.3
TO
ASSET PURCHASE AGREEMENT
PHOENIX STOCKHOLDER LIST
<TABLE>
<CAPTION>
SHARES STOCKHOLDER SHARES STOCKHOLDER
------ ----------- ------ -----------
<S> <C> <C> <C>
10,000 Jack E. & Linda L. Tucker 50,000 Robert G. Worrall
Husband and Wife as Sole and Separate Property
Community Property c/o Bonnie Ross
501 Marin Street, Suite 114 1112 Berkeley Street
Thousand Oaks, CA 91360 Santa Monica, CA 90403
TIN: ###-##-#### TIN: ###-##-####
50,000 Betty Temple Howell 25,000 Suzanne D. Worrall
Sole and Separate Property Single Woman
The Athena #814 17278 Avenida De La
6335 West N.W. Highway Herradura
Dallas, Texas 75225 Pacific Palisades, CA 90272
TIN: ###-##-#### TIN: ###-##-####
110,000 Eugene F. & Gailina K. Zannon 42,000 David J. & Susan T. Howell
Husband and Wife as Husband and Wife as
Community Property Community Property
1387 School House Road 2453 Mandeville Canyon Road
Santa Barbara, CA 93108 Los Angeles, CA 90049
TIN: ###-##-####
25,000 George A. Finck, Trustee 42,000 Frank J. & Bonita B. Welch
Trust U/D/T DTD 11/24/80 Husband and Wife as
145 Laurel Street Community Property
San Francisco, CA 94118 1723 Lotus
TIN: 95-6717306 El Centro, CA 92243
TIN: ###-##-####
75,000 Estate of Jean M. Richards 56,000 William J. & Eileen A. Nasif
Ted Richards, III, Executor Husband and Wife as
Sole and Separate Property Community Property
1096 Acanto Place 1111 Garden Street, Ste. 200
Los Angeles, CA 90049 Santa Barbara, CA 93101
(310) 476-3775 TIN: ###-##-####
TIN: 95-7004785
50,000 Ted Richards, III
28128 Pacific Coast Hwy, #21
Malibu, CA 90265
TIN: ###-##-####
</TABLE>
Page 1 of 1
<PAGE> 28
ANNEX 3.4
TO
ASSET PURCHASE AGREEMENT
WELCH & HOWELL STOCKHOLDER LIST
<TABLE>
<CAPTION>
SHARES STOCKHOLDER
------ -----------
<S> <C>
750 David J. Howell
2453 Mandeville Canyon Road
Los Angeles, CA 90049
TIN: ###-##-####
750 Frank J. Welch
1723 Lotus
El Centro, CA 92243
TIN: ###-##-####
</TABLE>
Page 1 of 1
<PAGE> 29
SCHEDULE 3.4(d)
TO
ASSET PURCHASE AGREEMENT
1. Winans, et al. v. Marco Crane & Rigging, et al., San Diego
county Superior Court Case No. 687281; filed June 7, 1995.
Welch & Howell was originally named in this action but was voluntarily
removed as a defendant because plaintiff was precluded from recovery against it
by virtue of the worker's compensation exclusive remedy doctrine. However,
California Energy Operating Company ("CEOC"), the operator on the site where
plaintiff was injured, tendered its defense to Welch & Howell under the
applicable drilling contract. A defense is being provided to CEOC by Lloyds of
London under Welch & Howell's general liability policy.
2. Wallace, et al. v. Welton Howard, et al.; Los Angeles County
Superior Court Case No. BC154552; filed February 2, 1996.
Welch & Howell is a named defendant in this action and is vigorously
defending each of the pending claims. Welch & Howell has tendered its defense
to Geo East Mesa Limited Partners, the operator on the site where plaintiff was
injured, under eh applicable drilling contract. A defense and indemnification
is being provided by Lloyds of London.
Page 1 of 1
<PAGE> 30
ANNEX 3.5
TO
ASSET PURCHASE AGREEMENT
IMPERIAL PARTNER LIST
<TABLE>
<CAPTION>
% OF
PARTNERSHIP PARTNER
----------- -------
<S> <C>
50% David J. Howell
2453 Mandeville Canyon Road
Los Angeles, CA 90049
TIN: ###-##-####
50% Frank J. Welch
1723 Lotus
El Centro, CA 92243
TIN: ###-##-####
</TABLE>
Page 1 of 1
<PAGE> 31
EXHIBIT A
FORM OF PROMISSORY NOTE
Snyder, Texas
US $400,000
December ___, 1996
FOR VALUE RECEIVED, PATTERSON DRILLING COMPANY, a Delaware corporation
("PDC"), promises to pay to the order of Welch & Howell Drilling, Inc., a
California corporation (the "Noteholder"), the principal sum of Four Hundred
Thousand Dollars ($400,000). Principal shall be paid in six (6) equal monthly
installments of Sixty-Six Thousand Six Hundred and Sixty-Six Dollars ($66,666)
each, beginning January 1, 1997, and ending on June 1, 1997, at which time the
entire principal amount outstanding, if not sooner paid, shall be due and
payable. Principal shall be payable at P.O. Box 1851, El Centro, California
92244, or such other place as the Noteholder may designate.
If any installment of principal under this Note is not paid within ten
(10) days of the date the Noteholder provides PDC written notice of a default
in the payment of such installment, the entire principal amount outstanding
thereon shall at once become due and payable without additional notice to PDC
at the option of the Noteholder. The Noteholder may exercise this option to
accelerate during any default by PDC regardless of any prior forbearance. If
suit is brought to collect this Note, the Noteholder shall be entitled to
collect all reasonable costs and expenses of suit, including, but not limited
to, reasonable attorney fees.
Presentment, notice of dishonor, and protest are hereby waived by PDC.
Any notice to PDC provided for in this Note shall be given by
delivering such notice by certified mail addressed to PDC at 4510 Lamesa
Highway, Snyder, Texas 75549, or to such other address as PDC may designate by
notice to the Noteholder. Any notice to the Noteholder shall be given by
mailing such notice by certified mail, return receipt requested, to the
Noteholder at the address stated in the first paragraph of this Note, or at
such other address as may have been designated by notice to PDC.
Neither this Note nor any right or interest of the Noteholder
hereunder may be transferred or assigned by the Noteholder to any other party
without the prior written consent of PDC.
A-1
<PAGE> 32
The Note is made in the State of Texas and shall be governed by and
interpreted in accordance with the internal laws of the State of Texas without
regard to its conflicts of law provisions or interpretations.
PDC:
PATTERSON DRILLING COMPANY
By: _________________________________
Cloyce A. Talbott
Chief Executive Officer
A-2
<PAGE> 33
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made and entered
into this _ day of December, 1996, by and between PATTERSON ENERGY, INC., a
Delaware corporation ("PEC"), and RIG I GROUP, INC., a California corporation
("Rig I"), PHOENIX DRILLING, INC., a California corporation ("Phoenix"), and
IMPERIAL EQUIPMENT CO., a California general partnership ("Imperial") (Rig I,
Phoenix and Imperial are collectively referred to herein as the "Sellers").
A. Pursuant to that certain Asset Purchase Agreement dated of even date
herewith ("Asset Purchase Agreement"), by and between PEC, Patterson Drilling
Company, a wholly-owned subsidiary of PEC ("PDC"), and the Sellers and Welch &
Howell Drilling, Inc., a California corporation, PEC has agreed to issue 52,000
shares ("Restricted Shares") of PEC's Common Stock, $0.01 par value (the
"Common Stock"), as partial consideration for the drilling rigs and equipment
being purchased by PDC from the Sellers.
B. This Agreement is being entered into in connection with and as a
condition to the parties closing the transactions contemplated under the Asset
Purchase Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
VII Certain Definitions. As used in this Agreement the following
terms shall have the following respective meanings:
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
"Holder" shall mean each of the Sellers and its successors and assigns
(including stockholders or partners thereof, as the case may be), and any
subsequent successors and assigns, of the Registrable Securities or any
portion thereof.
"Person" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
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"Registrable Securities" shall mean (i) the Restricted Shares, (ii)
Common Stock issued or issuable with respect to the securities referred to
in clause (i) by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or
other reorganization. As to any particular Registrable Securities, such
securities will cease to be Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market
maker in compliance with Rule 144 under the Securities Act (or any similar
rule then in force).
"Registration Expenses" shall mean all expenses incident to PEC's
performance of or compliance with this Agreement, including without
limitation all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws and all reasonable printing expenses,
messenger and delivery expenses, and fees and disbursements of counsel for
PEC and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other Person retained by PEC (all
such expenses being herein called "Registration Expenses"), will be borne as
provided in this Agreement, except that PEC will, in any event, pay its
internal expenses (including, without limitation, all salaries and expenses
of its officers and employees performing legal or accounting duties), the
expense of any annual audit or quarterly review, the expense of any
liability insurance and the expenses and fees for listing the securities to
be registered on each securities exchange on which similar securities issued
by PEC are then listed or on the NASD automated quotation system.
"Requesting Holder" shall mean any Holder of Registrable Securities
who shall request registration of Registrable Securities pursuant hereto.
"Securities Act" shall mean the Securities Act of 1933, or any
successor thereto, as the same shall be amended from time to time.
VIII Restrictions on Transfer. The Restricted Shares were acquired
by each of the Sellers from PEC for investment for its own account and not as a
nominee or agent and not with a present view to the resale or distribution of
any part thereof, except in compliance with the Securities Act. Each of the
Sellers acknowledges that the Restricted Shares are "restricted securities"
within the meaning of the Securities Act.
IX Registration Under Securities Act, etc.
.1 Registration Upon Demand
(a) Demand Rights. At any time after April 1, 1997, but
prior to December 1, 1998 ("Demand Registration Period"), but subject to the
provisions of Section 3.1(c),
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below, at the written demand of Requesting Holders and on one (1) occasion
only, PEC shall prepare, file with the Commission and use its best efforts to
have declared effective a registration statement with respect to the
distribution of up to all of the Registrable Securities. Such demand shall be
made by written notice to PEC by Requesting Holders, which notice shall (i)
request the preparation of the registration statement pursuant to the terms of
this Section 3.1, (ii) include the number of Registrable Securities to be
offered by Holders of Registrable Securities pursuant to such registration
statement and (iii) be sent to all other Holders. PEC may include in such
registration any securities of PEC for sale by PEC or persons other than PEC,
and such registration shall be deemed to be an incidental registration pursuant
to Section 3.2 hereof with Holders having the priority with respect to the
Registrable Securities.
(b) Expenses. PEC shall pay all Registration Expenses in
connection with the registration of Registrable Securities demanded pursuant to
this Section 3.1.
(c) Restrictions on Demand Registrations. PEC will not be
obligated to effect any registration under Section 3.1(a) within three months
after the effective date of (i) a registration initiated by PEC; or (ii) a
registration in which the Holders of Registrable Securities were given
incidental registration rights pursuant to Section 3.2 hereof and in which
there was no reduction in the number of Registrable Securities requested to be
included (the "Other Registrations"); provided that in either case (i) or (ii)
the three-month period can be extended to four months if required by the then
managing underwriter. PEC may postpone filing or the effectiveness of a
registration statement demanded by Holders under Section 3.1(a) for up to four
months following receipt of such demand if PEC has executed in good faith (x) a
letter of intent or a commitment letter with an underwriter for a public
offering or (y) an agreement in principle relating to an acquisition of assets
(other than in the ordinary course of business) or any merger, consolidation or
similar transaction, or (z) has made a filing with the Commission under the
Securities Exchange Act of 1934 in connection with a tender offer.
Notwithstanding anything in this Section 3.1(c) to the contrary, if the Demand
Registration Period expires without effectuation of a demand for registration
under Section 3.1(a) because of the occurrence of an event specified above in
this Section 3.1(c), the Demand Registration Period shall be extended for such
additional period as is necessary to effect such registration, provided that
such demand is given to PEC prior to the expiration of the Demand Registration
Period.
.2 Incidental Registration.
(a) Right to Include Registrable Securities. Subject to
the further provisions of this Section 3.2(a), if PEC, at any time commencing
on the date of this Agreement and expiring on the third anniversary date
hereof, proposes to register any of its equity securities
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under the Securities Act, for its own account or the account of other holders
of PEC's securities, on a form and in a manner which would permit registration
of Registrable Securities for sale to the public under the Securities Act, it
will each such time give prompt written notice to all Holders of its intention
to do so, describing such securities and specifying the form and manner and the
other relevant facts involved in such proposed registration and upon the
written request of any such Holder delivered to PEC within twenty (20) business
days after the giving of any such notice (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended method or methods of disposition thereof), PEC will use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities which PEC has been so requested to register by Holders to the extent
requisite to permit the disposition (in accordance with the intended methods
thereof as aforesaid) of the Registrable Securities so to be registered
provided that (i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the effective date of
the registration statement filed in connection with such registration, PEC
shall determine for any reason not to register such securities, PEC may, at its
election give written notice of such determination to each Holder and thereupon
shall be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from its obligation to pay the
Registration Expenses in connection therewith as provided herein); and (ii) if
(A) the registration so proposed by PEC involves an underwritten primary
registration on behalf of PEC to be distributed (on a firm commitment basis) by
or through one or more underwriters of recognized standing under underwriting
terms appropriate for such a transaction, and (B) the managing underwriter of
such underwritten offering shall advise PEC in writing that, in its good faith
judgment, all the shares to be offered by PEC and other parties are greater
than can be accommodated without interfering with the successful marketing of
all the securities to be then offered publicly for the account of PEC, then the
managing underwriter or underwriters shall include in such registration (1)
first, the securities PEC proposes to register for sale, and (2) second, any
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securities requested and permitted to be included in such registration pursuant
to incidental or piggyback rights granted to the holders thereof prior to the
date of this Agreement, (3) third, the Registrable Securities requested to be
included in such registration by the Requesting Holders, pro rata, if
necessary, and (4) fourth, any other securities requested to be included in
such registration, if any, pro rata; (iii) if (A) the registration so proposed
by PEC is an underwritten secondary registration on behalf of holders of PEC's
securities, to be distributed (on a firm commitment basis) by or through one or
more underwriters of recognized standing under underwriting terms appropriate
for such a transaction, and (B) the managing underwriter of such underwritten
offering shall advise PEC in writing that, in its good faith judgment, all the
shares to be offered by such requesting holder, PEC and other parties are
greater than can be accommodated without interfering with the successful
marketing of all of the securities to be then offered publicly for the account
of PEC, then the managing underwriter shall include in such registration (1)
first, the securities requested to be included therein by the holders
requesting such registration, (2) second, any securities requested and
permitted to be included in such registration statement pursuant to incidental
or piggyback rights granted to the holders thereof prior to the date of this
Agreement, (3) third, the securities which are requested to be included in such
registration by the Holders of Registrable Securities, pro rata, if necessary,
(4) fourth, any securities to be included in such registration on behalf of
PEC, and (5) fifth, any other securities requested to be included in such
registration, if any, pro rata.
(b) Expenses. PEC will pay all Registration Expenses in
connection with each registration of Registrable Securities requested pursuant
to Section 3.2.
.3 Registration Procedures. If and whenever PEC is required to
effect the registration of any Registrable Securities under the Securities Act
as provided in Section 3.1 or Section 3.2, PEC will promptly:
(a) prepare and (in any event within sixty (60) days)
file with the Commission a registration statement with respect to such
Registrable Securities and use its best efforts to cause such registration
statement to become effective, such registration statement to comply as to form
and content in all material respects with the Commission's forms, rules and
regulations;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective and to comply with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities and other securities covered
by such registration statement until the earlier of (i) such time as all of
such Registrable Securities and other securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement or (ii) the expiration of (A)
nine (9) months in the case of a registration of Registrable Securities
pursuant to Section 3.1 hereof, or (B) six (6) months in the case of a
registration of Registrable Securities pursuant to Section 3.2 hereof, after
such registration statement becomes effective, and will furnish to each such
seller prior to the filing thereof a copy of any amendment or supplement to
such registration statement or prospectus and shall not file any such amendment
or supplement to which any such seller shall have reasonably objected on the
grounds that such amendment or supplement does not comply in all material
respects with the requirements of the Securities Act or of the rules or
regulations thereunder;
(c) furnish to each seller of Registrable Securities one
originally executed registration statement, with all amendments, supplements
and additional documentation; such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits) as such seller may reasonably request;
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such number of copies of the prospectus included in such registration statement
(including each preliminary prospectus and any summary prospectus) as required
by the Securities Act as such Seller may reasonably request; such documents, if
any, incorporated by reference in such registration statement or prospectus;
and such other documents as such seller may reasonably request;
(d) use its best efforts to register or qualify all
Registrable Securities and other securities covered by such registration
statement under such other securities or blue sky laws of such jurisdictions as
each seller shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement remains in
effect, and do any and all other acts and things which may be necessary or
advisable to enable such seller to consummate the disposition in such
jurisdictions of his Registrable Securities covered by such registration
statement, except that PEC shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it would not but for the requirements of this subdivision (d) be
obligated to be so qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any such
jurisdiction;
(e) immediately notify each seller of Registrable
Securities covered by such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities
Act, upon discovery that, or upon the happening of any event as a result of
which, the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, or if it is
necessary to amend or supplement such prospectus or registration statement to
comply with law, and at the request of any such seller, prepare and furnish to
such seller a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statement therein not misleading
in light of the circumstances then existing and shall otherwise comply in all
material respects with the law and so that such prospectus or registration
statement, as amended or supplemented, will comply with law;
(f) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securities holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12) months beginning with the first
month of the first fiscal quarter after the effective date of such registration
statement, if such earnings statement is necessary to satisfy the provisions of
Section 11(a) of the Securities Act;
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(g) provide and cause to be maintained a transfer agent
and registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement; and
(h) use its best efforts to list all Common Stock covered
by such registration statement on each securities exchange on which any
Common Stock is then listed or quote all such Common Stock on NASDAQ if
PEC's Common Stock is quoted on NASDAQ, or, if PEC's Common Stock is not
then quoted on NASDAQ or listed on any national securities exchange, use its
best efforts to have such Common Stock covered by such registration
statement quoted on NASDAQ or, at the option of PEC, listed on a national
securities exchange.
PEC may require each seller of Registrable Securities as to which any
registration is being effected to furnish PEC such information regarding such
seller and the distribution of such securities as PEC may from time to time
reasonably request in writing and as shall be required by law or by the
Commission in connection therewith.
.4 Underwritten Offerings.
(a) Underwriting Agreement. If requested by the
underwriters for any underwritten offering of Registrable Securities on
behalf of a Holder or Holders pursuant to the registration demanded under
Section 3.1, PEC will enter into an underwriting agreement with such
underwriters for such offering, such agreement to contain such
representations and warranties by PEC and such other terms and provisions as
are customarily contained in underwriting agreements with respect to
secondary distributions, including, without limitation, indemnities to the
effect and to the extent provided in Section 3.6. Holders on whose behalf
Registrable Securities are to be distributed by such underwriters shall be
parties to any such underwriting agreement and the representations and
warranties by, and the other agreements on the part of, PEC to and for the
benefit of such underwriters, shall also be made to and for the benefit of
such Holders. No such Holder shall be required by PEC to make any
representations or warranties to or agreements with PEC or the underwriters
other than reasonable representations, warranties or agreement regarding
such Holder, such Holder's Registrable Securities and such Holder's intended
method or methods of disposition and any other representation required by
law and as provided in Section 3.4(d).
(b) Inclusion of Registrable Securities. If PEC at any
time proposes to register any of its securities for its own account under
the Securities Act as contemplated by Section 3.2 and such securities are to
be distributed by or through one or more underwriters,
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PEC will use its best efforts, if requested by any Holder who is entitled to
request incidental registration of Registrable Securities in connection
therewith pursuant to Section 3.2, to arrange for such underwriters to
include the Registrable Securities to be offered and sold by such Holder
among the securities to be distributed by or through such underwriters;
provided that, for purposes of this sentence, best efforts shall not require
PEC to reduce the amount of sales price of such securities proposed to be
distributed by or through such underwriters. Holders of Registrable
Securities to be distributed by such underwriters shall be parties to the
underwriting agreement between PEC and such underwriters and the
representations and warranties by, and the other agreements on the part of,
PEC to and for the benefit of such underwriters, shall also be made to and
for the benefit of such Holders of Registrable Securities. PEC will
cooperate with such Holders to the end that the conditions precedent to the
obligations of such Holders under such underwriting agreement shall not
include conditions that are not customary in underwriting agreements with
respect to combined primary and secondary distributions and shall be
otherwise satisfactory to such Holders. No such Holder shall be required by
PEC to make any representations or warranties other than reasonable
representations, warranties or agreements regarding such Holder, such
Holder's Registrable Securities and such Holder's intended method or methods
of distribution and any other representation required by law and as provided
in Section 3.4(d).
(c) Selection of Underwriters. Whenever a registration
demand pursuant to Section 3.1 is for an underwritten offering, the Holders
of Registrable Securities making such demand shall have the right to select
the managing underwriter(s) (which shall be an underwriter of national
standing) to administer the offering, subject to the approval of PEC, such
approval not to be unreasonable withheld. If PEC at any time proposes to
register any of its securities under the Securities Act for sale of its own
account or for the accounts of any other sellers, including Holder, and such
securities are to be distributed by or through one or more underwriters, the
selection of the managing underwriter(s) (which shall be an underwriter of
national standing) shall be made by PEC and notice of the selection thereof
delivered to Holders eligible to participate in such registration.
(d) Holdback Agreements.
(i) If any registration pursuant to Section 3.1 or 3.2
shall be in connection with any underwritten public offering, each Holder of
Registrable Securities agrees by acquisition of such Registrable Securities,
if so required by the managing underwriter, not to effect any public sale or
distribution of Registrable Securities (other than as part of such
underwritten public offering) within seven (7) days prior to the effective
date of such registration statement or one hundred twenty (120) days after
the effective date of such registration statement, unless the underwriters
managing the offering otherwise agree.
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(ii) PEC agrees (A) not to effect any public sale or
distribution prohibited by Rule 10b-6 under the Securities Act after the
demand or decision to make such registration and (i) prior to the effective
date of the registration statement, except as a part of such registration
statement or pursuant to any registration statements on Forms S-8 or S-4 or
any successor form, unless the managing underwriters of such registration
otherwise agree; or (ii) prior to the ninetieth (90th) day after the
effective date of such registration statement, and (B) to use its best
efforts to cause each holder of at least 10% of its Common Stock or any
securities convertible into or exchangeable or exercisable for any of its
Common Stock, in each case purchased from PEC at any time after the date of
this Agreement (other than in a public offering), to agree not to effect any
such public sale or distribution of such securities during such period.
.5 Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Registrable
Securities under the Securities Act, PEC will give Holders on whose behalf such
Registrable Securities are to be so registered and their underwriters, if any,
and each Requesting Holder and not more than one counsel for all Holders and
their respective accountants, the opportunity to participate in the preparation
of such registration statement, each prospectus included therein or filed with
the Commission and each amendment thereof or supplement thereto, and will give
each of them such access to its books and records and such opportunities to
discuss the business of PEC with its officers and the independent public
accountants who have certified its financial statements as shall be necessary
in the opinion of such Holders and such underwriters or their respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.
.6 Indemnification.
(a) Indemnification by PEC. In the event of any
registration of any securities of PEC under the Securities Act, PEC will,
and hereby does, indemnify and hold harmless Holder, its partners and each
other person, if any, who controls Holder within the meaning of the
Securities Act, in each case, against any losses, claims, damages,
liabilities or expenses, joint or several (including, without limitation,
the costs and expenses of investigating, preparing for and defending any
legal proceeding, including reasonable attorney's fees), to which such
Holder or any such director, trustee, officer, employee or controlling
person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any
untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such securities were registered
under the Securities Act, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement
thereto, or any document incorporated by reference therein, or (ii) any
omission or alleged omission to state therein a material fact required to be
stated therein
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or necessary to make the statements therein not misleading, and PEC will
reimburse Holder and each such partner and controlling person for any legal
or any other expenses incurred by them in connection with investigating or
defending or settling any such loss, claim, liability, action or proceeding;
provided that PEC shall not be liable in any such case to the extent that
any loss, claim, damage, liability or expense (or action or proceeding in
respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to PEC through an instrument
duly executed by Holder or any such partner or controlling person
specifically stating that it is for use in preparation thereof. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of Holder or any such partner or
controlling person and shall survive the transfer of such securities by
Holder. PEC will make provision for contribution in lieu of any such
indemnity that may be disallowed as shall be reasonably requested by Holder.
(b) Indemnification by Holder. In the event of any
registration of any securities of PEC under the Securities Act (pursuant to
which Holder sells Registrable Securities covered by such registration
statement), Holder will, and hereby does, indemnify and hold harmless PEC,
each director of PEC, each officer of PEC who shall sign such registration
statement and each other person, if any, who controls PEC within the meaning
of the Securities Act from and against losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement of
material fact contained in such registration statement, any preliminary
prospectus, final prospectus or summary prospectus included therein, or any
amendment or supplement thereto, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such statement
or omission was made in reliance upon and in conformity with written
information furnished to PEC through an instrument duly executed by Holder
specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of PEC
or any such director, officer or controlling person and shall survive the
transfer of such securities by Holder.
(c) Notice of Claims, etc. In case any proceeding
(including any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to this Section
3.6, such person (hereinafter called the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (hereinafter
called the "indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the
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indemnified party to represent the indemnified party and any other party the
indemnifying party may designate in such proceeding and shall pay the fees
and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for the settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there is a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(d) Indemnification Unavailable. If the indemnification
provided for in this Section 3.6 is unavailable as a matter of law to an
indemnified party in respect of any losses, claims, damages or liabilities
referred to therein, then each indemnifying party under any such paragraph,
in lieu of indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by such indemnified
party on the one hand and the indemnifying parties on the other or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of such
indemnified party on the one hand and the indemnifying parties on the other
in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative fault of such indemnified party and
the indemnifying parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by
such parties and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omissions. The parties agree that it would not be just and equitable if
contribution pursuant to this Section 3.6(d) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
and liabilities referred to above shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating, defending or
settling any such action or claim.
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(e) No Settlement, etc. No indemnifying party shall,
except with the written consent of the indemnified party, consent to entry
of any judgment or entry into settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim
or action.
(f) Indemnity Operative and in Full Force. The indemnity
and contribution agreements contained in this Section 3.6 shall remain
operative and in full force and effect regardless of any termination of this
Agreement.
X Rule 144.
(a) Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission which may at
any time permit the sale of Registrable Securities to the public without
registration, PEC shall use its best efforts to:
(i) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at
all times after the date of this Agreement;
(ii) File with the Commission in a timely manner all
reports and other documents required of PEC under the Securities Act and the
Securities Exchange Act of 1934 ("Exchange Act"); and
(iii) So long as any Holder owns any Registrable
Securities, furnish to Holders as soon as reasonably practicable after
request a written statement by PEC as to its compliance with the reporting
requirements of the Exchange Act, a copy of the most recent annual or
quarterly report of PEC filed with the Commission, and such other reports
filed by PEC with the Commission.
(b) Further Assurances. PEC shall take such action any
Holder may reasonably request from time to time to enable such Holder to
sell shares of Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule
144 under the Securities Act, as such Rule may be amended from time to time,
or (b) any similar rule or regulation hereafter adopted by the Commission.
Upon written request of any Holder, PEC will deliver to such Holder a
written statement as to whether it has complied with such requirements.
XI Amendments and Waivers. This Agreement may be amended, and PEC
may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if PEC shall have obtained the written
consent to such amendment, action or omissions to act of the Holder or Holders
of at least 51% or more of the shares of Registrable Securities.
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XII Nominees for Beneficial Owners. In the event that any
Registrable Securities are held by a nominee for the beneficial owner thereof,
the beneficial owner thereof may, at its election, be treated as the Holder of
such Registrable Securities for purposes of any request or other action by any
Holder or Holders of Registrable Securities pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any Holder or Holders of Registrable Securities contemplated by this
Agreement. If the beneficial owner of any Registrable Securities so elects, PEC
may require assurances reasonably satisfactory to it of such owner's beneficial
ownership of such Registrable Securities.
XIII Notices. Notices and other communications under this Agreement
shall be in writing and shall be sent by registered mail, postage prepaid,
addressed
(a) to any Holder at the address provided to Company in
writing by such Holder or as shown on stock transfer books of PEC unless
such Holder has advised PEC in writing of a different address as to which
notices shall be sent under this Agreement, and
(b) if to PEC at P.O. Drawer 1416, Snyder, Texas 79550 to
the attention of its President or to such other address as PEC shall have
furnished to each Holder.
XIV Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of either of the parties hereto will bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement are for the benefit of any
Holder of Registrable Securities.
XV Miscellaneous. This Agreement shall be binding upon and inure
to the benefit of and be enforceable by the respective successors and assigns
of the parties hereto, whether so expressed or not, and, in particular, but
subject to the provisions of Section 3.1 hereof, shall inure to the benefit of
and be enforceable by, any Holder or Holders of Registrable Securities. This
Agreement embodies the entire agreement and understanding between PEC and the
other parties hereto with respect to the subject matter hereof and supersedes
all prior agreements and understandings relating to the subject matter hereof.
This Agreement shall be construed and enforced in accordance with and governed
by the laws of the State of Texas. The headings in this Agreement are for the
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in counterparts, each of which shall be
an original, but both of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
B-13
<PAGE> 46
PEC:
PATTERSON ENERGY, INC.
By: ______________________________
Cloyce A. Talbott
Chief Executive Officer
SELLERS:
RIG I GROUP, INC.
By: ______________________________
William P. Mason
President
PHOENIX DRILLING, INC.
By: ______________________________
William J. Nasif
President
IMPERIAL EQUIPMENT CO.
By: ______________________________
David J. Howell, Partner
By: ______________________________
Frank J. Welch, Partner
B-14
<PAGE> 47
EXHIBIT C-1
BILL OF SALE AND ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS, that, pursuant to that certain Asset
Purchase Agreement among PATTERSON ENERGY, INC. ("PEC"), a Delaware
corporation, PATTERSON DRILLING COMPANY ("PDC"), a Delaware corporation
wholly-owned by PEC, and RIG I GROUP, INC. ("Rig I"), a California corporation,
PHOENIX DRILLING, INC. ("Phoenix"), a California corporation, WELCH & HOWELL
DRILLING, INC. ("Welch & Howell"), a California corporation, and IMPERIAL
EQUIPMENT CO., a California general partnership (Rig I, Phoenix and Welch &
Howell are collectively referred to herein as the "Assignors"), the Assignors,
for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, hereby grant, bargain, sell, convey and transfer unto PDC
(the "Assignee"), all of the Assignors' right, title, and interest in and to
the three drilling rigs (Rig No. 2, Rig No. 4 and Rig No. 11) and related
equipment set forth in Appendix A attached hereto and incorporated herein by
this reference. Appendix A is intended to describe the equipment offered for
sale in its entirety.
TO HAVE AND TO HOLD the same unto the Assignee and the Assignee's
successors and assigns forever. Each of the Assignors hereby covenants and
agrees that it has the full right, power, and authority to sell, convey, and
transfer the foregoing property to the Assignee pursuant to this Bill of Sale
and Assignment. This sale and transfer is made on an "as is, where is" basis.
Other than the power and authority to sell and transfer the property, Assignor
makes no warranties, express or implied, regarding the foregoing property.
IN WITNESS WHEREOF, the Assignors have caused this Bill of Sale and
Assignment to be duly executed by their respective duly authorized officers as
of the ____ day of December, 1996.
RIG I GROUP, INC.
By: ______________________________
William P. Mason
President
PHOENIX DRILLING, INC.
By: _______________________________
William J. Nasif
WELCH & HOWELL DRILLING, INC.
Page 1 of 2
<PAGE> 48
By: ______________________________
David J. Howell
President
Page 2 of 2
<PAGE> 49
APPENDIX A
TO
BILL OF SALE AND ASSIGNMENT
FROM
RIG I GROUP, INC.
PHOENIX DRILLING, INC.
AND
WELCH & HOWELL DRILLING, INC.
TO
PATTERSON DRILLING COMPANY
(LIST OF ASSETS ASSIGNED)
<PAGE> 50
EXHIBIT C-2
BILL OF SALE AND ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS, that, pursuant to that certain Asset
Purchase Agreement among PATTERSON ENERGY, INC. ("PEC"), a Delaware
corporation, PATTERSON DRILLING COMPANY ("PDC"), a Delaware corporation
wholly-owned by PEC, and RIG I GROUP, INC., a California corporation, PHOENIX
DRILLING, INC., a California corporation, WELCH & HOWELL DRILLING, INC., a
California corporation, and IMPERIAL EQUIPMENT CO., a California general
partnership ("Imperial") (Imperial is referred to herein as the "Assignor"),
the Assignor, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, hereby grants, bargains, sells, conveys and
transfers unto PDC (the "Assignee"), all of the Assignor's right, title, and
interest in and to the properties "as is, where is," set forth on Appendix A
attached hereto and incorporated herein by this reference:
TO HAVE AND TO HOLD the same unto the Assignee and the Assignee's
successors and assigns forever. Assignor hereby covenants and agrees that it
has the full right, power, and authority to sell, convey, and transfer the
foregoing properties to the Assignee pursuant to this Bill of Sale and
Assignment.
IN WITNESS WHEREOF, the Assignor has caused this Bill of Sale and
Assignment to be duly executed by its partners as of the ____ day of December,
1996.
IMPERIAL EQUIPMENT CO.,
a California General Partnership
By: _____________________________________
David J. Howell
Partner
By: _____________________________________
Frank J. Welch
Partner
Page 1 of 3
<PAGE> 51
APPENDIX A
TO
BILL OF SALE AND ASSIGNMENT
FROM
IMPERIAL EQUIPMENT CO.
TO
PATTERSON DRILLING COMPANY
<TABLE>
<CAPTION>
LICENSE VIN
<S> <C> <C>
CRANES
82 ton 71 Linkbelt 1LRE853 18H A335
50 ton Hydro 81 Linkbelt 2EMX372 36H 1774
MISC EQUIPMENT
Superior 700 drawworks w/ (2) 3412 Cat engines
Gardner Denver 37 1/2" rotary table
TRUCKS
93 Freightliner 9C15047 1FUYDXYB9PP47 9258
91 Freightliner 4E61203 1FUYDXYB4MP50 2813
91 Freightliner 4E61204 1FUYDXYB6MP50 2814
91 Freightliner 4E61202 1FUYDXYB2MP50 2815
81 AutoCar 3DAP300 1WBRCCJEXBU09 3469
80 International 3Y21653 AA185KHA1 6222
</TABLE>
Page 2 of 3
<PAGE> 52
<TABLE>
<S> <C> <C>
TRAILERS
48' lowboy '81 Leffler 1UC8168 OTCN07 9085
48' lowboy '81 Leffler 1UC8216 OTCN21 1790
48' lowboy '81 Hercules 1US3548 1HZL48308B100 2855
40' float '81 Nuttal XU5070 NMC5 0218
40' float '81 Nuttal XU5071 NMC5 0215
40' float '81 Nuttal XU5072 NMC5 0216
LICENSE VIN
40' float '81 Nuttal XU5073 NMC5 0217
40' float '81 Nuttal XU5074 NMC5 0214
40' flatbed '81 Lufkin UX7133 1Lo1B4027B105 8113
40' flatbed '66 Fruehauf XC8460 VVG35 1904
40' flatbed '78 Aztec XM8419 HT1 9991
40' flatbed '82 Aztec XP5901 1AZBG1A12B101 2516
40' flatbed '82 Aztec XP5902 1AZBG1A14B101 2517
40' flatbed '82 Aztec XP5903 1AZBG1A16B101 2518
35' lowboy '75 Fruehauf XT4283 FWS66 8107
</TABLE>
Page 3 of 3
<PAGE> 53
EXHIBIT D-1
FORM OF
INVESTMENT REPRESENTATION LETTER
FOR
WELCH & HOWELL AND IMPERIAL
AND
STOCKHOLDERS AND PARTNERS THEREOF
[Date]
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, Texas 79549
This letter is being submitted to Patterson Energy, Inc. ("PEC") in
connection with and as a condition to PEC's closing of the Asset Purchase
contemplated by the Asset Purchase Agreement among PEC, Patterson Drilling
Company ("PDC") and Rig I Group, Inc., Phoenix Drilling, Inc., Welch & Howell
Drilling, Inc. ("Welch & Howell") and Imperial Equipment Co. ("Imperial").
Capitalized terms not defined herein shall have the meaning given them in the
Memorandum (as defined below).
(a) Representations and Warranties.
The undersigned hereby represents and warrants to PEC that the
following statements are true:
.1 The undersigned has been furnished a copy of the Memorandum,
dated November __, 1996 (the "Memorandum") containing a copy of PEC's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995 and all other
reports filed by PEC with the Securities and Exchange Commission since January
1, 1996 (collectively, the "Reports") and has carefully reviewed the Memorandum
and the Reports, including, but not limited to, (i) the statements in the
Memorandum relating to taxation of the Asset Purchase and lack of free
transferability of the PEC Common Stock and PEC Promissory Notes to be issued
to the stockholders of Welch & Howell and the partners of Imperial by PEC as
consideration for the Asset Purchase, and (ii) the section entitled "Disclosure
Concerning Forward-Looking Statements," setting forth certain Cautionary
Statements or risk factors relating to PEC and its businesses and operations.
<PAGE> 54
Patterson Energy, Inc.
[Date]
Page 2
.2 The undersigned has such knowledge and experience in financial
and business matters that he/she is capable of evaluating the merits and risks
of an investment in PEC vis-a-vis the PEC Common Stock and PEC Promissory Notes
to be issued by PEC as consideration for the Asset Purchase.
.3 The undersigned has had an opportunity to ask questions of PEC
and its management concerning PEC and PDC, the businesses of PEC and PDC and
the PEC Common Stock and the PDC Promissory Notes, and, if asked, all such
questions have been answered to the full satisfaction of the undersigned.
.4 The undersigned understands that PEC has not registered the
offer or sale of the PEC Common Stock or PEC Promissory Notes under the
Securities Act of 1933, as amended (the "Act"), in reliance upon an exemption
therefrom under Section 4(2) of the Act and the provisions of Regulation D
promulgated thereunder. The undersigned therefore acknowledges that in no event
may he/she sell or otherwise transfer the PEC Common Stock or the PDC
Promissory Notes without registration under the Act (see paragraph (h) below)
or an exemption therefrom, and that he/she must therefore hold the PEC Common
Stock and the PEC Promissory Notes for an indefinite period of time.
.5 The undersigned represents that he/she will acquire the PEC
Common Stock and PEC Promissory Notes for his/her own account, with no
intention to distribute or offer to distribute the same to others, and
understands that the issuance by PEC of, the PEC Common Stock and PEC
Promissory Notes will be predicated upon the undersigned's lack of such
intention.
.6 The undersigned understands that neither the Securities and
Exchange Commission nor the securities commissioner of any state has received
or reviewed any documents relative to an investment in PEC, or has made any
finding or determination relating to the fairness of an investment in PEC.
.7 The undersigned acknowledges that stop transfer instructions
will be placed with PEC's transfer agent to restrict the resale, pledge,
hypothecation or other transfer of the PEC Common Stock and that the terms of
the PEC Promissory Notes will prohibit sale thereof without the prior written
consent of PEC.
<PAGE> 55
Patterson Energy, Inc.
[Date]
Page 3
.8 The undersigned acknowledges that, except as provided in the
Registration Rights Agreement attached as Exhibit B to the Stock Purchase
Agreement, PEC is under no obligation to register the PEC Common Stock, for
sale under the Act or to assist the undersigned in complying with any exemption
from registration under the Act, or any state securities laws. The undersigned
further acknowledges that PEC's limited agreement to register the PEC Common
Stock as described in the Registration Rights Agreement will be on a
best-efforts basis only. The undersigned further acknowledges that PEC has no
obligation to register the PEC Promissory Notes for sale under the Act and
that, therefore, the Notes will not be registered.
.9 If other than a natural person, the undersigned was not
organized for the specific purpose of acquiring the PEC Common Stock or PEC
Promissory Notes.
.10 The undersigned understands and acknowledges that the
foregoing representations and warranties will be relied upon by PEC in
connection with the issuance of the PEC Common Stock and PEC Promissory Notes.
.11 The undersigned is not relying on PEC or PDC with respect to
the economic considerations of the undersigned relating to the issuance to the
undersigned of the PEC Common Stock or PEC Promissory Notes. In regard to such
considerations, the undersigned has relied upon the advice of, or has consulted
with, only his own advisors, if any.
.12 If a natural person, the undersigned ____ has or ____ does not
have (i) an individual net worth, or joint net worth with the undersigned's
spouse in excess of $1 million, and/or (ii) an individual income in excess of
$200,000 in each of the two most recent years or joint income with the
undersigned's spouse in excess of $300,000 in each of such years and has a
reasonable expectation of reaching the same income level in the current year.
(b) Indemnification.
The undersigned agrees to indemnify and hold harmless PEC and PDC, or
either of them, the officers, directors and affiliates of either of them and
each other person, if any, who controls either of them, within the meaning of
Section 15 of the Act, against any and all loss, liability, claim, damage and
expense whatsoever (including, but not limited to, any and all expenses
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any false representation or warranty or failure by the undersigned
to comply with any covenant or agreement made by the undersigned herein.
<PAGE> 56
Patterson Energy, Inc.
[Date]
Page 4
(c) Authority.
If the undersigned is a corporation, partnership, trust or estate, the
undersigned has all right and authority, in his capacity as an officer, general
partner, trustee or executor of such corporation, partnership, trust or estate,
as the case may be, to execute and deliver this letter on behalf of such
corporation, partnership, trust or estate, as the case may be, and this letter
is a valid and binding agreement of such corporation, partnership, trust or
estate, as the case may be, enforceable in accordance with its terms.
(d) Survival.
All representations, warranties and covenants contained in this letter
shall survive the closing of the Asset Purchase. The undersigned acknowledges
and agrees that this letter shall survive the death or disability of the
undersigned.
Very truly yours,
_____________________________
<PAGE> 57
EXHIBIT D-2
FORM OF
INVESTMENT REPRESENTATION LETTER
FOR
RIG I AND PHOENIX
AND
STOCKHOLDERS THEREOF
[Date]
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, Texas 79549
This letter is being submitted to Patterson Energy, Inc. ("PEC") in
connection with and as a condition to PEC's closing of the Asset Purchase
contemplated by the Asset Purchase Agreement among PEC, Patterson Drilling
Company ("PDC") and Rig I Group, Inc. ("Rig I"), Phoenix Drilling, Inc.
("Phoenix"), Welch & Howell Drilling, Inc. and Imperial Equipment Co.
Capitalized terms not defined herein shall have the meaning given them in the
Memorandum (as defined below).
(e) Representations and Warranties.
The undersigned hereby represents and warrants to PEC that the
following statements are true:
.1 The undersigned has been furnished a copy of the Memorandum,
dated November __, 1996 (the "Memorandum") containing a copy of PEC's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995 and all other
reports filed by PEC with the Securities and Exchange Commission since January
1, 1996 (collectively, the "Reports") and has carefully reviewed the Memorandum
and the Reports, including, but not limited to, (i) the statements in the
Memorandum relating to taxation of the Asset Purchase and lack of free
transferability of the PEC Common Stock and PEC Promissory Notes to be issued
to the stockholders of Rig I and Phoenix by PEC as consideration for the Asset
Purchase, and (ii) the section entitled "Disclosure Concerning Forward-Looking
Statements," setting forth certain Cautionary Statements or risk factors
relating to PEC and its businesses and operations.
<PAGE> 58
Patterson Energy, Inc.
[Date]
Page 2
.2 The undersigned has such knowledge and experience in financial
and business matters that he/she is capable of evaluating the merits and risks
of an investment in PEC vis-a-vis the PEC Common Stock to be issued by PEC as
consideration for the Asset Purchase.
.3 The undersigned has had an opportunity to ask questions of PEC
and its management concerning PEC and PDC, the businesses of PEC and PDC and
the PEC Common Stock, and, if asked, all such questions have been answered to
the full satisfaction of the undersigned.
.4 The undersigned understands that PEC has not registered the
offer or sale of the PEC Common Stock under the Securities Act of 1933, as
amended (the "Act"), in reliance upon an exemption therefrom under Section 4(2)
of the Act and the provisions of Regulation D promulgated thereunder. The
undersigned therefore acknowledges that in no event may he/she sell or
otherwise transfer the PEC Common Stock or the PDC Promissory Notes without
registration under the Act (see paragraph (h) below) or an exemption therefrom,
and that he/she must therefore hold the PEC Common Stock for an indefinite
period of time.
.5 The undersigned represents that he/she will acquire the PEC
Common Stock for his/her own account, with no intention to distribute or offer
to distribute the same to others, and understands that the issuance by PEC of,
the PEC Common Stock will be predicated upon the undersigned's lack of such
intention.
.6 The undersigned understands that neither the Securities and
Exchange Commission nor the securities commissioner of any state has received
or reviewed any documents relative to an investment in PEC, or has made any
finding or determination relating to the fairness of an investment in PEC.
.7 The undersigned acknowledges that stop transfer instructions
will be placed with PEC's transfer agent to restrict the resale, pledge,
hypothecation or other transfer of the PEC Common Stock.
.8 The undersigned acknowledges that, except as provided in the
Registration Rights Agreement attached as Exhibit B to the Stock Purchase
Agreement, PEC is under no obligation to register the PEC Common Stock, for
sale under the Act or to assist the undersigned in complying with any exemption
from registration under the Act, or any state securities laws. The undersigned
<PAGE> 59
Patterson Energy, Inc.
[Date]
Page 3
further acknowledges that PEC's limited agreement to register the PEC Common
Stock as described in the Registration Rights Agreement will be on a
best-efforts basis only.
.9 If other than a natural person, the undersigned was not
organized for the specific purpose of acquiring the PEC Common Stock or PEC
Promissory Notes.
.10 The undersigned understands and acknowledges that the
foregoing representations and warranties will be relied upon by PEC in
connection with the issuance of the PEC Common Stock.
.11 The undersigned is not relying on PEC or PDC with respect to
the economic considerations of the undersigned relating to the issuance to the
undersigned of the PEC Common Stock. In regard to such considerations, the
undersigned has relied upon the advice of, or has consulted with, only his own
advisors, if any.
.12 If a natural person, the undersigned ____ has or ____ does not
have (i) an individual net worth, or joint net worth with the undersigned's
spouse in excess of $1 million, and/or (ii) an individual income in excess of
$200,000 in each of the two most recent years or joint income with the
undersigned's spouse in excess of $300,000 in each of such years and has a
reasonable expectation of reaching the same income level in the current year.
(f) Indemnification.
The undersigned agrees to indemnify and hold harmless PEC and PDC, or
either of them, the officers, directors and affiliates of either of them and
each other person, if any, who controls either of them, within the meaning of
Section 15 of the Act, against any and all loss, liability, claim, damage and
expense whatsoever (including, but not limited to, any and all expenses
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any false representation or warranty or failure by the undersigned
to comply with any covenant or agreement made by the undersigned herein.
(g) Authority.
If the undersigned is a corporation, partnership, trust or estate, the
undersigned has all right and authority, in his capacity as an officer, general
partner, trustee or executor of such corporation, partnership, trust or estate,
as the case may be, to execute and deliver this letter on behalf of such
<PAGE> 60
Patterson Energy, Inc.
[Date]
Page 4
corporation, partnership, trust or estate, as the case may be, and this letter
is a valid and binding agreement of such corporation, partnership, trust or
estate, as the case may be, enforceable in accordance with its terms.
(h) Survival.
All representations, warranties and covenants contained in this letter
shall survive the closing of the Asset Purchase. The undersigned acknowledges
and agrees that this letter shall survive the death or disability of the
undersigned.
Very truly yours,
__________________________________
<PAGE> 1
EXHIBIT 10.21.1
PROMISSORY NOTE
Snyder, Texas
US $400,000 December ___, 1996
FOR VALUE RECEIVED, PATTERSON DRILLING COMPANY, a Delaware
corporation ("PDC"), promises to pay to the order of Welch & Howell Drilling,
Inc., a California corporation (the "Noteholder"), the principal sum of Four
Hundred Thousand Dollars ($400,000). Principal shall be paid in six (6) equal
monthly installments of Sixty-Six Thousand Six Hundred and Sixty-Six Dollars
($66,666) each, beginning January 1, 1997, and ending on June 1, 1997, at which
time the entire principal amount outstanding, if not sooner paid, shall be due
and payable. Principal shall be payable at P.O. Box 1851, El Centro,
California 92244, or such other place as the Noteholder may designate.
If any installment of principal under this Note is not paid
within ten (10) days of the date the Noteholder provides PDC written notice of
a default in the payment of such installment, the entire principal amount
outstanding thereon shall at once become due and payable without additional
notice to PDC at the option of the Noteholder. The Noteholder may exercise
this option to accelerate during any default by PDC regardless of any prior
forbearance. If suit is brought to collect this Note, the Noteholder shall be
entitled to collect all reasonable costs and expenses of suit, including, but
not limited to, reasonable attorney fees.
Presentment, notice of dishonor, and protest are hereby waived
by PDC.
Any notice to PDC provided for in this Note shall be given by
delivering such notice by certified mail addressed to PDC at 4510 Lamesa
Highway, Snyder, Texas 75549, or to such other address as PDC may designate by
notice to the Noteholder. Any notice to the Noteholder shall be given by
mailing such notice by certified mail, return receipt requested, to the
Noteholder at the address stated in the first paragraph of this Note, or at
such other address as may have been designated by notice to PDC.
Neither this Note nor any right or interest of the Noteholder
hereunder may be transferred or assigned by the Noteholder to any other party
without the prior written consent of PDC.
<PAGE> 2
The Note is made in the State of Texas and shall be governed
by and interpreted in accordance with the internal laws of the State of Texas
without regard to its conflicts of law provisions or interpretations.
PDC:
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
-------------------------
Cloyce A. Talbott
Chief Executive Officer
-2-
<PAGE> 1
EXHIBIT 11.1
PATTERSON ENERGY, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
PRIMARY
Net income ....................................................... $ 4,271,077
-----------
Shares:
Weighted average number of common shares outstanding .......... 4,791,733
Dilutive effect of outstanding options and redeemable
warrants (as determined by the application of the treasury
stock method) ............................................... 160,969
-----------
Weighted average number of common shares outstanding, as
adjusted .................................................... 4,952,702
-----------
Net income per share: Primary .................................... $ 0.86
===========
ASSUMING FULL DILUTION
Net income ....................................................... $ 4,271,077
-----------
Shares:
Weighted average number of common shares outstanding .......... 4,791,733
Dilutive effect of outstanding options and redeemable
warrants (as determined by the application of the treasury
stock method) ............................................... 229,683
-----------
Weighted average number of common shares outstanding,
as adjusted ................................................. 5,021,416
-----------
Net income per share: Assuming full dilution ..................... $ 0.85
===========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF
PATTERSON ENERGY, INC.
<TABLE>
<CAPTION>
STATE OF NAMES UNDER WHICH
NAME INCORPORATION SUBSIDIARIES DO BUSINESS
---- ------------- ------------------------
<S> <C> <C>
Patterson Petroleum, Inc. Texas Patterson Petroleum, Inc.
Patterson Petroleum Trading Company, Inc. Texas Patterson Petroleum Trading Company, Inc.
Patterson Drilling Programs, Inc. Texas Patterson Drilling Programs, Inc.
Patterson Drilling Company Delaware Patterson Drilling Company
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Patterson Energy, Inc. on Form S-8 (File No. 333-09243) and on Form S-3, as
amended, (File No. 333-13497) of our report dated March 10, 1997, on our audits
of the consolidated financial statements of Patterson Energy, Inc. as of
December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Dallas, Texas
March 27, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the previously filed Registration
Statements of Patterson Energy, Inc., on Form S-8 (File No. 333-09243) and on
Form S-3, as amended (File No. 333-13497).
Arthur Andersen LLP
San Antonio, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED AS A PART OF PATTERSON
ENERGY, INC.'S FORM 10-K AS OF DECEMBER 31, 1995 AND 1996 AND FOR EACH OF THE
YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO PATTERSON ENERGY, INC.'S 1996 FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1996
<CASH> 3,493,626
<SECURITIES> 543,867
<RECEIVABLES> 24,742,089
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,481,452
<PP&E> 109,858,824
<DEPRECIATION> 58,550,705
<TOTAL-ASSETS> 87,913,305
<CURRENT-LIABILITIES> 17,889,441
<BONDS> 0
0
0
<COMMON> 49,436
<OTHER-SE> 43,432,681
<TOTAL-LIABILITY-AND-EQUITY> 87,913,305
<SALES> 0
<TOTAL-REVENUES> 83,707,830
<CGS> 0
<TOTAL-COSTS> 78,954,028
<OTHER-EXPENSES> 2,737,148
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,612,114
<INCOME-PRETAX> 2,016,654
<INCOME-TAX> (2,254,423)
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