<PAGE> 1
AS FILED WITH SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997
REGISTRATION NO. 333-18123
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
PATTERSON ENERGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2504748
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
(915) 573-1104
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CLOYCE A. TALBOTT
4510 LAMESA HIGHWAY
SNYDER, TEXAS 79549
(915) 573-1104
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS H. MAXFIELD, ESQ. ROBERT V. JEWELL, ESQ.
BAKER & HOSTETLER LLP ANDREWS & KURTH L.L.P.
SUITE 1100 SUITE 4200
303 EAST SEVENTEENTH AVENUE 600 TRAVIS
DENVER, COLORADO 80203 HOUSTON, TEXAS 77002
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED JANUARY 27, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
1,727,000 Shares
PATTERSON ENERGY, INC.
[Patterson Logo] Common Stock
- --------------------------------------------------------------------------------
Of the shares of common stock, par value $0.01 per share (the "Common Stock"),
offered hereby, 1,500,000 shares are being sold by Patterson Energy, Inc., a
Delaware corporation ("Patterson" or the "Company") and 227,000 shares are being
sold by the selling stockholders (the "Selling Stockholders"). The Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
The Common Stock is quoted in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "PTEN." On January 2, 1997, the last
reported sales price of the Common Stock on the Nasdaq National Market was
$25.50 per share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" ON PAGES 8 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- -----------------------------------------------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
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Total(3)............................... $ $ $ $
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- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 259,050 additional shares of Common Stock on the
same terms and conditions set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to Company will be $ and the total
Proceeds to Selling Stockholders will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
<PAGE> 3
PRINCIPAL AREAS OF ACTIVITY
[MAP DEPICTING THE LOCATION OF THE COMPANY'S OFFICES AND
PRINCIPAL AREAS OF OPERATIONS IN THE STATE OF TEXAS,
AS WELL AS OUTLINES OF THE AUSTIN CHALK TREND,
PERMIAN BASIN AND HARDEMAN BASIN AND FOLD OUT
PAGES WITH PHOTOS OF DRILLING RIGS.]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus and in the documents incorporated by reference into this Prospectus.
Unless the context indicates otherwise, (i) the terms "Company" and "Patterson"
refer to the Company and its subsidiaries, (ii) the information in this
Prospectus includes the effects of the restatement of Patterson's financial,
operating and reserve information to include Tucker Drilling Company, Inc.
("Tucker") on a combined basis effective for all periods as a result of the
merger of Patterson and Tucker on July 30, 1996, which was accounted for as a
pooling of interests, (iii) all information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and (iv) references to
numbers of drilling rigs include only drilling rigs that the Company considers
operable. See "Glossary of Industry Terms" at the back of this Prospectus for
definitions of industry terms used in this Prospectus.
THE COMPANY
Patterson Energy, Inc. ("Patterson" or the "Company") is one of the leading
providers of domestic land drilling services to major and independent oil and
natural gas companies. Formed in 1978, the Company focuses its operations
primarily in Texas in the Permian Basin, the Austin Chalk Trend and the Hardeman
Basin. The Company has a fleet of 61 drilling rigs, 52 of which are currently
operable, and ranked third during 1995 in both land footage and horizontal wells
drilled in the U.S. The Company is also engaged in the development, exploration,
acquisition and production of oil and natural gas.
The Company has established a reputation for reliability, high quality
equipment and well-trained crews. The Company continually seeks to modify and
upgrade its equipment to maximize the performance and capabilities of its
drilling rig fleet, which the Company believes provides it with a competitive
advantage. Additionally, the Company has the in-house capability to design,
manufacture, repair and modify its drilling rigs. Of the Company's drilling
rigs, 46 are capable of drilling to depths greater than 10,000 feet, including
five that are capable of drilling to depths greater than 15,000 feet. During the
nine months ended September 30, 1996, the Company drilled 314 wells totaling 2.6
million feet for 92 different customers. The Company believes that it has one of
the highest utilization rates in the U.S. land drilling industry, with an
average utilization rate in excess of 80% during the fourth quarter of 1996.
The Company's oil and natural gas activities are designed to complement its
land drilling operations. These activities are focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 13% of the Company's revenues for
the nine months ended September 30, 1996. As of September 30, 1996, the
Company's proved developed reserves were 1,919 MBOE and had a SEC PV-10 Value of
$12.6 million.
Over the past three years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
acquired 47 drilling rigs and assembled one drilling rig, 39 of which are
presently operable. From 1991 (prior to giving effect to the Tucker merger) to
1995, the Company's annual revenues increased from $21.9 million to $64.4
million, and its annual EBITDA increased from $2.7 million to $11.2 million.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
Since 1982, the U.S. land drilling industry has been characterized by an
over supply of drilling equipment due to decreased demand for land drilling
services. During the past 14 years, the available land drilling rig fleet
declined from 5,139 drilling rigs in 1982 to 1,425 drilling rigs in 1996.
Industry profitability also suffered, and in many cases insufficient cash flow
was generated to support proper drilling rig maintenance. To maintain operation
of drilling equipment in that environment, drilling contractors frequently
removed drill pipe, parts and components from less desirable drilling rigs. The
available domestic drilling fleet has been further reduced through the
mobilization of drilling equipment to international markets.
3
<PAGE> 5
Many drilling contractors have used up most of their internal inventories
of drilling rig components and drill pipe and have begun to experience rising
costs for the components necessary to maintain their drilling rigs in working
condition. These increased capital costs have strained the economic resources of
many small land drilling operators, resulting in an environment that encourages
industry consolidation. These factors have led to a reduction in the number of
domestic drilling contractors from 388 in 1993 to 289 in 1996. In addition,
approximately one-third of the land footage drilled in the U.S. during 1995 was
drilled by only 10 companies, down from 25 in 1993.
During the last two years, however, demand for domestic onshore drilling
services has increased as a result of stronger oil and natural gas prices and
technological advances (such as 3-D seismic, new drilling techniques and
improved completion methods) that have reduced exploration, development and
production costs per BOE. As a consequence, the Company has recently begun to
realize modest price increases for the first time in many years.
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in
good operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize utilization rates and pricing.
GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities exist to further expand its drilling rig fleet. In
evaluating potential acquisitions, the Company seeks to identify drilling rigs
and related equipment that complement the Company's existing drilling rig fleet
and enable it to expand its market share in its core geographic operating areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the highest ratios of EBITDA to revenues in the U.S.
land drilling industry during the first nine months of 1996. The Company has
produced these results from the combination of providing premium contract
drilling services and operating under an efficient cost structure. In addition,
the Company has achieved cost reductions and efficiencies through acquisition
related synergies. The Company also uses its fleet of trucks and trailers to rig
down, transport and rig up its drilling rigs, which increases efficiency by
reducing the time and costs associated with these ancillary operations.
COMPLEMENTARY OIL AND NATURAL GAS OPERATIONS. The Company believes that
its oil and natural gas operations provide it with the additional financial
flexibility to generate cash flow during downturns in the land drilling market.
The Company's ability to participate in oil and natural gas wells also generates
opportunities to serve as the land drilling contractor for other operators or on
its own behalf.
RECENT ACQUISITIONS
During July 1996, the Company acquired Tucker for Common Stock valued at
$26.4 million. A total of 1,577,514 shares of Common Stock was issued to the
stockholders of Tucker pursuant to the merger, and an additional 74,592 shares
of Common Stock were reserved for issuance upon exercise of then outstanding
Tucker stock options. Tucker was engaged in onshore contract drilling in the
Permian and Hardeman Basins and, to a lesser extent, in the exploration,
development and production of oil and natural gas, primarily in the Permian
Basin. At the time of the merger, Tucker owned 13 drilling rigs. While all of
the drilling rigs were
4
<PAGE> 6
operable, their utilization rate was approximately 50%. The utilization rate for
these drilling rigs is now approximately 80%.
During October 1996, the Company purchased six drilling rigs and related
assets through the acquisition of Gene Sledge Drilling Corporation ("Sledge").
The net purchase price for Sledge was $8.9 million which, in addition to the
drilling rigs, included an inventory of drilling equipment valued by the Company
at approximately $4.4 million. Sledge's contract drilling operations were
conducted in the Permian Basin. Five of the six drilling rigs were operable at
the time of the transaction and the sixth became operable in November. Sledge's
utilization rates were comparable to the Company's utilization rates.
During November and December 1996, in two separate transactions, the
Company acquired 15 drilling rigs and related assets. The consideration paid for
these assets was approximately $4.2 million, consisting of $2.4 million cash, a
$400,000 promissory note and 52,000 shares of the Company's Common Stock valued
at approximately $1.4 million. Six of the drilling rigs were operable at the
time of the transactions, but were underutilized. The nine remaining drilling
rigs are expected to become operable at various times during 1997. The Company
has budgeted approximately $7.5 million to modify and upgrade the drilling rigs
acquired in these two transactions.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered:
By the Company............................................ 1,500,000 shares
By the Selling Stockholders............................... 227,000 shares
Total............................................. 1,727,000 shares
Common Stock to be Outstanding after the Offering........... 6,475,031 shares(1)
Use of Proceeds............................................. Repayment of indebtedness, drilling rig
modifications and upgrades and other
general corporate purposes, including
possible drilling rig and equipment
acquisitions. The Company will not
receive any of the proceeds from the
sale of shares by the Selling
Stockholders. See "Use of Proceeds."
Nasdaq National Market Symbol............................... PTEN
</TABLE>
- ---------------
(1) Does not include 345,250 shares issuable upon exercise of outstanding stock
options and warrants held by management, non-employee directors and others,
at a weighted average exercise price of $9.63 per share.
RISK FACTORS
See "Risk Factors" for a discussion of certain considerations relevant to
an investment in the Common Stock offered hereby.
5
<PAGE> 7
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table sets forth certain summary selected consolidated
financial data of the Company for each of the periods indicated. The financial
data for the three-year period ended December 31, 1995 have been derived from
the Company's audited consolidated financial statements. The data presented for
the years ended December 31, 1991 and 1992 have not been audited and were
prepared by the Company using these periods' stand alone audited financial
statements of the Company and Tucker. The financial data for the nine months
ended September 30, 1995 and 1996 are derived from unaudited consolidated
financial statements of the Company and Tucker. The Company's previously
reported data for 1996 and prior years have been restated to reflect the merger
with Tucker under the pooling of interests method of accounting. The summary
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, notes thereto and other
information included elsewhere in this Prospectus and the documents incorporated
by reference herein.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling................................ $33,614 $34,417 $37,746 $54,823 $57,599 $42,656 $47,725
Oil and gas............................. 4,028 4,171 5,147 4,707 6,845 4,905 7,331
------- ------- ------- ------- ------- ------- -------
Total............................. 37,642 38,588 42,893 59,530 64,444 47,561 55,056
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Direct drilling costs................... 29,090 29,376 30,631 43,036 46,505 34,431 38,818
Oil and gas related costs............... 1,618 1,800 1,920 2,654 2,669 1,671 2,423
Depreciation, depletion and
amortization.......................... 4,976 4,338 4,655 4,912 7,682 5,286 7,913
General and administrative.............. 3,310 3,686 4,014 4,793 5,063 3,607 3,944
------- ------- ------- ------- ------- ------- -------
Total............................. 38,994 39,200 41,220 55,395 61,919 44,995 53,098
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... (1,352) (612) 1,673 4,135 2,525 2,566 1,958
------- ------- ------- ------- ------- ------- -------
Other income (expenses):
Interest expense........................ (523) (416) (331) (366) (1,065) (762) (985)
Non-recurring acquisition costs......... -- -- -- -- -- -- (2,268)
Other................................... 1,413 1,011 397 1,045 954 752 1,006
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items..................... (462) (17) 1,739 4,814 2,414 2,556 (289)
------- ------- ------- ------- ------- ------- -------
Income tax expense (benefit):
Current................................. 57 79 123 213 213 264 112
Deferred................................ (8) -- -- (406) (1,000) (208) (2,531)
Charge in lieu of income taxes.......... 131 312 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) before extraordinary
items................................... (642) (408) 1,616 5,007 3,201 2,500 2,130
Extraordinary items....................... 131 458 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ (511) $ 50 $ 1,616 $ 5,007 $ 3,201 $ 2,500 $ 2,130
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common share:
Primary................................. $ (.17) $ .02 $ .51 $ 1.24 $ .73 $ .59 $ .43
Fully diluted........................... $ (.17) $ .02 $ .51 $ 1.24 $ .71 $ .55 $ .43
OTHER FINANCIAL DATA:
EBITDA(1)................................. $ 5,037 $ 4,884 $ 6,725 $10,092 $11,161 $ 8,604 $10,877(3)
Operating cash flow(2).................... 3,639 3,649 6,373 9,301 9,618 7,277 8,594(3)
Total capital expenditures................ 5,701 4,770 5,262 11,617 19,906 15,237 10,554
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 9,450 $ 8,284 $17,319
Total assets................................................ 68,498 81,049 90,084
Notes payable............................................... 15,655 26,480 --
Total stockholders' equity.................................. 39,237 40,667 76,182
</TABLE>
(See Notes on following page)
6
<PAGE> 8
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(1) EBITDA (earnings before interest expense, taxes and depreciation, depletion
and amortization) is presented to provide additional information about the
Company's operations. EBITDA should not be considered as an alternative to
net income under generally accepted accounting principles as an indicator of
the Company's operating performance or as an alternative to cash flow from
operating activities under generally accepted accounting principles as a
measure of liquidity.
(2) Operating cash flow is defined as net income plus depreciation, depletion
and amortization, write-down due to impairment of long-lived assets and
abandonments minus net gain on sale of assets and deferred income tax
benefit. Operating cash flow should not be considered as an alternative to
net income under generally accepted accounting principles as an indicator of
the Company's operating performance or as an alternative to cash flow from
operating activities under generally accepted accounting principles as a
measure of liquidity.
(3) Adjusted to exclude $2.3 million (before-tax) and $1.5 million (after-tax)
of non-recurring acquisition costs associated with the Tucker merger.
(4) Pro forma to give effect to the acquisition of six drilling rigs and related
assets from Sledge in October 1996 and the acquisition of 15 (six currently
operable) drilling rigs and related assets in two separate transactions
during November and December 1996. See "Business and Properties -- Recent
Acquisitions" and "The Company."
(5) Pro forma to give effect to the acquisition of six drilling rigs and related
assets from Sledge in October 1996 and the acquisition of 15 (six currently
operable) drilling rigs and related assets in two separate transactions
during November and December 1996 and as adjusted to reflect the issuance
and sale of the 1,500,000 shares of Common Stock offered hereby by the
Company and the application of the net proceeds therefrom. See "Business and
Properties -- Recent Acquisitions," "The Company" and "Use of Proceeds."
SUMMARY OPERATING AND OIL AND NATURAL GAS DATA
The following table sets forth operating and oil and natural gas data for
the Company for each of the periods indicated which have been restated to
reflect the merger of the Company and Tucker. The reserve data set forth below
represent only estimates, which are based on various assumptions and, therefore,
are inherently imprecise. In addition, the reserve data may be subject to upward
or downward revisions depending upon, among other factors, production history
and prevailing oil and natural gas prices. See "Risk Factors -- Volatility of
Oil and Natural Gas Prices," "Risk Factors -- Uncertainty of Oil and Natural Gas
Reserve Estimates," "Business and Properties" and "Experts."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
RIG ACTIVITY DATA:
Number of wells drilled............................ 333 460 395 327 314
Average rigs available for service................. 25 31 36 35 39
Average rig utilization rate....................... 75% 76% 69% 70% 70%
PRODUCTION DATA:
Average net daily production:
Oil (Bbls)....................................... 399 340 524 509 630
Natural Gas (Mcf)................................ 1,946 2,356 3,731 3,675 4,539
Total (BOE)...................................... 723 733 1,146 1,122 1,387
Average sales price:
Oil (per Bbl).................................... $17.05 $16.40 $ 17.48 $17.40 $ 20.23
Natural Gas (per Mcf)............................ 2.02 1.68 1.51 1.41 1.96
Average production (lifting) costs (per BOE)....... $ 4.57 $ 4.27 $ 3.61 $ 3.50 $ 3.86
RESERVE DATA:
Proved Developed Reserves (MBOE)................. 767 1,228 1,635 - 1,919
SEC PV-10 Value (in thousands)................... $4,461 $6,433 $10,295 - $12,615
</TABLE>
7
<PAGE> 9
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby.
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas, both with respect to its contract
drilling operations and its oil and natural gas operations. In recent years, oil
and natural gas prices and, therefore, the level of drilling, exploration,
development and production, have been extremely volatile. Prices are affected by
market supply and demand factors as well as actions of state and local agencies,
U.S. and foreign governments and international cartels. All of these factors are
beyond the control of the Company. Any significant or extended decline in oil
and/or natural gas prices will have a material adverse effect on the Company's
financial condition and operations and could impair access to sources of
capital.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business is currently experiencing increased demand for drilling services
primarily due to stronger oil and natural gas prices. However, the market for
onshore contract drilling services has generally been depressed since 1982, when
crude oil and natural gas prices began to weaken. A particularly sharp decline
in demand for contract drilling services occurred in 1986 because of the
world-wide collapse in oil prices (to approximately $10.00 per Bbl in April 1986
in the U.S.). Since this time and except during occasional upturns, there have
been substantially more drilling rigs available than necessary to meet demand in
most operating and geographic segments of the domestic drilling industry. As a
result, drilling contractors have had difficulty sustaining profit margins. In
addition to adverse effects that future declines in demand could have on the
Company, ongoing movement or reactivation of onshore drilling rigs or new
construction of drilling rigs could adversely affect 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. Currently, there
is a growing shortage of drill pipe in the contract drilling industry in the
U.S. This shortage has caused the price of drill pipe to increase significantly
over the past 30 months and has required orders for new drill pipe to be placed
at least 150 to 180 days in advance of expected use. The price increase and the
delay in delivery caused the Company to substantially increase capital
expenditures in its contract drilling segment over the approximately 30-month
period ending September 30, 1996, primarily with respect to new drill pipe
purchases. In the event of an extended shortage, the Company may be unable to
obtain the drill pipe required for its contract drilling operations.
MANAGEMENT OF GROWTH. The Company has experienced substantial growth over
the past three years, particularly in its contract drilling segment, and intends
to further expand its drilling fleet through selected acquisitions. Continued
growth could strain the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to manage
growth effectively or that it will be successful in maintaining the market share
attributable to operable drilling rigs acquired by the Company. If the Company
is unable to manage its growth, its business, results of operations and
financial condition could be materially adversely affected.
ABILITY TO GROW THROUGH ACQUISITIONS. The Company's growth has been
enhanced materially by strategic acquisitions that have substantially increased
the Company's drilling rig fleet. One element of the Company's strategy is to
make acquisitions in markets in which it currently competes. While the Company
believes that the land drilling industry is highly fragmented and that
significant acquisition opportunities are available, there can be no assurance
that suitable acquisition candidates can be found, and the Company is likely to
face competition from other companies for available acquisition opportunities.
In addition, if the prices paid by buyers of drilling rigs continue to rise, the
Company may find fewer acceptable acquisition opportunities. There can be no
assurance that the Company will have sufficient capital resources to complete
acquisitions, that acquisitions can be completed on terms acceptable to the
Company or that any completed
8
<PAGE> 10
acquisition would improve the Company's financial condition, results of
operations, business or prospects in any material manner.
LABOR SHORTAGES. Increases in domestic drilling demand since mid-1995 and
recent increases in contract drilling activity have resulted in a shortage of
qualified drilling rig personnel in the industry. If the Company is unable to
attract and retain sufficient qualified personnel, its ability to market and
operate its drilling rigs will be restricted. Further, labor shortages could
result in wage increases, which could reduce the Company's operating margins.
RELIANCE ON KEY PERSONNEL. The Company is highly dependent upon its
executive officers and key employees. The unexpected loss of the services of any
of these individuals, particularly Cloyce A. Talbott or A. Glenn Patterson, the
Chief Executive Officer and the President of the Company, respectively, could
have a detrimental effect on the Company. The Company has no employment
agreements with any of its executive officers. The Company maintains key man
insurance on the lives of Messrs. Talbott and Patterson in the amount of $3
million each.
RISKS OF OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND PRODUCTION. The
search for oil and natural gas often results in unprofitable efforts, not only
from dry holes, but also from wells which, though productive, do not produce oil
or natural gas in sufficient quantities to return a profit on the costs
incurred. No assurance can be given that any oil or natural gas reserves located
by the Company in the future will be commercially productive. In addition, the
cost of drilling, completing and operating wells is often uncertain, and
drilling may be delayed or cancelled as a result of many factors, including
unacceptably low oil and natural gas prices, oil and natural gas property title
problems, inclement weather conditions and financial instability of well
operators and working interest owners. Furthermore, the availability of a ready
market for the Company's oil and natural gas depends on numerous factors beyond
its control, including demand for and supply of oil and natural gas, general
economic conditions, proximity of natural gas reserves to pipelines, weather
conditions and government regulation.
COMPETITION. The Company encounters intense competition in its contract
drilling operations from other drilling contractors. The competitive environment
for contract drilling services involves such factors as drilling rates,
availability and condition of drilling rigs and equipment, reputation and
customer relations. The Company faces strong competition from major oil
companies, independent oil and natural gas companies and individual producers
and operators in acquiring oil and natural gas leases for exploration and
development. Many of the competitors in each of the Company's lines of business
have substantially greater financial and other resources than the Company.
OPERATING RISKS AND INSURANCE. Contract drilling and oil and natural gas
activities are subject to a number of risks and hazards which could cause
serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir damages. The occurrence of a significant
event, including pollution or environmental damage, could materially affect the
Company's operations and financial condition. Although the Company believes that
it is adequately insured against normal and foreseeable risks in its operations
in accordance with industry standards, such insurance may not be adequate to
protect the Company against liability from all consequences of well disasters,
extensive fire damage or damage to the environment. No assurance can be given
that the Company will be able to maintain adequate insurance in the future at
rates it considers reasonable or that any particular types of coverage will be
available. Furthermore, a portion of the Company's contract drilling is done on
a turnkey basis, which involves substantial economic risks.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. The Company's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells, including
laws and regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent years,
and
9
<PAGE> 11
may in certain circumstances impose strict liability, rendering a person liable
for environmental damage without regard to negligence or fault on the part of
such person. To date, the Company has not been required to expend significant
resources in order to comply with applicable environmental laws and regulations
nor has it incurred any fines or penalties for noncompliance. However,
compliance costs under existing legal requirements and under any new
requirements could become material, and the Company could incur liability in the
future for noncompliance. Additional matters subject to governmental regulation
include discharge permits for drilling operations, performance bonds, reports
concerning operations, spacing of wells, unitization and pooling of properties,
disposal of produced water and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. In addition, although the
Company performed visual inspections on three yards acquired by it during 1996,
the Company did not obtain Phase I environmental reports on any of the yards,
which reports, if obtained, may have revealed potential environmental
liabilities not otherwise apparent from the Company's visual inspection. The
Company typically does not have indemnifications from the respective sellers of
the yards for preclosing liabilities, including environmental liabilities.
Accordingly, any loss resulting from environmental liabilities from any of these
yards, 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.
CONFLICTS OF INTEREST. Certain of the Company's directors and executive
officers and their respective affiliates have participated and may continue to
participate from time to time in oil and natural gas prospects and properties in
which the Company has an interest. Conflicts of interest may arise between such
persons and the Company as to the advisability of conducting drilling and
recompletion activities on these properties. Of the 266 wells operated by the
Company at September 30, 1996, the Company's directors, officers and/or their
respective affiliates were working interest owners in approximately 104 wells.
See "Management -- Related Party Transactions."
ANTI-TAKEOVER MEASURES. The Company, a Delaware corporation, is subject to
the General Corporation Law of the State of Delaware, including Section 203, an
anti-takeover law enacted in 1988. The Company has also enacted certain
anti-takeover measures, including a stockholder rights plan. As a result of
these measures, potential acquirors of the Company may find it more difficult or
be discouraged from attempting to effect an acquisition transaction with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions. See "Description of Capital
Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the offering, the
Company will have 6,475,031 shares of Common Stock outstanding (6,734,081 shares
if the Underwriters' over-allotment option is exercised in full), 5,508,410
(5,767,460 if the Underwriters' over-allotment option is exercised in full) of
which will be freely tradeable without substantial restriction or the
requirement of future registration under the Securities Act of 1933, as amended
(the "Securities Act"). Of the remaining 966,621 shares, 691,621 shares will be
held by "affiliates" of the Company, as that term is defined in Rule 144 under
the Securities Act, and may be sold subject to the provisions of Rule 144 and
the contractual restrictions described below, 25,000 shares are eligible for
sale under a shelf registration statement and 250,000 shares (all of which are
"restricted securities" under Rule 144) are held by a third party. These 250,000
shares are entitled to certain registration rights and also may be sold subject
to the provisions of Rule 144. In addition, the Company has reserved for
issuance 75,000 shares of Common Stock pursuant to the exercise of outstanding
warrants held by a third party which
10
<PAGE> 12
are entitled to certain registration rights. The Company and the Selling
Stockholders have agreed that they will not, for a period of 120 days from the
date of this Prospectus, and the executive officers and directors of the Company
that are not also Selling Stockholders have agreed that they will not, for a
period of 120 days from the date of this Prospectus, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the Company
or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, except that such agreement does not prevent the Company from
granting additional options under the Patterson Energy, Inc. 1993 Stock
Incentive Plan (the "1993 Plan") or the Company's Non-Employee Directors' Stock
Option Plan (the "Non-Employee Director Plan"). Upon the expiration of these
lockup agreements, all 691,621 shares held by such executive officers and
directors which are not sold in this offering will become eligible for sale in
the public market, subject to the applicable volume and manner-of-sale
limitations of Rule 144, 83,650 shares of Common Stock issuable upon exercise of
outstanding warrants and options that are vested will be eligible for sale and
106,600 shares of Common Stock issuable upon exercise of options that are not
vested will become eligible for sale as such options become vested. In addition,
a total of 80,000 shares of Common Stock issuable upon exercise of outstanding
options are eligible for sale under a shelf registration statement. Sales of
substantial amounts of Common Stock in the public market could adversely affect
the prevailing market price of the Common Stock. See "Shares Eligible for Future
Sale" and "Underwriting."
No prediction can be made as to the effect, if any, that future sales of
shares or the availability of shares for sale will have on the market price for
Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception of the availability of
shares for sale, could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities.
PREFERRED STOCK. The Company has a class of authorized Preferred Stock.
The Board of Directors, without stockholder approval, may issue shares of the
Preferred Stock with rights and preferences adverse to the voting power or other
rights of the holders of the Common Stock. The Company has not issued any shares
of Preferred Stock. However, as of January 2, 1997, an aggregate of 100,000
shares of Preferred Stock had been reserved for issuance upon exercise of the
Rights described under "Description of Capital Stock -- Stockholder Rights
Plan."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and documents incorporated by reference in this Prospectus
include certain statements that may be deemed to be "forward-looking statements"
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts, included in this
Prospectus that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, including such
matters as market conditions, future capital, development and exploration
expenditures (including the amount and nature thereof), drilling rig utilization
rates, drilling of wells, reserve estimates, repayment of debt, business
strategies and other plans and objectives of management of the Company for
future operations and activities, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions, expected future developments and other factors it believes are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including the risk factors discussed
above, general economic and business conditions, the business opportunities (or
lack thereof) that may be presented to and pursued by the Company, changes in
law or regulations and other factors, many of which are beyond the control of
the Company. Prospective investors are cautioned that any such statements are
not guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are expressly qualified in their
entirety by the foregoing matters.
11
<PAGE> 13
THE COMPANY
The Company is engaged in onshore contract drilling for oil and natural gas
and, to a lesser extent, in the development, exploration, acquisition and
production of oil and natural gas. The Company's operations are conducted
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 (52 of
which are currently operable) through assembly of one drilling rig during
September 1995 from existing equipment inventory and through the following
series of strategic acquisitions:
- In July 1994, nine drilling rigs, a yard in Victoria, Texas and 16 rig
hauling trucks were acquired by the Company from Questor Drilling Corp.,
a wholly owned subsidiary of Phibro Energy USA, Inc., for $6.4 million
consisting of cash and Common Stock.
- In April 1995, an approximate 58% undivided interest in each of two
drilling rigs in which the Company owned the remaining interest was
acquired for a price of $434,000 in cash.
- In May 1995, three inoperable drilling rigs and related equipment were
acquired for $1.1 million consisting of cash and Common Stock. Two of
these drilling rigs became operable in May and September 1995 and one
became operable in May 1996.
- In May 1995, one drilling rig was purchased for a price of $360,000 in
cash.
- In July 1996, 13 drilling rigs, related equipment and a yard in San
Angelo, Texas, were acquired from Tucker in consideration for Common
Stock valued at $26.4 million.
- In October 1996, six drilling rigs, related equipment and inventory and a
yard were acquired from Sledge for a net purchase price of $8.9 million
in cash. Five drilling rigs were operable at the time of the acquisition
and the remaining drilling rig was placed in service in November 1996.
- In November and December 1996, 15 drilling rigs, related equipment and a
yard were acquired in two separate transactions for aggregate net
consideration of $4.2 million. Of these drilling rigs, six were operable
at the time of acquisition and nine are expected to become operable at
various times during 1997. See "Business and Properties -- Recent
Acquisitions."
The Company's headquarters are located at 4510 Lamesa Highway, Snyder,
Texas 79549, and its telephone number at that address is (915) 573-1104. The
Company also has small offices in Austin, Houston and Midland, Texas and yard
facilities in Snyder, LaGrange, Victoria, Odessa, Midland, San Angelo and
Wichita Falls, Texas.
12
<PAGE> 14
USE OF PROCEEDS
Assuming an offering price of $25.50 per share (the last reported sales
price of the Common Stock on the Nasdaq National Market on January 2, 1997), the
net proceeds to be received by the Company from the sale of the 1,500,000 shares
of Common Stock offered by the Company hereby are estimated to be $35.5 million
($41.7 million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated expenses.
The Company intends to use the net proceeds approximately as follows: (i) $25.4
million to repay indebtedness as set forth in the table below; (ii) $7.5 million
for drilling rig modifications and upgrades; and (iii) the remaining $2.6
million for other general corporate purposes, including possible drilling rig
and equipment acquisitions. Pending use thereof, the Company intends to invest
the net proceeds in short-term, investment grade or government interest-bearing
securities.
The Company will not receive any of the proceeds from the sale of the
Common Stock being sold by the Selling Stockholders.
The following table sets forth certain information concerning the
indebtedness to be paid with the net proceeds of this offering:
<TABLE>
<CAPTION>
PRINCIPAL
OUTSTANDING
AT PRINCIPAL ANNUAL
DECEMBER 31, TO BE INTEREST MATURITY
NAME OF LENDER 1996 REPAID(1) RATE DATE
-------------------------------- ------------- --------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Norwest Bank, N.A. Prime(3)
("Norwest")................... $ 3,600(2) $ 3,600 June 1998
The CIT Group/Equipment One month
Financing, Inc. ("CIT")....... 21,849(4) 21,849 LIBOR(5) August 2002
plus 2.75%
------- -------
Totals................ $25,449 $25,449
======= =======
</TABLE>
- ---------------
(1) Does not include accrued interest and, in the case of the CIT loan, a
prepayment fee of approximately $200,000.
(2) Loan proceeds were used to refinance an existing credit facility with
Norwest in November 1996.
(3) Based on the prime rate announced from time to time by Chase Manhattan Bank,
N.A. (8.25% at December 31, 1996).
(4) Loan proceeds were used to refinance existing credit facilities with CIT and
U.S. Bancorp Leasing and Financial in September 1996, and the balance was
used to acquire drilling rigs and related equipment in October 1996.
(5) London Interbank Offered Rate (5.53125% at December 31, 1996).
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is included in the Nasdaq National Market under the symbol
"PTEN." The following table sets forth the high and low sale prices of the
Common Stock for the periods indicated as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995:
-----
First quarter...................................................... $ 7.75 $ 6.00
Second quarter..................................................... 10.25 7.00
Third quarter...................................................... 13.88 9.25
Fourth quarter..................................................... 14.63 10.50
1996:
-----
First quarter...................................................... $15.63 $11.25
Second quarter..................................................... 18.13 13.25
Third quarter...................................................... 20.25 15.00
Fourth quarter..................................................... 30.25 17.50
1997:
-----
First quarter (through January 2, 1997)............................ $26.25 $25.50
</TABLE>
On January 2, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $25.50. As of December 31, 1996, there were
approximately 246 holders of record of the Common Stock.
The Company has not declared or paid cash dividends on the Common Stock in
the past and does not expect to declare or pay any cash dividends on the Common
Stock in the foreseeable future. The terms of an existing bank credit facility
prohibit payment of dividends by the Company without the prior written consent
of the bank. This bank line will be repaid in full with proceeds of this
offering received by the Company.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the current maturities of notes payable and
capitalization of the Company at September 30, 1996, pro forma to give effect to
acquisition of six drilling rigs and related assets from Sledge in October 1996
and the acquisition of 15 (six then operable) drilling rigs and related assets
in two separate transactions during November and December 1996 and as adjusted
to give effect to the sale of the 1,500,000 shares of Common Stock by the
Company and the application of the estimated net proceeds therefrom (assuming a
public offering price of $25.50 per share, the last reported sales price for the
Common Stock on the Nasdaq National Market on January 2, 1997).
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of notes payable(1)................ $ 4,040 $ 4,440 $ --
======= ======= =======
Notes payable, less current maturities(1)............. $11,615 $22,040 $ --
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; no shares issued..................... -- -- --
Common Stock, $0.01 par value, 9,000,000 shares
authorized, 4,810,689 shares issued and
outstanding; 4,862,689 shares issued and
outstanding after the three acquisitions; and
6,362,689 shares issued and outstanding after the
offering(2)...................................... 48 49 64
Additional paid-in capital.......................... 19,256 20,685 56,185
Retained earnings................................... 19,933 19,933 19,933
------- ------- -------
Total stockholders' equity....................... 39,237 40,667 76,182
------- ------- -------
Total capitalization............................. $50,852 $62,707 $76,182
======= ======= =======
</TABLE>
- ---------------
(1) For information regarding the Company's indebtedness, see Notes 5 and 17 of
Notes to Consolidated Financial Statements.
(2) The number of outstanding shares on an as adjusted basis does not include a
total of 112,342 shares issued after September 30, 1996, pursuant to
exercise of certain then outstanding options and warrants, and does not
include 345,250 shares issuable upon exercise of outstanding options and
warrants held by management, non-employee directors and others, at a
weighted average exercise price of $9.63 per share.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company as of December 31,
1993, 1994 and 1995, and for each of the three years then ended, were derived
from the consolidated financial statements of the Company which have been
audited by Coopers & Lybrand L.L.P., independent accountants. This data and the
selected consolidated financial data presented below as of September 30, 1996,
and for each of the nine months ended September 30, 1995 and 1996, should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included elsewhere in this Prospectus. Such data for the nine
months ended September 30, 1995 and 1996 are unaudited, and, in the opinion of
management of the Company, all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of operations and
financial position for, and as of the end of, such periods have been included.
The data presented as of December 31, 1991 and 1992 and for each of the two
years then ended have not been audited and were prepared by the Company using
those periods' stand alone audited financial statements of the Company and
Tucker. The Company's previously reported data for 1996 and for prior years have
been restated to reflect the Tucker merger under the pooling of interests method
of accounting. The results of operations for the nine months ended September 30,
1996 are not necessarily indicative of the results to be achieved for the entire
year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling............................................. $33,614 $34,417 $37,746 $54,823 $57,599 $42,656 $47,725
Oil and gas sales.................................... 3,038 3,289 3,914 3,594 5,400 3,831 5,940
Well operation fees.................................. 868 823 1,064 980 1,296 940 1,111
Other................................................ 122 59 169 133 149 134 280
------- ------- ------- ------- ------- ------- -------
Total.......................................... 37,642 38,588 42,893 59,530 64,444 47,561 55,056
------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Direct drilling costs................................ 29,090 29,376 30,631 43,036 46,505 34,431 38,818
Lease operating and production....................... 1,085 1,362 1,207 1,141 1,509 1,071 1,468
Write-down due to impairment of long lived assets.... -- -- -- -- 159 -- 159
Exploration costs.................................... -- -- 317 234 369 227 344
Dry holes and abandonments........................... 533 438 396 1,279 791 373 612
Depreciation, depletion and amortization............. 4,976 4,338 4,655 4,912 7,523 5,286 7,753
General and administrative........................... 3,310 3,686 4,014 4,793 5,063 3,607 3,944
------- ------- ------- ------- ------- ------- -------
Total.......................................... 38,994 39,200 41,220 55,395 61,919 44,995 53,098
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................................ (1,352) (612) 1,673 4,135 2,525 2,566 1,958
------- ------- ------- ------- ------- ------- -------
Other income (expense):
Net gain on sale of assets........................... 818 765 138 611 374 336 533
Interest income...................................... 301 173 141 409 545 422 376
Interest expense..................................... (523) (416) (331) (366) (1,065) (762) (985)
Non-recurring acquisition costs...................... -- -- -- -- -- -- (2,268)
Other................................................ 294 73 118 25 35 (6) 97
------- ------- ------- ------- ------- ------- -------
Total.......................................... 890 595 66 679 (111) (10) (2,247)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary
items................................................ (462) (17) 1,739 4,814 2,414 2,556 (289)
------- ------- ------- ------- ------- ------- -------
Income tax expense (benefit):
Current.............................................. 57 79 123 213 213 264 112
Deferred............................................. (8) -- -- (406) (1,000) (208) (2,531)
Charge in lieu of income taxes....................... 131 312 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total.......................................... 180 391 123 (193) (787) 56 (2,419)
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary items............... (642) (408) 1,616 5,007 3,201 2,500 2,130
------- ------- ------- ------- ------- ------- -------
Extraordinary items:
Utilization of NOL................................... 131 361 -- -- -- -- --
Gain on extinguishment of debt....................... -- 97 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)...................................... $ (511) $ 50 $ 1,616 $ 5,007 $ 3,201 $ 2,500 $ 2,130
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common share:
Primary.............................................. $ (0.17) $ 0.02 $ 0.51 $ 1.24 $ 0.73 $ 0.59 $ 0.43
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... $ (0.17) $ 0.02 $ 0.51 $ 1.24 $ 0.71 $ 0.55 $ 0.43
======= ======= ======= ======= ======= ======= =======
Weighted average number of common shares outstanding:
Primary.............................................. 3,080 3,073 3,176 4,030 4,379 4,261 4,950
======= ======= ======= ======= ======= ======= =======
Assuming full dilution............................... 3,080 3,073 3,176 4,030 4,521 4,533 4,980
======= ======= ======= ======= ======= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............................ $ 5,685 $ 4,143 $ 6,121 $ 6,845 $ 9,344 $10,155 $ 9,450
Working capital...................................... 4,851 3,819 10,100 13,768 15,096 13,791 11,254
Total assets......................................... 27,786 27,877 33,920 49,509 62,991 62,213 68,498
Notes payable........................................ 4,708 4,374 2,459 6,886 13,816 12,963 15,655
Total stockholders' equity........................... 16,922 17,044 23,385 30,310 37,656 36,614 39,237
</TABLE>
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are generated from the sale of onshore contract
drilling services and, to a lesser extent, from its oil and natural gas
operations. As a leading provider of domestic land drilling services to major
oil companies and independent producers, the Company focuses its operations
primarily in Texas in the Austin Chalk Trend and the Permian and Hardeman
Basins. These drilling services are provided primarily pursuant to standard
daywork and footage contracts. The Company's oil and natural gas activities
accounted for approximately 13% of the Company's revenues for the nine months
ended September 30, 1996.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors that are
beyond the control of the Company. See "-- Volatility of Oil and Natural Gas
Prices." Operating margins are affected by (i) contract drilling rates, which
have recently begun to increase, (ii) operating costs, which are also
increasing, and (iii) drilling rig utilization, which was lower in the nine
months ended September 30, 1996 as a result of the Tucker merger in July 1996.
During the fourth quarter of 1996, however, rig utilization was in excess of
80%, as the 13 Tucker rigs were put into service.
In anticipation of rising drill pipe prices and to keep its drilling fleet
in good operating condition, the Company made $5.7 million and $2.7 million in
capital expenditures for the purchase of drill pipe during the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
These capital expenditures have resulted in increased depreciation expense of
approximately $1.0 million for the nine months ended September 30, 1996. Despite
the adverse effect of the increased depreciation on earnings, the Company
believes that it has benefited from the recent procurements of drill pipe at
prices below current market prices.
During 1996, the Company expanded its drilling rig fleet by 24 operable and
10 inoperable drilling rigs through selective acquisitions, the most significant
of which was the Tucker merger in July 1996. Similar to the Company at the time
of the merger, Tucker was engaged in the sale of onshore contract drilling
services and, to a lesser extent, the exploration, development and production of
oil and natural gas. The Tucker merger was accounted for using the pooling of
interests method of accounting which, after conforming accounting methods
previously used by Tucker to those used by the Company, combines previously
reported results as though the combination had occurred at the beginning of the
periods being presented. Merger costs have been expensed during the nine months
ended September 30, 1996. The financial statements of the Company and Tucker for
1996 and prior years have been restated and adjusted for the Tucker merger. Due
to the restatement, these financial statements are not comparable to the
financial statements for the same periods previously presented by the Company.
The following description should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
For the nine months ended September 30, 1996, contract drilling revenues
were approximately $47.7 million as compared to $42.7 million for the same
period in 1995, an increase of 12%. Direct contract drilling costs for the nine
months ended September 30, 1996 and 1995 were approximately $38.8 million and
$34.4 million, respectively, representing approximately 81% of contract drilling
revenues. The increase in contract drilling revenues and direct contract
drilling costs was due primarily to the increased number of drilling rigs
included in the Company's operating drilling rig fleet. The Company placed one
rig into operation during May 1995 and two additional drilling rigs during the
latter part of the third quarter of 1995. These drilling rigs were operational
during the nine months ended September 30, 1996. An additional drilling rig was
added during May 1996, increasing the total number of operable drilling rigs to
39. Average rig utilization was 70% for the
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<PAGE> 19
nine months ended September 30, 1996 and 1995. General and administrative
expense for the contract drilling segment was approximately $2.8 million for the
nine months ended September 30, 1996 as compared to approximately $2.7 million
for the same period in 1995. Depreciation expense for the contract drilling
segment was approximately $4.9 million for the nine months ended September 30,
1996, compared to $3.7 million for the same period in 1995. Of the $1.2 million
increase in depreciation expense, approximately $1.0 million was attributable to
the Company's purchases of new drill pipe during the fourth quarter of 1995 and
the nine months ended September 30, 1996. These higher levels of depreciation
expense will continue for the foreseeable future. For the nine months ended
September 30, 1996, income from this segment was approximately $1.7 million as
compared to approximately $2.1 million for the same period in 1995, largely as a
result of the increase in depreciation.
Oil and natural gas revenue was approximately $5.9 million for the nine
months ended September 30, 1996, as compared to approximately $3.8 million for
the nine months ended September 30, 1995. The increase in revenue was
attributable to increases in both production volumes and prices. The Company
sold approximately 173,000 and 139,000 Bbls of oil and approximately 1,244,000
and 1,003,000 Mcf of natural gas for the nine months ended September 30, 1996
and 1995, respectively. The average price per Bbl was $20.23 for the nine months
ended September 30, 1996 as compared to $17.40 for the same period in 1995, and
the average price per Mcf of natural gas was $1.96 for the nine months ended
September 30, 1996 as compared to $1.41 for the same period in 1995. Lease
operating and production costs were $3.86 per BOE for the nine months ended
September 30, 1996 as compared to $3.50 per BOE for the same period in 1995.
Exploration costs increased by 51% to approximately $344,000 for the nine months
ended September 30, 1996 as a result of the staffing and associated costs of
opening an exploration and production office in Midland, Texas during June 1995.
Depreciation, depletion and amortization for the oil and natural gas segment was
approximately $2.8 million for the nine months ended September 30, 1996 as
compared to approximately $1.6 million for the same period in 1995. The increase
is due primarily to increased production of crude oil and natural gas as
discussed above. General and administrative expense for the oil and natural gas
segment was approximately $1.1 million for the first nine months of 1996 as
compared to $948,000 for the first nine months of 1995. For the nine months
ended September 30, 1996, income from the oil and natural gas segment was
approximately $885,000 as compared to $795,000 for the same period in 1995.
For the nine months ended September 30, 1996, interest expense was
approximately $985,000 as compared to $762,000 for the same period in 1995. This
increase was primarily attributable to an approximate 48% increase in the
average outstanding principal balance of the Company's notes payable as compared
to the same period in 1995. At September 30, 1996, the Company recognized a net
gain on the sale of certain fixed assets of approximately $533,000 as compared
to approximately $336,000 recognized a year earlier. This increase was primarily
attributable to the sale of six drilling rig generator sets and approximately
25,000 feet of used drill pipe. During the nine months ended September 30, 1996,
the Company incurred approximately $2.3 million of non-recurring acquisition
costs associated with the Tucker merger.
For the nine months ended September 30, 1996, the Company recorded net
income tax benefits of approximately $2.4 million as compared to net income tax
expense of approximately $56,000 for the same period in 1995. This significant
change resulted from an approximate $2.5 million deferred tax benefit generated
from the reduction of valuation allowances previously recorded against the
Company's deferred tax assets. The valuation allowance reduction was caused by
management's estimate that it was more likely than not that the Company's
deferred tax assets, which are primarily comprised of net operating loss
carryforwards, will be substantially realized.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
For the year ended December 31, 1995, contract drilling revenues were
approximately $57.6 million as compared to $54.8 million for the same period in
1994, an increase of 5%. Direct contract drilling costs for 1995 and 1994 were
approximately $46.5 million and $43.0 million, respectively, representing
approximately 81% of contract drilling revenues in 1995 as compared to 78% in
1994. Average rig utilization was 69% in 1995 as compared to 76% in 1994. The
increase in contract drilling revenues and direct contract drilling costs was
due primarily to the increased number of drilling rigs included in the Company's
operating drilling fleet. The
18
<PAGE> 20
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, the Questor
acquisition in 1994 and the addition of three drilling rigs in 1995. In 1995,
income from this segment was approximately $3.7 million as compared to
approximately $6.0 million in 1994.
Oil and natural gas revenue was approximately $5.4 million in 1995 as
compared to approximately $3.6 million for 1994. The volume of crude oil and
natural gas sold increased by 54% and 58%, respectively, for 1995 as compared to
1994. The Company sold approximately 191,000 Bbls of oil in 1995 as compared to
124,000 Bbls in 1994 and approximately 1,362,000 Mcf of natural gas in 1995 as
compared to 860,000 Mcf of natural gas for 1994. The average price per Bbl was
$17.48 for 1995 as compared to $16.40 for 1994, and the average price per Mcf of
natural gas was $1.51 for 1995 as compared to $1.68 for 1994. Lease operating
and production costs were $3.61 per BOE in 1995 as compared to $4.27 per BOE in
1994. Depreciation, depletion and amortization for the oil and natural gas
segment was approximately $2.4 million in 1995 as compared to approximately $1.3
million in 1994. The increase was due primarily to increased production of oil
and natural gas as discussed above. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million in 1995 as compared
to $1.2 million in 1994. In 1995, the loss from the oil and natural gas segment
was approximately $51,000 as compared to $489,000 in 1994.
In 1995, interest expense was approximately $1.1 million as compared to
$366,000 in 1994. This increase was primarily attributable to a substantial
increase in the outstanding principal balance of the Company's notes payable as
compared to 1994.
In 1995, the Company recorded net income tax benefits of approximately
$787,000 as compared to approximately $193,000 in 1994. The increase was due
primarily from a deferred tax benefit of approximately $1.0 million which was
the result of revisions in management's estimates with regard to the Company's
deferred tax assets, which are primarily comprised of net operating loss
carryforwards. The deferred tax benefit in 1995 exceeded that of 1994 by
approximately $594,000.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND 1993
For the year ended December 31, 1994, contract drilling revenues were
approximately $54.8 million as compared to $37.7 million for the same period in
1993, an increase of 45%. Direct contract drilling costs for 1994 and 1993 were
approximately $43.0 million and $30.6 million, respectively, representing
approximately 78% of contract drilling revenues in 1994 as compared to 81% in
1993. Average rig utilization was 76% for 1994 as compared to 75% in 1993. The
increase in contract drilling revenues and direct contract drilling costs was
due primarily to the increase in the average number of drilling rigs included in
the Company's operable drilling fleet from 25 to 31. The increase in gross
profit margin in 1994 was due to an increase in rig utilization and negotiation
of certain contracts on a footage basis that provided higher profit margins than
generally experienced by the Company. General and administrative expense for the
contract drilling segment was approximately $3.6 million for 1994 as compared to
approximately $2.6 million for 1993. The increase in general and administrative
expense was due primarily to an increase in general and administrative salaries
of approximately $160,000, an allowance for doubtful accounts of $90,000,
accrued contributions to the employee 401(k) profit sharing plan of $75,000 and
an increase in professional fees and other costs related primarily to becoming a
public company of approximately $365,000. General and administrative expenses
for 1993 included an allowance of 100% of a doubtful receivable in the
approximate amount of $356,000. In 1994, income from this segment was
approximately $6.0 million as compared to approximately $2.6 million for 1993.
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<PAGE> 21
Oil and natural gas revenue was approximately $3.6 million for 1994 as
compared to approximately $3.9 million for 1993. Included in oil and natural gas
revenues in 1994 was a nonrecurring recognition of approximately $115,000 in oil
and natural gas revenues from the settlement of litigation. The volume of crude
oil sold decreased by 15% while the volume of natural gas sold increased by 21%
for 1994 as compared to 1993. Oil volumes decreased due primarily to the sale of
the Company's interest in a producing oil and natural gas field. The Company
sold approximately 124,000 Bbls in 1994 as compared to 146,000 Bbls in 1993 and
approximately 860,000 Mcf of natural gas in 1994 as compared to 710,000 Mcf of
natural gas for 1993. The average price per Bbl was $16.40 for 1994 as compared
to $17.05 for 1993, and the average price per Mcf of natural gas was $1.68 for
1994 as compared to $2.02 for 1993. Lease operating and production costs were
$4.27 per BOE in 1994 as compared to $4.57 per BOE for 1993. General and
administrative expense for the oil and natural gas segment was approximately
$1.2 million in 1994 as compared to $1.4 million in 1993. Dry holes and
abandonments were $1.3 million in 1994 as compared to $396,000 in 1993. The
increase was due primarily to the drilling of five dry holes ($660,000) and the
write off of certain oil and natural gas leases that expired by their terms
($203,000). For 1994, the loss from the oil and natural gas segment was
approximately $489,000 as compared to income of $45,000 for 1993.
In 1994, interest expense was approximately $366,000 as compared to
$330,000 in 1993. This increase is primarily attributable to an increase in the
interest rates and an increase in the outstanding principal balance of the
Company's notes payable as compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996, the Company generated net
cash from operations of approximately $7.7 million, a decrease of approximately
$1.2 million or 13% for the same period in 1995. The decrease was primarily
attributable to non-recurring acquisition costs of approximately $2.3 million
incurred during the nine months ended September 30, 1996 in connection with the
Tucker acquisition. The net increase of approximately $1.0 million before
nonrecurring acquisition costs was primarily attributable to the introduction of
five additional drilling rigs into the Company's contract drilling operations
during the period from May 1995 to May 1996, as well as increases in both
production volumes and prices in the Company's oil and natural gas segment.
During 1995, the Company's net cash from operations increased by 16% to
$9.5 million due to the inclusion of a greater number of drilling rigs in the
Company's operating fleet and increases in oil and natural gas volumes and oil
prices. Partly offsetting these gains was the reduction of revenues as a result
of the conversion of certain footage contracts to daywork contracts.
The Company's capital expenditures during 1993, 1994, 1995 and the nine
months ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Contract drilling:
Acquisitions........................... $ 470 $ 4,500 $ 5,256 $ 661
Modifications, upgrades and drill pipe
purchases........................... 2,908 4,149 9,543 5,315
Oil and natural gas...................... 1,884 2,968 5,107 4,578
------ ------- ------- -------
$5,262 $11,617 $19,906 $10,554
====== ======= ======= =======
</TABLE>
Beginning in the third quarter of 1995, the Company accelerated its drill
pipe replacement program in response to increases in drill pipe prices. During
1995 and the first nine months of 1996, the Company spent approximately $8.4
million for drill pipe, representing 40% of total capital expenditures for
contract drilling during that period.
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<PAGE> 22
During the nine months ended September 30, 1996, the Company's oil and
natural gas segment incurred capital expenditures of approximately $4.6 million
relating primarily to its activities in the Austin Chalk Trend, South Texas and
in the Permian Basin. The Company has budgeted approximately $5.0 million in
capital expenditures for 1997, consisting of approximately $2.0 million for the
development of its properties in the Austin Chalk Trend, $500,000 in South Texas
and $2.5 million in the Permian Basin.
Through several acquisitions, the Company has expanded its operable
drilling rig fleet, adding 48 drilling rigs (39 currently operable) in three
years, and has also enhanced its ability to upgrade and maintain its fleet using
the additional parts and equipment acquired in these transactions. In 1994, the
Company acquired certain assets of Questor Drilling Corp. for $6.4 million,
including $4.5 million in cash and 250,000 shares of the Company's Common Stock.
These assets included nine drilling rigs. During October 1996, the Company
acquired Sledge for a net purchase price of $8.9 million. Included with the six
drilling rigs acquired in this transaction was an inventory of drilling
equipment valued by the Company at approximately $4.4 million. The Company
acquired 15 (six operable) additional drilling rigs and other related assets in
two separate transactions during the last two months of 1996 for a total
purchase price of approximately $4.2 million, consisting of approximately $2.4
million in cash, a $400,000 promissory note and 52,000 shares of the Company's
Common Stock. The Company has budgeted approximately $7.5 million to modify and
upgrade these drilling rigs.
During September 1996, the Company entered into a credit facility with CIT
under which the Company has borrowed $22 million. Collateralized by the
Company's drilling rigs, the loan is a revolving loan until August 1997, at
which time it will be converted into a 60-month term loan. The proceeds from the
loan were used to repay loans of approximately $3.8 million and $7.7 million to
U.S. Bancorp Leasing and Financing, Inc. and CIT, respectively, and to fund the
cash portion of the purchase price in the Sledge acquisition. When the CIT and
Norwest loans are repaid with net proceeds from this offering, the Company will
not have an available credit facility. The Company believes that it will be able
to obtain a new credit facility on acceptable terms when necessary, although
there can be no assurance that such credit will be available.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations and the net proceeds
from the sale of the Common Stock offered hereby, should be sufficient to meet
the Company's immediate capital needs. From time to time, the Company reviews
acquisition opportunities relating to its business segments. While the Company
has no definitive agreements to acquire additional assets, suitable
opportunities may arise in the future. The timing, size or success of any
acquisition and the associated capital committments are unpredictable. Should
further opportunities for growth requiring additional capital arise, the Company
believes it would be able to satisfy these needs through a combination of
working capital, cash generated from operations and either debt or equity
financing. However, there can be no assurance that such capital will be
available.
INCOME TAXES
At December 31, 1995, the Company had tax net operating loss ("NOL")
carryforwards of approximately $8.0 million ($5.5 million for Patterson and $2.5
million for Tucker). These NOL carryforwards expire at various dates from 1998
through 2008, subject to certain limitations. Prior to August 3, 1995, the
Company realized substantial federal income tax savings due to the NOL
carryforwards. The utilization of these NOL carryforwards prior to that date
effectively reduced the current federal income tax rate from approximately 34%
to approximately 2.5%. Due to a change of over 50% in the stock ownership of the
Company during the three-year period ended August 3, 1995 (primarily from the
Company's initial public offering in 1993 and the exercise of the Company's
redeemable warrants in 1995), the NOL carryforwards became subject to an annual
limitation. The amount of the limitation on the $5.5 million NOL will be equal
to approximately $1.8 million and the amount of the limitation on the $2.5
million NOL will be approximately $1.5 million. This limitation on the use of
the Company's NOL carryforwards could increase the federal income tax liability
of the Company and thereby affect the Company's net income.
During 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes." The Company recognized
the benefit of deferred income taxes of
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<PAGE> 23
approximately $407,000 during 1994, which increased to approximately $1.4
million during 1995, and further increased to approximately $3.1 million in
1996. The benefit of deferred income taxes during each of these periods
represented management's estimate of future benefits to be received by the
Company primarily from its NOL carryforwards. SFAS 109 required a change from
the deferred method under Accounting Principles Board Opinion 11, to the asset
and liability method of accounting for income taxes. Deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or settled. As a result
of the Company's recognizing the benefit of its deferred income taxes, in the
future, as these benefits are utilized, the Company will incur deferred income
tax expense in a like amount. This deferred income tax expense will
significantly increase the income tax expense of the Company and adversely
affect the Company's net income.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
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<PAGE> 24
BUSINESS AND PROPERTIES
OVERVIEW
The Company is one of the leading providers of domestic land drilling
services to major and independent oil and natural gas companies. Formed in 1978,
the Company focuses its operations primarily in Texas in the Permian Basin, the
Austin Chalk Trend and the Hardeman Basin. The Company has a fleet of 61
drilling rigs, 52 of which are currently operable, and ranked third in 1995 in
both land footage and horizontal wells drilled in the U.S. (according to Land
Rig Newsletter). The Company is also engaged in the development, exploration,
acquisition and production of oil and natural gas.
The Company has established a reputation for reliability, high quality
equipment and well-trained crews. The Company continually seeks to modify and
upgrade its equipment to maximize the performance and capabilities of its
drilling rig fleet, which the Company believes provides it with a competitive
advantage. Additionally, the Company has the in-house capability to design,
manufacture, repair and modify its drilling rigs. Of the Company's drilling
rigs, 46 are capable of drilling to depths greater than 10,000 feet, including
five that are capable of drilling to depths greater than 15,000 feet. During the
nine months ended September 30, 1996, the Company drilled 314 wells totaling 2.6
million feet for 92 different customers. The Company believes that it has one of
the highest utilization rates in the U.S. land drilling industry, with an
average utilization rate in excess of 80% during the fourth quarter of 1996.
The Company's oil and natural gas activities are designed to complement its
land drilling operations. These activities are focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 13% of the Company's revenues for
the nine months ended September 30, 1996. As of September 30, 1996, the
Company's proved developed reserves were 1,919 MBOE and had a SEC PV-10 Value of
$12.6 million.
Over the past three years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
acquired 47 drilling rigs and assembled one drilling rig, 39 of which are
presently operable. From 1991 (prior to giving effect to the Tucker merger) to
1995, the Company's annual revenues increased from $21.9 million to $64.4
million, and its annual EBITDA increased from $2.7 million to $11.2 million.
DOMESTIC LAND DRILLING INDUSTRY OVERVIEW
Since 1982, the U.S. land drilling industry has been characterized by an
over supply of drilling equipment due to decreased demand for land drilling
services. During the past 14 years, the available land drilling rig fleet
declined from 5,139 drilling rigs in 1982 to 1,425 drilling rigs in 1996
(according to the annual Reed Tool Company census). Industry profitability also
suffered, and in many cases insufficient cash flow was generated to support
proper drilling rig maintenance. To maintain operation of drilling equipment in
that environment, drilling contractors frequently removed drill pipe, parts and
components from less desirable drilling rigs. The available domestic drilling
fleet has been further reduced through the mobilization of drilling equipment to
international markets. Set forth below is a table which presents the supply of
domestic land drilling rigs for the years indicated:
AVAILABLE LAND DRILLING RIGS
(1982-1996)
[CHART]
<TABLE>
<CAPTION>
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available
Land Rigs .. 5,139 4,832 4,102 3,940 3,573 2,956 2,429 2,249 2,061 2,006 1,809 1,660 1,613 1,500 1,425
</TABLE>
Source: Reed Tool Company
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<PAGE> 25
Many drilling contractors have used up most of their internal inventories
of drilling rig components and drill pipe and have begun to experience rising
costs for the components necessary to maintain their drilling rigs in working
condition. These increased capital costs have strained the economic resources of
many small land drilling operators, resulting in an environment that encourages
industry consolidation. These factors have led to a reduction in the number of
domestic drilling contractors from 388 in 1993 to 289 in 1996 (according to the
annual Reed Tool Company census). In addition, Land Rig Newsletter reports that
approximately one-third of the land footage drilled in the U.S. during 1995 was
drilled by only 10 companies, down from 25 in 1993.
During the last two years, however, demand for domestic onshore drilling
services has increased as a result of stronger oil and natural gas prices and
technological advances (such as 3-D seismic, new drilling techniques and
improved completion methods) that have reduced exploration, development and
production costs per BOE. As a consequence, the Company has recently begun to
realize modest price increases for the first time in many years.
BUSINESS STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
enhancing its position as a leading domestic land drilling contractor. The
principal components of this strategy are as follows:
STRONG INDUSTRY REPUTATION. The Company believes that it has a strong
reputation within its existing markets for providing well maintained equipment,
high quality service and experienced personnel. The Company intends to build on
existing customer relationships in each of its areas of operation by offering
technically sophisticated drilling equipment and providing quality service to
its customers with an emphasis on efficiency, dependability and safety.
HIGH QUALITY ASSET BASE. The Company's drilling rigs are maintained in
good operating condition through an established program of modifications and
upgrades. The Company believes that the quality and operating condition of its
drilling equipment allow it to maximize utilization rates and pricing.
GROWTH THROUGH ACQUISITION. The Company believes that attractive
acquisition opportunities exist to further expand its drilling rig fleet. In
evaluating potential acquisitions, the Company seeks to identify drilling rigs
and related equipment that complement the Company's existing drilling rig fleet
and enable it to expand its market share in its core geographic operating areas.
Following an acquisition, the Company refurbishes the drilling rigs to the
Company's standards of quality and dependability.
EFFICIENT OPERATIONS. Based on publicly available information, the Company
believes that it had one of the highest ratios of EBITDA to revenues in the U.S.
land drilling industry during the first nine months of 1996. The Company has
produced these results from the combination of providing premium contract
drilling services and operating under an efficient cost structure. In addition,
the Company has achieved cost reductions and efficiencies through acquisition
related synergies. The Company also uses its fleet of 50 trucks and 64 trailers
to rig down, transport and rig up its drilling rigs, which increases efficiency
by reducing the time and costs associated with these ancillary operations.
COMPLEMENTARY OIL AND NATURAL GAS OPERATIONS. The Company believes that
its oil and natural gas operations provide it with the additional financial
flexibility to generate cash flow during downturns in the land drilling market.
The Company's ability to participate in oil and natural gas wells also generates
opportunities to serve as the land drilling contractor for other operators or on
its own behalf.
RECENT ACQUISITIONS
During July 1996, the Company acquired Tucker for Common Stock valued at
$26.4 million. A total of 1,577,514 shares of Common Stock was issued to the
stockholders of Tucker pursuant to the merger, and an additional 74,592 shares
of Common Stock were reserved for issuance upon exercise of then outstanding
Tucker stock options. Tucker was engaged in onshore contract drilling in the
Permian and Hardeman Basins and, to a lesser extent, in the exploration,
development and production of oil and natural gas, primarily in the Permian
Basin. At the time of the merger, Tucker owned 13 drilling rigs. While all of
the drilling rigs were
24
<PAGE> 26
operable, their utilization rate was approximately 50%. The utilization rate for
these drilling rigs is now approximately 80%.
During October 1996, the Company purchased six drilling rigs and related
assets through the acquisition of Sledge. The net purchase price for Sledge was
$8.9 million which, in addition to the drilling rigs, included an inventory of
drilling equipment valued by the Company at approximately $4.4 million. Sledge's
contract drilling operations were conducted in the Permian Basin. Five of the
six drilling rigs were operable at the time of the transaction and the sixth
became operable in November. Sledge's utilization rates were comparable to the
Company's utilization rates.
During November and December 1996, in two separate transactions, the
Company acquired 15 drilling rigs and related assets. The consideration paid for
these assets was approximately $4.2 million, consisting of $2.4 million cash, a
$400,000 promissory note and 52,000 shares of the Company's Common Stock valued
at approximately $1.4 million. Six of the drilling rigs were operable at the
time of the transactions, but were underutilized. The nine remaining drilling
rigs are expected to become operable during 1997. The Company has budgeted
approximately $7.5 million to modify and upgrade the drilling rigs acquired in
these two transactions.
CONTRACT DRILLING OPERATIONS
General. The Company markets its contract drilling services to major oil
companies and independent oil and natural gas producers. The Company owns 61
drilling rigs, 52 of which are currently operable. Fourteen of the operable
drilling rigs are based in the Austin Chalk Trend and South Texas, 33 are based
in the Permian Basin and five are based in the Hardeman Basin. The drilling rigs
have rated maximum depth capabilities ranging from 9,000 feet to 22,000 feet.
The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling. Wells drilled with Company drilling rigs in the Permian and
Hardeman Basins are primarily vertical wells. Both vertical wells and horizontal
wells are drilled with Company drilling rigs in the Austin Chalk Trend.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant importance to
prospective customers. The Company has and will continue to strive to maintain
its drilling fleet in good working condition. In addition to normal repair and
maintenance expenses, the Company spends significant funds each year on an
ongoing program of modifying and upgrading its drilling rigs. The Company also
strives to employ experienced and dedicated drilling supervisors for its various
drilling rigs in the field. The Company intends to continue its ongoing rig
maintenance program and to continue to retain high quality, experienced drilling
supervisors in order to build upon its reputation in the market place. In
addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
Drilling Contracts. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other
25
<PAGE> 27
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 also would bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems. Compensation is based on a
rate-per-foot-drilled basis at completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling operation revenues attributable
to daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
TYPE OF REVENUES 1993 1994 1995 1995 1996
---------------- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Daywork............................................. 27% 32% 51% 57% 54%
Footage............................................. 66 65 45 37 37
Turnkey............................................. 7 3 4 6 9
</TABLE>
Contract drilling operations depend on the availability of drill pipe and
bits, fuel and qualified personnel, some of which have been in short supply from
time to time. As favorable buying opportunities arise, the Company stockpiles
bits and other drilling rig parts. Currently there is a substantial shortage of
drill pipe in the contract drilling industry in the United States. This shortage
has caused the price of drill pipe to increase significantly over the past 30
months. In addition, new drill pipe must be placed on order at least 150 to 180
days in advance of expected use. See "Risk Factors -- Shortage of Drill Pipe in
the Contract Drilling Industry" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General" for information
concerning the impact of this shortage on the Company's capital expenditures and
operations due to higher levels of depreciation.
26
<PAGE> 28
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, 1995, and for both nine-month
periods ended September 30, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of wells drilled......................... 333 460 395 327 314
Average rigs available for service.............. 25 31 36 35 39
Average rig utilization rate.................... 75% 76% 69% 70% 70%
</TABLE>
The Company has substantial experience drilling horizontal wells in the
Austin Chalk Trend. During the three-year period ended December 31, 1995, the
Company drilled a total of 139 horizontal wells as follows: 31 in 1993, 54 in
1994, 54 in 1995 and 36 in the nine months ended September 30, 1996.
Customers. For the year ended December 31, 1995, the Company drilled wells
for 108 nonaffiliated customers. This compares with 99 nonaffiliated customers
for the year ended December 31, 1994. No customer for contract drilling
accounted for 10% or more of the Company's consolidated revenues in the fiscal
year ended December 31, 1995. The Company does not believe that the loss of any
one customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included Snyder Oil
Corporation, Chevron U.S.A., Union Pacific Resources, Co., IP Petroleum Company,
Inc., Mobil Exploration & Producing U.S., Inc., Swift Energy Company, Louis
Dreyfus Natural Gas Company, Mitchell Energy Corporation, Burlington Resources
Oil & Gas Company, Enron Oil & Gas Company and Union Oil Company of California.
As of September 30, 1996, the Company was drilling a total of 30 wells, all
of which were for nonaffiliated customers. Fifteen of these wells were located
in the Permian Basin, two were located in the Hardeman Basin and 13 were located
in South and Southeast Texas, primarily in the Austin Chalk Trend.
Drilling Rigs and Related Equipment. The following table provides certain
information concerning the drilling rigs owned by the Company as of the date of
this Prospectus:
<TABLE>
<CAPTION>
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
------------------ ---------- ---------------
<S> <C> <C>
7,000 to 10,000............................................ 6 --
10,000 to 15,000............................................ 40(1) 7
15,000 to 22,000............................................ 4(2) 4(3)
-- --
Totals.................................................... 50 11
== ==
</TABLE>
--------------------
(1) Includes six inoperable rigs.
(2) Includes one inoperable rig.
(3) Includes two inoperable rigs.
The Company owns 50 trucks and 64 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs. The Company is not
dependent upon third parties for these ancillary services, which contributes to
increased operating efficiencies and reduced expenses.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities in Snyder, LaGrange, Victoria, San
Angelo and Odessa, Texas. The Company believes that its operable drilling rigs
and related equipment are in good operating condition. In addition to normal
repair and maintenance expenses, the Company historically has spent significant
funds for its ongoing program of modifying and upgrading its equipment.
27
<PAGE> 29
OIL AND NATURAL GAS OPERATIONS
Overview. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities are primarily concentrated in three operating areas
of Texas: (i) the Austin Chalk Trend, (ii) the Permian Basin and (iii) South
Texas. The Company has budgeted approximately $5.0 million in capital
expenditures for development of these three areas during 1997.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. The oil and
natural gas operations complement the Company's land drilling operations by
providing supplemental cash flow during downturns in the land drilling market.
During the downturn in the land drilling market beginning in 1982, the Company's
oil and natural gas operations provided supplemental cash flow through
production and property sales. In addition, the oil and natural gas operations
generate opportunities for the Company to participate in wells for which it
serves as the land drilling contractor. At September 30, 1996, the Company was
the operator of 266 wells, of which it was the drilling contractor for 51 wells.
The Company has a significant concentration of proved developed reserves in
the fractured carbonates of the Austin Chalk Trend, which is currently one of
the most active oil and natural gas areas in the U.S. The primary producing
intervals in the Austin Chalk Trend are the Austin Chalk, Buda and Georgetown
formations. The Company's activities in the Austin Chalk Trend encompass Brazos,
Fayette, Grimes and Robertson Counties, Texas. Since 1991, the Company has
drilled 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'
horizontal lateral that was drilled and completed in the Georgetown formation
during November 1996. Through December 31, 1996, the well produced 64,730 Bbls
and was flowing naturally at a rate of approximately 900 Bbls per day as of the
date of this Prospectus. 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 Robertson County surrounding the well. On
December 26, 1996, a confirmation offset well was spudded and is currently being
drilled. 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 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 $2.0 million 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 $2.3 million
for capital expenditures for 1997.
28
<PAGE> 30
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. The well is currently producing at a rate of approximately 3.4
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 existing properties
as of December 31, 1993, 1994 and 1995 and September 30, 1996. Mr. Wallace's
estimates were based upon a review of production histories and other geologic,
economic, ownership and engineering data provided by the Company. In determining
the estimates of the reserve quantities that are economically recoverable, Mr.
Wallace used oil and gas prices and estimated average development and production
costs provided by the Company.
The following table sets forth information as of the end of each of the
years in the three year period ended December 31, 1995 and as of September 30,
1996 derived from the reserve reports of Mr. Wallace. The SEC PV-10 Values shown
in the table are not intended to represent the current market value of the
estimated oil and natural gas reserves owned by the Company. For further
information concerning the present value of estimated future net revenue from
these proved developed reserves, see Note 14 of Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------
1993 1994 1995 1996
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls)........................... 346,773 600,069 756,942 1,004,472
Gas (Mcf)............................ 2,522,614 3,769,248 5,269,924 5,487,179
Total (BOE).......................... 767,209 1,228,277 1,635,263 1,919,002
Estimated future net revenue before
income taxes (in thousands)....... $ 5,728 $ 8,627 $ 13,813 $ 18,118
Present value of estimated future net
revenues before income taxes,
discounted at 10% (in
thousands)........................ $ 4,461 $ 6,433 $ 10,295 $ 12,615
</TABLE>
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise. In
addition, the reserve data may be subject to upward or downward revisions
depending upon, among other factors, production history and prevailing oil and
gas prices. Oil and gas prices have fluctuated widely in recent years. There is
no assurance that prices will be higher or lower than prices used in estimating
the Company's reserves. See "Risk Factors -- Volatility of Oil and Natural Gas
Prices" and "Risk Factors -- Uncertainty of Oil and Natural Gas Reserve
Estimates."
29
<PAGE> 31
Drilling Activities. The following tables set forth the results of the
Company's participation in the drilling of development and exploratory wells
during the three-year period ended December 31, 1995 and during the nine-month
period ended September 30, 1996:
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
------------------------------- -----------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
YEAR ENDED -------------- ------------- ------------ -------------
DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
------------ ----- ----- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993.................... 12 2.50 4 2.10 1 .03 3 .43
1994.................... 23 2.88 6 .87 2 .45 12 1.64
1995.................... 43 7.12 15 2.68 2 .24 4 .73
-- ----- -- ---- -- --- -- ----
Total......... 78 12.50 25 5.65 5 .72 19 2.80
== ===== == ==== == === == ====
</TABLE>
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
------------------------------ -----------------------------
NINE MONTHS PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
ENDED ------------- ------------- ------------ -------------
SEPTEMBER 30, GROSS NET GROSS NET GROSS NET GROSS NET
------------- ----- ---- ----- ---- ----- --- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996..................... 19 2.92 13 3.08 1 .16 5 .80
== ==== == ==== == === == ====
</TABLE>
Production. The Company's wells in the Austin Chalk Trend and South Texas
produce primarily natural gas and in the Permian Basin produce primarily oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -----------------
1993 1994 1995 1996
------ ------ ------ -----------------
<S> <C> <C> <C> <C>
Average net daily production:
Oil (Bbls)................................ 399 340 524 630
Gas (Mcf)................................. 1,946 2,356 3,731 4,539
Total (BOE)............................... 723 733 1,146 1,387
Average sales prices:
Oil (per Bbl)............................. $17.05 $16.40 $17.48 $20.23
Gas (per Mcf)............................. 2.02 1.68 1.51 1.96
Average production (lifting) costs (per
BOE)...................................... $ 4.57 $ 4.27 $ 3.61 $ 3.86
</TABLE>
Productive Wells. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
September 30, 1996. One or more completions in the same well bore are counted as
one well.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
------ ------
<S> <C> <C>
Oil.......................................... 296 78.99
Gas.......................................... 65 13.55
----- -----
Total.............................. 361 92.54
===== =====
</TABLE>
Developed and Undeveloped Acreage. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of September 30, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ----------------
LOCATION GROSS NET GROSS NET
-------- ------ ----- ------ ------
<S> <C> <C> <C> <C>
Austin Chalk Trend and South Texas............... 8,546 1,389 22,614 5,796
Permian Basin.................................... 5,360 959 23,313 6,598
------ ----- ------ ------
Total.................................. 13,906 2,348 45,927 12,394
====== ===== ====== ======
</TABLE>
Marketing of Crude Oil and Natural Gas. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
30
<PAGE> 32
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman of the Board and Chief
Executive Officer, is a first purchaser of most of the oil produced from
Company-operated leases. See "Management -- Related Party Transactions."
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1995, or for the
nine months ended September 30, 1996.
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
31
<PAGE> 33
noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental hazards which would
materially affect its operations, but it has not initiated environmental due
diligence associated with its recent acquisitions.
The contract drilling industry is dependent on demand for services from the
oil and natural gas exploration industry and, accordingly, is affected by
changing tax laws, price controls and other laws relating to the energy business
generally. The Company's business is affected generally by political
developments and by federal, state, foreign and local laws and regulations which
relate to the oil and natural gas industry. The adoption of laws and regulations
affecting the oil and 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.
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<PAGE> 34
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.
TITLE TO OIL AND NATURAL GAS PROPERTIES
Title to the Company's oil and natural gas properties is subject to
royalty, overriding royalty, carried working, and other similar interests and
cost sharing arrangements customary in the oil and natural gas industry
(including farmout agreements, operating agreements and joint venture
arrangements), liens for current taxes not yet due, and to other minor defects
and encumbrances. The Company believes that such burdens do not materially
detract from the value of such properties or from the Company's interest therein
or materially interfere with the operation of the Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
EMPLOYEES
The Company employed a total of 777 full-time persons (33 as office
personnel and 744 as field personnel) at September 30, 1996. The number of
drilling rig employees will fluctuate depending upon the number of operable
drilling rigs and the demand for contract drilling services. The Company
considers its employee relations to be satisfactory. None of the Company's
employees is represented by a union.
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ ---- ------------------------------------------
<S> <C> <C>
Cloyce A. Talbott 61 Chairman of the Board; Chief Executive
Officer
A. Glenn Patterson 50 President; Chief Operating Officer;
Director
James C. Brown 45 Vice President -- Finance; Secretary;
Treasurer; Chief Financial Officer
Robert C. Gist(1) 56 Director
Kenneth E. Davis(1) 73 Director
Vincent A. Rossi, Jr. 39 Director
</TABLE>
- ---------------
(1) Member of Audit Committee and Compensation Committee.
Cloyce A. Talbott has served as a Director of the Company since its
incorporation in 1978. Mr. Talbott is a co-founder of the Company, served as
Vice President from 1978 to 1983 and has served as Chairman of the Board and
Chief Executive Officer of the Company since 1983. He also serves as Chairman of
the Board and Chief Executive Officer of the Company's four subsidiaries. Mr.
Talbott is primarily responsible for the Company's oil and natural gas
activities. Mr. Talbott received a Bachelor of Science degree in Petroleum
Engineering in 1958 from Texas Tech University, Lubbock, Texas.
A. Glenn Patterson has served as a Director of the Company since its
incorporation in 1978. Mr. Patterson is a co-founder of the Company and has
served as its President since 1978 and also as Chief Operating Officer since
1983. Mr. Patterson also serves as a director and as President of the Company's
four subsidiaries. Mr. Patterson is primarily responsible for the day-to-day
management of the Company and directs its contract drilling activities. Mr.
Patterson received his Bachelor of Science degree in Business in 1970 from
Angelo State University, San Angelo, Texas.
James C. Brown has served as Secretary and Treasurer of the Company since
June 1993 and as Chief Financial Officer since August 1993. Mr. Brown served as
Vice President from 1982 until June 1990, as a Director of the Company from
February 1985 until June 1990, and as Controller from June 1983 until June 1990.
Mr. Brown also serves as a director and as Vice President-Finance, Treasurer,
Secretary and Chief Financial Officer of the Company's four subsidiaries. Mr.
Brown is responsible for managing all office personnel of the Company involved
with general financial and tax accounting activities. Mr. Brown received a
Bachelor of Science degree in Business Administration in 1973 from Tarleton
State University, Stephenville, Texas. He is a certified public accountant in
the State of Texas and a member of the American Institute of Certified Public
Accountants.
Robert C. Gist has served as a Director of the Company since 1985. Mr. Gist
has served as general legal counsel and advisor to the Company since 1987. Mr.
Gist received a Bachelor of Science degree in Economics in 1965 and a law degree
in 1968 from Southern Methodist University. He is currently self-employed as an
attorney and has been for at least the past five years. He has over 20 years
experience in the oil and natural gas industry.
Kenneth E. Davis has served as a Director of the Company since 1978 and
served as Treasurer from 1978 to June 1993. Mr. Davis received a Bachelor of
Arts degree in Business from University of North Texas, Denton, Texas, in 1950.
He was the owner and director of Fluid Transports, Inc., an oil field trucking
company, until he sold that company in December 1994 and retired.
Vincent A. Rossi, Jr. has served as a director of the Company since July
30, 1996. Since 1995, Mr. Rossi has served as a Managing Director of Turnberry
Capital Management L.P., an investment advisory firm. From March 1991 through
1994, he was a Managing Director of CS First Boston and co-founder of the First
Boston Special Situations Fund where he was jointly responsible for capital
commitment. From 1989 to March 1991,
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<PAGE> 36
he was responsible for proprietary capital commitment in the Distressed
Securities Group at CS First Boston. During the prior two years, he was a senior
member of the Reorganizations Group at CS First Boston. Mr. Rossi joined CS
First Boston in 1987 from Odyssey Partners. He is a 1984 graduate of the Harvard
Business School and received a B.S., summa cum laude, from the Wharton School,
University of Pennsylvania in 1980.
In August 1993, the Company established an Audit Committee and a
Compensation Committee of the Board of Directors consisting in each case of
Kenneth E. Davis and Robert C. Gist. Each of these persons has continued to
serve in these capacities. The Audit Committee's function is to review and
approve the services of the outside public accounting firm. The Compensation
Committee's function is to review and approve proposals by management as to
compensation for officers and other employees of the Company and to administer
the Patterson Energy, Inc. 1993 Stock Incentive Plan.
The directors hold office until the next annual meeting of stockholders, or
until their successors are duly elected and qualified. The officers hold office
until their successors are appointed by the Board of Directors. All officers of
the Company are employed on a full-time basis. There are no arrangements or
understandings between any of the directors or officers and any other person
pursuant to which he was or is to be selected as a director, nominee or officer.
There is no family relationship between any director and executive officer of
the Company other than between Messrs. Talbott and Patterson, who are
brothers-in-law.
RELATED PARTY TRANSACTIONS
The Company leases a 1981 Beech King-Air 90 airplane owned by Talbott
Aviation, Inc., a company wholly-owned by Cloyce A. Talbott, Chief Executive
Officer of the Company. Under the terms of the lease, the Company pays a monthly
rental of $9,200 and the costs of fuel, insurance, taxes and maintenance of the
aircraft. The Company also pays the salary of the pilot, who is a full-time
employee of the Company. The total cost to the Company for the aircraft
(exclusive of the pilot's salary) was $174,455 in 1995 and $191,415 (including
$70,000 of repairs) during the nine months ended September 30, 1996. The
Company's headquarters are located approximately 100 miles from the nearest
major airport. The Company's management believes that the lease of the aircraft
is necessary for the efficient operation of its business.
The Company sells substantially all of the oil produced from
Company-operated wells to BHT Marketing, Inc. ("BHT"), a corporation in which a
son of Mr. Talbott is a stockholder, director and officer, under terms of crude
oil purchase contracts entered into on October 19, 1994 and October 24, 1995
(the "Purchase Contracts"). The purchase price for the oil is the posted monthly
average price plus a bonus per Bbl of oil less basic sediment and water
deductions. The bonus is determined by competitive bid. The Purchase Contracts
can be terminated by either party upon at least 30 days' prior written notice.
Crude oil sales to BHT in 1995 were approximately $5.9 million. Simultaneously
with the execution of the Purchase Contracts, the Company and BHT entered into
participation agreements (the "Participation Agreements") pursuant to which the
Company and BHT agreed to share equally in the net sales proceeds received by
BHT from the sale of all oil purchased by BHT under the Purchase Contracts. The
term "net sales proceeds" generally means the gross proceeds received by BHT for
the oil less all payments paid to the Company under the Purchase Contracts,
pipeline tariffs and all other costs and expenses actually incurred by BHT
associated with the transportation and sale of such oil. The proceeds received
by the Company under these Participation Agreements were approximately $83,500
in 1995 and $206,544 in the nine months ended September 30, 1996.
Certain of the Company's directors, executive officers and key employees
and their family members (principally Cloyce A. Talbott, A. Glenn Patterson,
Kenneth E. Davis, Lee W. Staiger and Kenneth C. Nelson, collectively referred to
herein as "Affiliated Persons") have participated, either individually or
through entities they control, in oil and natural gas prospects or properties in
which the Company has an interest. These participations, which have been on a
working interest basis, have been in prospects or properties originated or
acquired by the Company. In substantially every property in which any of the
Affiliated Persons has been a working interest participant, the Company also has
sold working interests to nonaffiliated persons on the same basis. At September
30, 1996, Affiliated Persons were working interest owners in 104 of the 266
wells then being operated by the Company. Of the 104 wells, the Company also
sold
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<PAGE> 37
working interests in 91 wells to nonaffiliated persons. In some cases, the
interests sold to affiliated and nonaffiliated participants were sold on a
promoted basis requiring these participants to pay a portion of the Company's
costs. As is the case of sales of working interests by the Company in its
properties to nonaffiliated persons, sales of working interests to Affiliated
Persons are made to reduce the Company's economic risk in the properties. The
Company believes that each of the participations by Affiliated Persons has been
on terms no less favorable to the Company than it could have obtained from
nonaffiliated participants. It is expected that joint participations with the
Company, by affiliated persons, will occur from time to time in the future.
Conflicts of interest may arise between such directors and officers and the
Company as to the advisability of conducting drilling and recompletion
activities on those properties. During the two years ended December 31, 1994 and
1995 and the 10 months ended October 31, 1996, the Affiliated Persons received
aggregate production revenues (net of state severance taxes) of $12 million and
paid aggregate joint interest billings of $8.8 million. These numbers do not
necessarily represent their profits or losses from these interests because the
joint production costs do not include the parties' related drilling and
leasehold acquisition costs incurred prior to January 1, 1994. In order to
minimize these conflicts, no Affiliated Person will (i) have an interest in any
property larger than the Company's interest, (ii) participate in an interest
that does not bear costs (such as an overriding royalty interest) or (iii)
borrow any money from the Company to fund his participation.
Any future transactions between the Company and its officers, directors,
key employees, 5% stockholders and their family members and affiliates will
continue to be subject to the approval of a majority of disinterested members of
the Board of Directors and will continue to be on terms no less favorable to the
Company than those that could be negotiated with nonaffiliated parties.
During February 1994, the Board of Directors adopted a policy approving in
advance all participations by Affiliated Persons in oil and natural gas
prospects and properties after that date, provided that the participations of
such Affiliated Persons are on the same basis as participations with
nonaffiliated persons. In those instances when there are no nonaffiliated third
party participants, prior approval of a majority of disinterested members of the
Board of Directors is required on a participation-by-participation basis.
In 1993, 1994 and 1995, the Company provided contract drilling services for
which it received approximately $960,000, $338,000 and $598,000, respectively,
from HAT Oil & Gas, Inc., a company in which a son of Mr. Talbott is a
stockholder, director and officer. The Company competitively bids for these
drilling services on the same basis as it bids for the performance of drilling
services for other third parties. The Company also owns a minor working interest
in oil and gas properties operated by that company.
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<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of November 30, 1996, with
respect to the beneficial ownership of the Company's Common Stock by (i) each
stockholder known by the Company to own beneficially more than 5% of the
outstanding Common Stock, (ii) each director and the Chief Executive Officer and
the President of the Company, (iii) all executive officers and directors of the
Company as a group and (iv) each Selling Stockholder. Except as otherwise
indicated below, each of the persons named in the table has sole voting and
investment power with respect to all shares of Common Stock beneficially owned
by him as set forth opposite his name.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP BENEFICIAL
PRIOR TO OWNERSHIP
OFFERING(1) AFTER OFFERING(1)
------------------- -------------------
NUMBER NUMBER NUMBER
OF OF SHARES OF
NAME AND ADDRESS SHARES PERCENT BEING OFFERED SHARES PERCENT
- ----------------------------------------- ------- ------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
Metropolitan Life Insurance Company...... 250,000(2) 5.06% -- 250,000 3.88%
One Madison Avenue
New York, NY 10010
C.A. Delaney Capital Management, Ltd. ... 280,500(3) 5.68% -- 280,500 4.35%
Suite 5100
161 Bay Street
P.O. Box 713
Toronto, Ontario M5J 2S1
Cloyce A. Talbott(4)..................... 639,974(5) 12.95% 49,840 494,974 7.68%
2500 Towle Park Road
Snyder, TX 79549
H.A. Talbott and Audrey Talbott
Children's Trust(6).................... 37,862 * 37,862 -- --
SSI Oil & Gas, Inc.(7)................... 57,298 1.16 57,298 -- --
A. Glenn Patterson(4).................... 201,441(8) 4.06% 30,000 114,143 1.77%
Kenneth E. Davis(4)...................... 71,554(9) 1.45% -- 71,554 1.11%
Robert C. Gist(4)........................ 17,943(10) * -- 17,943 *
Vincent A. Rossi, Jr.(4)................. -- -- -- --
Phoenix Drilling, Inc. .................. 28,000(11) * 28,000 -- --
Imperial Equipment Co. .................. 19,750(11) * 19,750 -- --
Rig I Group, Inc. ....................... 4,250(11) * 4,250 -- --
All executive officers and directors as a
group (6 persons)...................... 909,341(12) 18.24% 175,000 734,341 11.33%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership includes shares over which the indicated beneficial
owner exercises voting and/or investment power. Shares of Common Stock
subject to options currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage ownership of the person
holding the options, but not deemed outstanding for computing the
percentage ownership of any other person.
(2) Number of shares stated was obtained from a Schedule 13G filed with the
Securities and Exchange Commission by Metropolitan Life Insurance Company.
State Street Research and Management Company, an affiliate of Metropolitan
Life Insurance Company, has also filed a 13G with the Securities and
Exchange Commission for the same shares.
(3) Number of shares was obtained from a Schedule 13G filed with the Securities
and Exchange Commission by C.A. Delaney Capital Management, Ltd.
(4) An executive officer and/or director of the Company.
(5) Includes 37,862 shares owned by H.A. Talbott and Audrey Talbott Children's
Trust, of which Mr. Talbott is a beneficiary and co-trustee and 57,298
shares owned by SSI Oil & Gas, Inc., a Texas corporation owned 50% by an
affiliate of Mr. Talbott and 50% by Mr. Patterson.
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<PAGE> 39
(6) An affiliate of Mr. Talbott.
(7) An affiliate of Messrs. Talbott and Patterson.
(8) Includes 22,720 shares purchasable under currently exercisable employee
stock options and the 57,298 shares owned by SSI Oil & Gas, Inc. (see Note
5 above).
(9) Includes 5,474 shares owned by the wife of Mr. Davis and 5,000 shares
purchasable under exercisable Non-Employee Directors' Stock Options.
(10) Includes 5,000 shares purchasable under exercisable Non-Employee Directors'
Stock Options.
(11) Issued on December 5, 1996 in partial consideration for the acquisition of
three drilling rigs. These shares are being sold pursuant to the exercise
of registration rights granted in the acquisition.
(12) Includes a total of 42,720 shares purchasable under currently exercisable
employee stock options including the 22,720 shares referenced in Note 8
above for Mr. Patterson and 10,000 shares purchasable under Non-Employee
Directors' Stock Options (see Notes 9 and 10 above).
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<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue (i) 9,000,000 shares of Common Stock,
$0.01 Par Value, of which 4,975,031 shares are issued and outstanding as of the
date of this Prospectus, and (ii) 1,000,000 shares of Preferred Stock, $0.01 Par
Value, of which no shares have been issued.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share of Common
Stock held of record on all matters submitted to a vote of stockholders. Holders
of a majority of the shares of Common Stock outstanding may authorize a merger,
consolidation, dissolution of the Company, the sale of all or substantially all
of the Company's assets if not made in the usual or ordinary course of the
Company's business, or an amendment of the Company's Restated Certificate of
Incorporation. In the event of liquidation, holders of Common Stock are entitled
to share pro rata in any distribution of the Company's assets to holders of
Common Stock after payment of liabilities and liquidation preferences, if any,
granted to holders of Preferred Stock. There are no preemptive, subscription,
conversion or redemption rights regarding the Common Stock. Holders of Common
Stock are entitled to receive such dividends as may be declared on the Common
Stock by the Board of Directors in its discretion out of funds legally available
for that purpose.
PREFERRED STOCK
Preferred Stock may be issued in series from time to time with such
designations, relative rights, priorities, preferences, qualifications,
limitations and restrictions thereof, to the extent that such are not fixed in
the Company's Restated Certificate of Incorporation, as the Board of Directors
determines. The rights, preferences, limitations and restrictions of different
series of Preferred Stock may differ with respect to dividend rates, amounts
payable on liquidation, voting rights, conversion rights, redemption provisions,
sinking fund provisions and other matters. The Board of Directors may authorize
the issuance of Preferred Stock which ranks senior to the Common Stock with
respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has not issued any shares of Preferred Stock. However, as of January 2,
1997, an aggregate of 100,000 shares of Preferred Stock had been reserved for
issuance upon exercise of the Rights described under "-- Stockholder Rights
Plan."
STOCKHOLDER RIGHTS PLAN
General. In January 1997, the Board of Directors of the Company declared a
dividend distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock. The dividend is payable to the stockholders
of record on January 17, 1997 (the "Record Date"), and with respect to Common
Stock issued thereafter until the Distribution Date (as defined below) and, in
certain circumstances, with respect to Common Stock issued after the
Distribution Date. Except as set forth below, each Right, when it becomes
exercisable, entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Preferred Stock, $0.01 par
value (the "Preferred Shares"), of the Company at a price of $166 per one
one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and Continental Stock
Transfer & Trust Company, as Rights Agent (the "Rights Agent"), dated as of
January 2, 1997. A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission (the "Commission") as an Exhibit to the
Registration Statement of which this Prospectus is a part. This summary
description of the Rights does not purport to be complete and is qualified in
its entirety by reference to the Rights Agreement.
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<PAGE> 41
The Rights Agreement. Initially, the Rights will be attached to all
certificates representing Common Stock then outstanding, and no separate Right
Certificates will be distributed. The Rights will separate from the Common Stock
upon the earliest to occur of (i) a person or group of affiliated or associated
persons having acquired beneficial ownership of 15% or more of the outstanding
shares of Common Stock (except pursuant to a Permitted Offer, as hereinafter
defined); or (ii) 10 days (or such later date as the Board of Directors may
determine) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result in
a person or group becoming an Acquiring Person (as hereinafter defined) (the
earliest of such dates being called the "Distribution Date"). A person or group
whose acquisition of Common Stock causes a Distribution Date pursuant to clause
(i) above is an "Acquiring Person." The date that a person or group becomes an
Acquiring Person is the "Shares Acquisition Date."
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferred with and only with the Common Stock. Until the Distribution
Date (or earlier redemption or expiration of the Rights), new Common Stock
certificates issued after the Record Date upon transfer or new issuance of
Common Stock will contain a notation incorporating the Rights Agreement by
reference. Until the Distribution Date (or earlier redemption or expiration of
the Rights), the surrender for transfer of any certificates for Common Stock
outstanding as of the Record Date, even without such notation or a copy of a
summary of the Rights being attached thereto, will also constitute the transfer
of the Rights associated with the Common Stock represented by such certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Common Stock as of the close of business on the Distribution Date (and to
each initial record holder of certain Common Stock issued after the Distribution
Date), and such separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on January 2, 2007, unless earlier redeemed by the
Company as described below.
In the event that any person becomes an Acquiring Person (except pursuant
to a tender or exchange offer which is for all outstanding Common Stock at a
price and on terms which a majority of certain members of the Board of Directors
determines to be adequate and in the best interests of the Company, its
stockholders and other relevant constituencies, other than such Acquiring
Person, its affiliates and associates (a "Permitted Offer")), each holder of a
Right will thereafter have the right (the "Flip-In Right") to receive upon
exercise the number of shares of Common Stock or, in the discretion of the Board
of Directors of the Company, of one one-hundredths of a Preferred Share (or, in
certain circumstances, other securities of the Company) having a value
(immediately prior to such triggering event) equal to two times the Purchase
Price. Notwithstanding the foregoing, following the occurrence of the event
described above, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person or any
affiliate or associate thereof will be null and void.
In the event that, at any time following the Shares Acquisition Date, (i)
the Company is acquired in a merger or other business combination transaction in
which the holders of all of the outstanding Common Stock immediately prior to
the consummation of the transaction are not the holders of all of the surviving
company's voting power, or (ii) more than 50% of the Company's assets or earning
power is sold or transferred, in either case with or to an Acquiring Person or
any affiliate or associate or any other person in which such Acquiring Person,
affiliate or associate has an interest or any person acting on behalf of or in
concert with such Acquiring Person, affiliate or associate, or, if in such
transaction all holders of Common Stock are not treated alike, any other person,
then each holder of a Right (except Rights which previously have been voided as
set forth above) shall thereafter have the right (the "Flip-Over Right") to
receive, upon exercise, common shares of the acquiring company having a value
equal to two times the Purchase Price. The holder of a Right will continue to
have the Flip-Over Right whether or not such holder exercises or surrenders the
Flip-In Right.
The Purchase Price payable, and the number of Preferred Shares, shares of
Common Stock or other securities issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Shares, (ii) upon the grant to holders of the Preferred Shares of
certain rights or warrants to subscribe for or
40
<PAGE> 42
purchase Preferred Shares at a price, or securities convertible into Preferred
Shares with a conversion price, less than the then current market price of the
Preferred Shares or (iii) upon the distribution to holders of the Preferred
Shares of evidences of indebtedness or assets (excluding regular quarterly cash
dividends) or of subscription rights or warrants (other than those referred to
above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Stock or a stock dividend
on the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Description of Preferred Shares. Preferred Shares purchasable upon exercise
of the Rights will not be redeemable. Each Preferred Share will be entitled to a
minimum preferential quarterly dividend payment of $0.01 per share but, if
greater, will be entitled to an aggregate dividend per share of 100 times the
dividend declared per share of Common Stock. In the event of liquidation, the
holders of the Preferred Shares will be entitled to a minimum preferential
liquidation payment of $1.00 per share; thereafter, and after the holders of the
Common Stock receive a liquidation payment of $0.01 per share, the holders of
the Preferred Shares and the holders of the Common Stock will share the
remaining assets in the ratio of 100 to 1 (as adjusted) for each Preferred Share
and share of Common Stock so held, respectively. Finally, in the event of any
merger, consolidation or other transaction in which shares of Common Stock are
exchanged, each Preferred Share will be entitled to receive 100 times the amount
received per share of Common Stock. These rights are protected by customary
antidilution provisions. In the event that the amount of accrued and unpaid
dividends on the Preferred Shares is equivalent to six full quarterly dividends
or more, the holders of the Preferred Shares shall have the right, voting as a
class, to elect two directors in addition to the directors elected by the
holders of the Common Stock until all cumulative dividends on the Preferred
Shares have been paid through the last quarterly dividend payment date or until
noncumulative dividends have been paid regularly for at least one year.
Redemption. At any time prior to the earlier to occur of (i) a person
becoming an Acquiring Person or (ii) the expiration of the Rights, and under
certain other circumstances, the Company may redeem the Rights in whole, but not
in part, at a price of $0.01 per Right (the "Redemption Price"), which
redemption shall be effective upon the action of the Board of Directors.
Additionally, following the Shares Acquisition Date, the Company may redeem the
then outstanding Rights in whole, but not in part, at the Redemption Price
provided that such redemption is in connection with a merger or other business
combination transaction or series of transactions involving the Company in which
all holders of Common Stock are treated alike but not involving an Acquiring
Person or its affiliates or associates.
Anti-Takeover Effect. The distribution of the Rights may have the effect of
delaying, deferring or preventing a change in control of the Company
notwithstanding that a majority of the stockholders might benefit from such a
change in control.
OTHER PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT
Delaware, like many other states, permits a corporation to adopt a number
of measures through amendment of the corporate charter or bylaws or otherwise,
which, along with certain provisions of the Delaware General Corporation Law
(the "DGCL"), may have the effect of delaying or deterring any unsolicited
takeover attempts notwithstanding that a majority of the stockholders might
benefit from such a takeover or attempt. In connection with the Company's
reincorporation, the right of stockholders to cumulate votes in the election of
directors was eliminated. In addition, Section 203 of the DGCL, which will apply
to the Company since the Common Stock has been approved for quotation on the
Nasdaq National Market, restricts certain "business combinations" with an
"interested stockholder" for three years following the date such person becomes
an interested stockholder, unless the Board of Directors approves the business
combination. "Business combinations" is defined to include mergers, sale of
assets and other similar transactions with an "interested stockholder." An
"interested stockholder" is defined as a person who, together with affiliates
and associates, owns (or, within the prior three years, did own) 15% or more of
the corporation's
41
<PAGE> 43
voting stock. By delaying or deterring unsolicited takeover attempts, these
provisions could adversely affect prevailing market prices for the Company's
Common Stock.
The Company's Restated Certificate of Incorporation and Bylaws contain
certain provisions that could discourage potential takeover attempts and make
more difficult attempts by stockholders to change management. The following
paragraphs set forth a summary of these provisions:
Special Meetings of Stockholders. The Restated Certificate of Incorporation
provides that special meetings of stockholders may be called only by the Board
of Directors (or a majority of the members thereof), the Chief Executive
Officer, the President or the holders of a majority of the outstanding stock
entitled to vote at such special meeting. This provision will make it more
difficult for stockholders to call a special meeting.
No Stockholder Action By Written Consent. The Restated Certificate of
Incorporation provides that stockholder action may be taken only at annual or
special meetings and not by written consent of the stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to,
or mailed and received at, the principal executive offices of the Company not
less than 30 days nor more than 60 days prior to the meeting as originally
scheduled; provided that in the event less than 40 days written notice is given
to stockholders, notice by the stockholder to be made timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed. The Bylaws also
specify certain requirements for a stockholders notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual meeting or from making nominations for
directors at an annual meeting.
Authorized Class of Preferred Stock. See "-- Preferred Stock" for
information concerning the Company's Preferred Stock.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company, New York, New York.
42
<PAGE> 44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 6,475,031 shares of
Common Stock outstanding (6,734,081 shares if the Underwriters' over-allotment
option is exercised in full), 5,508,410 (5,767,460, if the Underwriters'
over-allotment option is exercised in full) of which will be freely tradeable
without substantial restriction or the requirement of future registration under
the Securities Act. Of the remaining 966,621 shares, 691,621 shares will be held
by "affiliates" of the Company, as that term is defined in Rule 144, and may be
sold subject to the provisions of Rule 144 and the contractual restrictions
described below, 25,000 shares are eligible for sale under a shelf registration
statement and 250,000 shares (all of which are "restricted securities" under
Rule 144) are held by a third party. These 250,000 shares are entitled to
certain registration rights and also may be sold subject to the provisions of
Rule 144. In addition, the Company has reserved for issuance 75,000 shares of
Common Stock pursuant to the exercise of outstanding warrants held by a third
party which are entitled to certain registration rights. The Company and the
Selling Stockholders have agreed that they will not, for a period of 120 days
from the date of this Prospectus, and the executive officers and directors of
the Company that are not also Selling Stockholders have agreed that they will
not, for a period of 120 days from the date of this Prospectus, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, pledge, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or other capital stock
of the Company or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock or other capital stock of the
Company without the prior written consent of Prudential Securities Incorporated,
on behalf of the Underwriters, except that such agreement does not prevent the
Company from granting additional options under the 1993 Plan or the Non-Employee
Director Plan. Upon the expiration of these lockup agreements, all 691,621
shares held by such executive officers and directors which are not sold in this
offering will become eligible for sale in the public market, subject to the
applicable volume and manner-of-sale limitations of Rule 144, 83,650 shares of
Common Stock issuable upon exercise of outstanding warrants and options that are
vested will be eligible for sale and 106,600 shares of Common Stock issuable
upon exercise of options that are not vested will become eligible for sale as
such options become vested. Under Rule 144, the volume limitations permit the
sale of a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 64,750 shares immediately
after the offering) or the average weekly trading volume of the Common Stock on
the Nasdaq National Market during the four calendar weeks preceding the sale,
subject to the filing of a Form 144 with respect to such sale and certain other
limitations and restrictions. The Company has filed registration statements
under the Securities Act to register shares of Common Stock reserved for
issuance under its employee stock plans, thus permitting the resale of such
shares of Common Stock by non-affiliates in the public market without
restriction under the Securities Act. A total of 175,000 shares (including
shares subject to outstanding options) are reserved for issuance under the 1993
Plan and 30,000 shares are reserved for issuance under the Company's
Non-Employee Director Plan. In addition, a total of 80,000 shares of Common
Stock issuable upon exercise of outstanding options are eligible for sale under
a shelf registration statement.
The Common Stock has been included in the Nasdaq Stock Market's National
Market since November 1993. Nevertheless, sales of substantial amounts of Common
Stock in the public market could adversely affect the prevailing market price
and could impair the Company's future ability to raise capital through an
offering of its equity securities.
43
<PAGE> 45
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Morgan Keegan & Company, Inc. and Raymond James &
Associates, Inc. are acting as representatives (collectively, the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------------------------------------------------------------------- ---------
<S> <C>
Prudential Securities Incorporated....................................
Morgan Keegan & Company, Inc. ........................................
Raymond James & Associates, Inc. .....................................
-------
Total....................................................... 1,727,000
=======
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
offering price and the concessions may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 259,050 additional
shares of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of additional shares as the number of shares set forth next
to such Underwriter's name in the preceding table bears to 1,727,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Company, its directors and executive officers, the Selling Stockholders
and certain other stockholders holding an aggregate of approximately 691,621
shares of Common Stock (exclusive of shares of Common Stock being sold by the
Selling Stockholders) have agreed that they will not, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock, without the prior
written consent of Prudential Securities Incorporated on behalf of the
Underwriters, for a period of 120 days after the date of this Prospectus, except
for shares offered pursuant to this offering and issuances pursuant to the
exercise of options granted under employee benefit plans existing as of the date
of this Prospectus or pursuant to the terms of convertible securities or
warrants of the Company outstanding as of the date of this Prospectus.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market, may engage
44
<PAGE> 46
in passive market making transactions in the Common Stock of the Company on the
Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act,
during the two business day period before commencement of offers or sale of the
Common Stock. Passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
Prudential Securities Incorporated has been engaged by the Company to
render certain advisory services in the future and expects to receive customary
compensation therefor.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Baker & Hostetler LLP, Denver, Colorado.
Certain legal matters relating to this offering will be passed upon for the
Underwriters by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1994 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995, included in
this Prospectus have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
The consolidated balance sheets of the Company as of December 31, 1994 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995, incorporated by reference in this Prospectus from the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The supplemental consolidated balance sheets as of December 31, 1994 and
1995, and the related supplemental consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, incorporated by reference in this Prospectus from the
Company's Current Report on Form 8-K/A (Amendment No. 2), have been incorporated
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The financial statements of Tucker, as of March 31, 1996 and 1995, and for
each of the three years in the period ended March 31, 1996, incorporated by
reference in this Prospectus and elsewhere in the Registration Statement, have
been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods indicated in their reports, and are incorporated
herein by reference in reliance upon the authority of said firm as experts in
giving said reports.
The estimated reserve evaluations and related calculations of M. Brian
Wallace, P.E., Dallas, Texas, an independent petroleum engineer, as of December
31, 1993, 1994 and 1995 and September 30, 1996, have been included herein in
reliance upon the authority of Mr. Wallace as an expert in petroleum
engineering.
45
<PAGE> 47
INDEPENDENT ACCOUNTANTS
With respect to the unaudited interim financial information for the periods
ended September 30, 1995 and 1996, included in this Prospectus, Coopers &
Lybrand L.L.P., independent accountants, have reported that they have applied
limited procedures in accordance with professional standards for a review of
such information. However, their separate report included in this Prospectus
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act for their report on the
unaudited interim financial information because that report is not a "report" or
a "part" of the registration statement prepared or certified by the accountants
within the meaning of Sections 7 and 11 of the Securities Act.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements, and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, as well as at the following regional offices: 7
World Trade Center, Suite 1300, New York, New York 10048, and Citicorp Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained at prescribed rates from the Public Reference
Section of the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Company's Common Stock is traded on the Nasdaq
National Market. The foregoing materials can also be inspected at the National
Association of Securities Dealers, Inc., 1735 K. Street, N.W., Washington, D.C.
20006.
The Company has also filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the shares offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information pertaining
to the Company and the shares offered hereby, reference is made to the
Registration Statement, copies of which may be inspected without charge at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of which
may be obtained from the Commission upon payment of the prescribed fees. In
addition, the Commission maintains a web site that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Company is such a filer. The
Commission's web site address is (http://www.sec.gov).
46
<PAGE> 48
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission, are hereby incorporated by reference into this Prospectus:
(a) The Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, as amended by Form 10-KSB/A for fiscal year ended
December 31, 1995.
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, as amended by Form 10-Q/A for the quarter ended March 31,
1996.
(c) The Company's Current Report on Form 8-K dated April 22, 1996.
(d) The Company's Current Report on Form 8-K dated April 30, 1996.
(e) The Company's Current Report on Form 8-K dated May 16, 1996.
(f) The Company's Current Report on Form 8-K dated July 30, 1996, as
amended by Form 8-K/A dated July 30, 1996, and as further amended by Form
8-K/A (Amendment No. 2) dated July 30, 1996.
(g) The Company's Current Report on Form 8-K dated July 30, 1996.
(h) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, as amended by Form 10-Q/A for the quarter ended June 30,
1996.
(i) The Company's Current Report on Form 8-K dated September 27, 1996.
(j) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, as amended by Form 10-Q/A for the quarter ended
September 30, 1996.
(k) The Company's Current Report on Form 8-K dated October 23, 1996.
(l) The Company's Current Report on Form 8-K dated December 18, 1996.
(m) The Company's Current Report on Form 8-K dated January 3, 1997.
(n) The Company's Current Report on Form 8-K dated January 7, 1997.
(o) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A dated November 2, 1993.
(p) The description of the Company's Preferred Stock Purchase Rights
contained in the Company's Registration Statement on Form 8-A dated January
10, 1997.
All documents filed by the Company after the date of this Prospectus
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide, without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference in such documents). Written requests for such copies should be
directed to James C. Brown, Vice President -- Finance, Patterson Energy, Inc.,
at the Company's principal executive offices located at 4510 Lamesa Highway,
Snyder, Texas 79549. Telephone requests may be directed to Mr. Brown at (915)
573-1104.
47
<PAGE> 49
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
Report of Independent Accountants on Interim Financial
Statements; Coopers & Lybrand L.L.P....................... F-4
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and
1995 and September 30, 1996 (unaudited)................ F-5
Consolidated Statements of Income for the years ended
December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1995 and 1996 (unaudited)... F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1993, 1994 and 1995 and for
the nine months ended September 30, 1996 (unaudited)... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995 and for the nine
months ended September 30, 1995 and 1996 (unaudited)... F-8
Notes to Consolidated Financial Statements................ F-9
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
We have audited the consolidated balance sheets of Patterson Energy, Inc.
and Subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Patterson Drilling
Company (formerly Tucker Drilling Company, Inc.) which financial statements
reflect 36 and 30 percent of consolidated total assets as of December 31, 1994
and 1995, respectively, and 42, 41 and 28 percent in 1993, 1994 and 1995,
respectively, of consolidated total operating revenues. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Patterson
Drilling Company, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 28, 1996, except as to
the Tucker Drilling Company, Inc.
merger discussed in Note 2
for which the date is
September 13, 1996
F-2
<PAGE> 51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Tucker Drilling Company, Inc.
We have audited the balance sheets of Tucker Drilling Company, Inc. (a
Delaware corporation) as of March 31, 1996 and 1995, and the related statements
of operations, changes in stockholder's equity and cash flows for the three
years ended March 31, 1996, prior to the restatement (and, therefore, are not
presented herein) for the pooling of interests as described in Note 2 to the
consolidated financial statements of Patterson Energy, Inc., and Subsidiaries
included in the Registration Statement on Form S-3. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tucker Drilling Company,
Inc. as of March 31, 1996 and 1995, and the results of its operations and its
cash flows for the three years ended March 31, 1996 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
May 16, 1996
F-3
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
We have reviewed the accompanying interim consolidated balance sheet of
Patterson Energy, Inc. and Subsidiaries as of September 30, 1996, the related
interim consolidated statements of income and cash flows for each of the nine
month periods ended September 30, 1995 and 1996, and the consolidated statement
of stockholders' equity for the nine month period ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
December 18, 1996
F-4
<PAGE> 53
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
--------------------------- SEPTEMBER 30,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 6,845,059 $ 9,344,494 $ 9,450,477
Marketable securities.............................. 2,570,459 524,323 524,323
Accounts receivable:
Trade:
Billed........................................ 11,445,058 10,570,891 10,809,438
Unbilled...................................... 1,929,055 2,048,782 2,170,650
Oil and gas sales............................... 593,861 712,497 820,202
Costs of uncompleted drilling contracts in excess
of related billings............................. -- -- 330,557
Equipment inventory................................ 426,897 413,677 490,342
Deferred income taxes.............................. 406,515 1,058,947 614,567
Undeveloped oil and gas properties held for
resale.......................................... 1,385,781 2,122,112 2,549,906
Other current assets............................... 1,072,485 351,579 416,379
----------- ----------- -----------
Total current assets....................... 26,675,170 27,147,302 28,176,841
----------- ----------- -----------
Property and equipment, at cost, net................. 21,538,030 34,385,345 36,660,298
Deferred income taxes................................ -- 347,892 2,531,395
Deposits on workers' compensation insurance policy... 556,864 343,760 343,760
Other assets......................................... 738,739 766,546 785,290
----------- ----------- -----------
Total assets............................... $49,508,803 $62,990,845 $ 68,497,584
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable................ $ 918,834 $ 909,634 $ 4,039,952
Accounts payable:
Trade........................................... 8,534,535 7,115,697 8,174,718
Revenue distribution............................ 967,020 1,686,626 2,226,419
Other........................................... 648,668 297,184 16,582
Accrued expenses................................... 1,838,588 2,042,254 2,465,439
----------- ----------- -----------
Total current liabilities.................. 12,907,645 12,051,395 16,923,110
----------- ----------- -----------
Deferred liabilities................................. 324,650 376,746 722,786
Notes payable, less current maturities............... 5,966,710 12,906,473 11,614,622
----------- ----------- -----------
6,291,360 13,283,219 12,337,408
----------- ----------- -----------
Commitments and contingencies........................ -- -- --
Stockholders' equity:
Preferred stock -- par value $.01; authorized
1,000,000 shares, no shares issued.............. -- -- --
Common stock -- par value $.01; authorized
5,000,000 shares with 4,168,632 shares issued at
December 31, 1994 and 4,747,083 shares issued at
December 31,1995 and authorized 9,000,000 shares
with 4,810,689 issued at September 30, 1996..... 41,687 47,471 48,107
Additional paid-in capital......................... 14,907,454 19,047,037 19,255,879
Retained earnings.................................. 15,360,657 18,561,723 19,933,080
----------- ----------- -----------
Total stockholders' equity................. 30,309,798 37,656,231 39,237,066
----------- ----------- -----------
Total liabilities and stockholders'
equity................................... $49,508,803 $62,990,845 $ 68,497,584
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Drilling........................... $37,746,477 $54,822,766 $57,599,180 $42,655,844 $47,724,707
Oil and gas sales.................. 3,913,746 3,593,786 5,399,536 3,831,366 5,939,900
Well operation fees................ 1,063,629 979,756 1,296,257 940,135 1,110,813
Other.............................. 168,926 133,240 148,976 133,919 280,234
----------- ----------- ----------- ----------- -----------
42,892,778 59,529,548 64,443,949 47,561,264 55,055,654
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs.............. 30,631,392 43,035,526 46,504,502 34,431,381 38,817,618
Lease operating and production..... 1,206,796 1,141,391 1,509,206 1,070,674 1,468,390
Write-down due to impairment of
long-lived assets............... -- -- 159,403 -- 159,403
Exploration costs.................. 317,085 233,547 369,133 227,258 343,581
Dry holes and abandonments......... 395,508 1,279,133 791,221 373,270 611,732
Depreciation, depletion and
amortization.................... 4,654,697 4,911,929 7,522,695 5,285,551 7,753,384
General and administrative......... 4,013,766 4,793,484 5,062,940 3,607,326 3,943,887
----------- ----------- ----------- ----------- -----------
41,219,244 55,395,010 61,919,100 44,995,460 53,097,995
----------- ----------- ----------- ----------- -----------
Operating income..................... 1,673,534 4,134,538 2,524,849 2,565,804 1,957,659
----------- ----------- ----------- ----------- -----------
Other income (expense):
Net gain on sale of assets......... 138,272 611,009 373,567 335,961 532,684
Interest income.................... 141,067 408,945 545,463 422,475 376,734
Interest expense................... (330,739) (366,152) (1,064,523) (761,638) (985,373)
Non-recurring acquisition costs.... -- -- -- -- (2,268,331)
Other.............................. 117,463 25,020 34,946 (6,110) 97,185
----------- ----------- ----------- ----------- -----------
66,063 678,822 (110,547) (9,312) (2,247,101)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.... 1,739,597 4,813,360 2,414,302 2,556,492 (289,442)
----------- ----------- ----------- ----------- -----------
Income tax expense (benefit):
Current............................ 123,309 213,349 213,560 264,275 112,030
Deferred........................... -- (406,515) (1,000,324) (208,052) (2,531,395)
----------- ----------- ----------- ----------- -----------
123,309 (193,166) (786,764) 56,223 (2,419,365)
----------- ----------- ----------- ----------- -----------
Net income........................... $ 1,616,288 $ 5,006,526 $ 3,201,066 $ 2,500,269 $ 2,129,923
=========== =========== =========== =========== ===========
Net income per common share:
Primary............................ $ 0.51 $ 1.24 $ 0.73 $ .59 $ .43
=========== =========== =========== =========== ===========
Assuming full dilution............. $ 0.51 $ 1.24 $ 0.71 $ .55 $ .43
=========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding:
Primary............................ 3,175,957 4,029,669 4,379,236 4,261,488 4,949,593
=========== =========== =========== =========== ===========
Assuming full dilution............. 3,175,957 4,029,669 4,520,588 4,532,679 4,979,510
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
-------------------- ----------------------- ADDITIONAL
NUMBER NUMBER PAID-IN RETAINED
OF SHARES AMOUNT OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992........ 3,331,760 $33,318 351,158 $(730,292) $ 9,003,283 $ 8,737,843 $17,044,152
Sale of treasury stock............ -- -- (97,554) 49,172 3,935 -- 53,107
Issuance of common stock and
redeemable warrants............. 835,000 8,350 -- -- 4,662,925 -- 4,671,275
Net income........................ -- -- -- -- -- 1,616,288 1,616,288
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1993........ 4,166,760 41,668 253,604 (681,120) 13,670,143 10,354,131 23,384,822
Issuance of common stock.......... 250,000 2,500 -- -- 1,872,500 -- 1,875,000
Retirement of treasury stock...... (253,604) (2,536) (253,604) 681,120 (678,584) -- --
Exercise of stock options......... 5,476 55 -- -- 43,395 -- 43,450
Net income........................ -- -- -- -- -- 5,006,526 5,006,526
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1994........ 4,168,632 41,687 -- -- 14,907,454 15,360,657 30,309,798
Issuance of common stock and
warrants........................ 97,500 975 -- -- 721,275 -- 722,250
Conversion of 853,748 redeemable
warrants........................ 426,874 4,269 -- -- 2,991,015 -- 2,995,284
Conversion of 75,315 underwriters
redeemable warrants............. 35,577 355 -- -- 280,353 -- 280,708
Exercise of stock options......... 18,500 185 -- -- 146,940 -- 147,125
Net income........................ -- -- -- -- -- 3,201,066 3,201,066
--------- ------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1995........ 4,747,083 47,471 -- -- 19,047,037 18,561,723 37,656,231
Exercise of stock options
(unaudited)..................... 25,382 254 -- -- 209,224 -- 209,478
Conversion of 75,316 underwriters
redeemable warrants
(unaudited)..................... 38,224 382 -- -- (382) -- --
Net income (unaudited)............ -- -- -- -- -- 2,129,923 2,129,923
Adjustment to conform fiscal years
(see Note 2) (unaudited)........ -- -- -- -- -- (758,566) (758,566)
--------- ------- -------- --------- ----------- ----------- -----------
Balance September 30, 1996
(unaudited)..................... 4,810,689 $48,107 -- $ -- $19,255,879 $19,933,080 $39,237,066
========= ======= ======== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 1,616,288 $ 5,006,526 $ 3,201,066 $ 2,500,269 $ 2,129,923
Adjustments to reconcile net income to net cash
from operating activities:
Loss on abandonment of oil and gas properties... 225,478 399,694 108,867 35,304 118,550
Depreciation, depletion and amortization........ 4,654,697 4,911,929 7,522,695 5,285,551 7,753,384
Write-down due to impairment of long-lived
assets........................................ -- -- 159,403 -- 159,403
Net gain on sale of assets...................... (123,945) (611,009) (373,567) (335,961) (532,684)
Deferred income tax benefit..................... -- (406,515) (1,000,324) (208,052) (2,531,395)
Change in current assets and liabilities:
(Increase) decrease in trade accounts
receivable................................ (3,268,159) (4,666,120) 1,680,215 2,242,334 568,614
(Increase) decrease in oil and gas sales
receivable................................ 91,026 (47,110) (258,561) (129,415) (333,175)
Increase in undeveloped oil and gas
properties held for resale................ (469,710) (549,440) (736,331) (617,586) (427,794)
(Increase) decrease in other current
assets.................................... 4,142 (70,067) (25,777) 26,051 (448,655)
Increase (decrease) in trade accounts
payable................................... 1,391,010 2,825,111 (1,761,828) (916,631) 778,871
Increase in revenue distribution payable.... 45,426 181,459 699,235 200,138 622,610
Increase in deferred compensation payable... 49,026 182,701 52,096 40,500 357,636
Increase (decrease) in other current
payables.................................. (47,191) 1,107,299 53,495 637,561 (525,542)
Net change in deposits on workers' compensation
insurance policy.............................. 57,853 (22,901) 213,104 150,000 --
----------- ------------ ----------- ------------ ------------
Net cash provided by operating activities... 4,225,941 8,241,557 9,533,788 8,910,063 7,689,746
----------- ------------ ----------- ------------ ------------
Cash flows from investing activities:
Net sales (purchases) of investment
securities.................................... 23,488 (1,685,929) 2,046,136 99,574 1,946,562
Purchases of property and equipment............. (5,261,725) (11,617,225) (19,906,204) (15,236,661) (10,553,569)
Sales of property and equipment................. 181,388 1,315,491 555,878 412,471 1,136,515
Change in other assets.......................... -- -- (83,844) (78,764) (56,713)
----------- ------------ ----------- ------------ ------------
Net cash used in investing activities....... (5,056,849) (11,987,663) (17,388,034) (14,803,380) (7,527,205)
----------- ------------ ----------- ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable..................... 2,766,488 5,000,000 9,375,000 8,000,000 3,170,000
Payments on notes payable....................... (4,681,296) (573,456) (2,444,437) (1,922,779) (1,331,533)
Issuance of common stock and redeemable
warrants...................................... 4,671,275 -- 3,275,993 3,009,911 --
Proceeds from exercise of stock options......... -- 43,450 147,125 116,500 240,102
Proceeds from sale of treasury stock............ 53,107 -- -- -- --
----------- ------------ ----------- ------------ ------------
Net cash provided by financing activities... 2,809,574 4,469,994 10,353,681 9,203,632 2,078,569
----------- ------------ ----------- ------------ ------------
Net increase in cash and cash equivalents... 1,978,666 723,888 2,499,435 3,310,315 2,241,110
Cash and cash equivalents at beginning of
period.......................................... 4,142,505 6,121,171 6,845,059 6,845,059 7,209,367(1)
----------- ------------ ----------- ------------ ------------
Cash and cash equivalents at end of period........ $ 6,121,171 $ 6,845,059 $ 9,344,494 $ 10,155,374 $ 9,450,477
=========== ============ =========== ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest...................................... $ 347,888 $ 344,487 $ 992,651 $ 695,285 $ 984,059
Income taxes.................................. 101,711 75,679 270,095 222,487 155,144
</TABLE>
Noncash investing and financing activities:
During the year ended December 31, 1994, the Company issued 250,000
shares of common stock to Questor Drilling Corp. for certain assets valued
at $1,875,000 (See Notes 2 and 7).
During the year ended December 31, 1994, the Company retired 253,604
shares of common stock that were held in treasury (See Note 7).
During the year ended December 31, 1995, the Company acquired three
drilling rigs and related equipment from a non-affiliated person. The
purchase price for the rigs consisted of $367,500 cash, 97,500 shares of
the Company's common stock, valued for purposes of this transaction at
$682,500, and warrants to purchase an additional 75,000 shares at an
exercise price of $9.00 per share, valued at $39,750 for this transaction
(See Note 7).
During the nine months ended September 30, 1996, 75,316 redeemable
warrants relative to the Underwriter's Warrant Agreement dated November 2,
1993, as amended on November 15, 1994 and June 18, 1996, were converted in
which 38,224 shares of the Company's common stock were issued and 37,092
shares of such common stock were forfeited to the Company in lieu of a cash
payment.
- ---------------
(1) Amount does not agree to cash and cash equivalents as presented as a
result of conforming reporting periods (See Note 2).
The accompanying notes are an integral part of these consolidated financial
statements
F-8
<PAGE> 57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies follows:
Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson Energy, Inc. ("Patterson") and its wholly
owned subsidiaries, Patterson Drilling Company, Patterson Petroleum, Inc.,
Patterson Petroleum Trading Company, Inc. and Patterson Drilling Programs, Inc.
(collectively referred to as the "Company"). All significant intercompany
accounts and transactions have been eliminated.
Interim financial statements -- The consolidated financial statements as of
September 30, 1996 and for each of the nine months ended September 30, 1995 and
1996 have been prepared by management of the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These consolidated interim financial statements should be read in
conjunction with the audited December 31, 1993, 1994 and 1995 consolidated
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for presentation have
been included. Furthermore, the results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results expected for
the full year.
Management estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Drilling operations -- The Company follows the percentage-of-completion
method of accounting for day work and footage drilling arrangements. Under this
method all drilling revenues, direct costs and appropriate portions of indirect
costs, related to the contracts in progress, are recognized as contract drilling
services are performed.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs
and appropriate portions of indirect costs (including maintenance, repairs and
depreciation) related to the contracts in progress are deferred and recognized
as revenues and expenses in the period the contracts are completed.
Provisions for losses are made on incomplete contracts when significant
losses are anticipated.
Equipment inventory -- Equipment inventory consists primarily of equipment
to be used in conjunction with the Company's contract drilling activities. The
inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Undeveloped oil and gas properties held for resale -- Undeveloped oil and
gas properties held for resale represent leasehold interests in unproven oil and
gas properties which the Company expects to sell. Also included are leasehold
costs programmed for development under arrangements which will provide for
reimbursement of such costs to the Company. Such properties are carried at lower
of cost or net realizable value. The Company recognizes gains or losses upon
disposition or impairment of the properties. For the years ended December 31,
1993, 1994 and 1995, the Company recorded impairment of undeveloped properties
of approximately $287,000, $313,000 and $56,000, respectively.
F-9
<PAGE> 58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment -- (a) Property and equipment (other than oil and
gas) -- Depreciation of property and equipment (other than oil and gas
properties) is provided on the straight-line method over their estimated useful
lives as follows:
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Drilling rigs and equipment...................... 2-15
Automotive equipment............................. 2-7
Office furniture................................. 3-10
Buildings........................................ 5-20
Other............................................ 3-7
</TABLE>
(b) Oil and gas properties -- The Company follows the successful efforts
method of accounting, using the field as its accumulation center for capitalized
costs. Under the successful efforts method of accounting, costs which result
directly in the discovery of oil and gas reserves and all development costs are
capitalized. Exploration costs which do not result directly in discovering oil
and gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease and well equipment, lease acquisition costs and intangible
development costs are depreciated, depleted and amortized on the
unit-of-production method, based on petroleum engineer estimates of recoverable
proved developed oil and gas reserves of each respective field. In addition, net
capitalized costs are subject to a periodic ceiling limitation. Such costs are
limited to the undiscounted future net revenues from proved oil and gas
properties, using period end costs and prices, after considering potential
future income tax effects. There were no charges relating to ceiling limitations
during the years ended December 31, 1993, 1994 and 1995.
(c) Maintenance and repairs -- Maintenance and repairs are charged against
operations. Renewals and betterments which extend the life or improve existing
properties are capitalized.
(d) Retirements -- Upon disposition or retirement of property and equipment
(other than oil and gas properties), the cost and related accumulated
depreciation are removed from the accounts and the gain or loss thereon, if any,
is credited or charged to income.
The Company recognizes the gain or loss on the sale of either a part of a
proved oil and gas property or of an entire proved oil and gas property
constituting a part of a field upon the sale or other disposition of such. The
unamortized cost of the property or group of properties, a part of which was
sold or otherwise disposed of, is apportioned to the interest sold and the
interest retained on the basis of the fair value of those interests.
Income per common share -- Income per common share of stock is based on the
weighted average number of shares outstanding during the year. Common stock
equivalents are excluded for the years ended December 31, 1993 and 1994 because
their effect is antidilutive and are included for the year ended December 31,
1995. The average number of shares outstanding has been adjusted for all periods
to give effect to the number of shares outstanding as a result of the Tucker
merger discussed in Note 2.
In addition, the number of shares outstanding has also been adjusted for
the year ended December 31, 1993, to give effect to the issuance of treasury
stock to existing stockholders in 1993 (see Note 7). The dilutive effect of this
transaction was calculated using the treasury stock method.
Income taxes -- Income taxes are provided based on earnings reported for
financial statement purposes. The provision for income taxes differs from the
amounts currently payable because of temporary differences in the recognition of
certain income and expense items for financial reporting and tax reporting
purposes.
The Company and its subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") effective January
1, 1993, the beginning of its 1993 fiscal year, and did not retroactively apply
the provisions of SFAS 109 prior to that date. SFAS 109 requires the asset and
liability approach be used to account for income taxes. Under this method,
deferred tax liabilities
F-10
<PAGE> 59
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and assets are determined based on the temporary differences between financial
statement and tax basis of assets and liabilities using enacted rates in effect
for the year in which the differences are expected to reverse. Deferred tax
assets (net of a valuation allowance) primarily result from net operating loss
carryforwards, certain accrued but unpaid insurance losses, unpaid state income
taxes, alternative minimum tax credit carryforwards and investment tax credit
carryforwards.
The cumulative effect as of January 1, 1993, of adopting this new
accounting standard was not material to the financial position of the Company.
Also, there was no material impact on the consolidated statement of income for
the year ended December 31, 1993.
Investment tax credits are recorded under the flow through method as a
reduction of the provision for income taxes.
The Company files a consolidated Federal income tax return.
Statement of cash flows -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash on deposit and unrestricted
certificates of deposit with original maturities of less than 90 days.
Reclassifications -- Certain reclassifications have been made to the 1993
and 1994 consolidated financial statements in order for them to conform with the
1995 presentation. The reclassifications had no effect on net income or
stockholders' equity for those years.
2. MERGER AND ACQUISITIONS
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company and Tucker executed the Agreement and Plan of Merger among
Patterson Energy, Inc. ("Patterson"), Patterson Drilling Company ("Patterson
Drilling") and Tucker Drilling Company, Inc. ("Tucker") (the "Merger Agreement")
providing for the merger of Patterson Drilling with and into Tucker. The merger
was consummated on July 30, 1996 after a required approval of the stockholders
of both Patterson and Tucker, with Tucker as the surviving corporation, wholly
owned by Patterson and operating under the name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock upon the terms of the governing stock option
plans and as adjusted by the Exchange Ratio. A total of 1,577,514 shares of
Patterson common stock was issued pursuant to the merger and an additional
74,592 shares of Patterson common stock were reserved for issuance under the
outstanding Tucker stock options.
The merger was treated as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended and was accounted for as
a pooling of interests for accounting purposes.
The consolidated financial statements give retroactive effect to the merger
which encompasses, among other things, combining Patterson's previous historical
financial statements as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 with the previous historical
financial statements of Tucker as of March 31, 1995 and 1996 and for each of the
three years in the period ended March 31, 1996. Certain adjustments were made in
those years to conform the previous accounting policies of Tucker with those of
Patterson. As of January 1, 1996, the financial statements are presented using
the same fiscal periods. Consequently, the operations of Tucker for the three
months ended March 31, 1996 are reflected in the consolidated financial
statements of Patterson for the year ended December 31, 1995 and the nine months
ended September 30, 1996. A corresponding stockholders' equity adjustment has
been recorded as a result of including Tucker's operations for the three months
ended March 31, 1996 with Patterson's operations for the year ended December 31,
1995 and the nine months ended September 30, 1996. Selected
F-11
<PAGE> 60
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unaudited information related to the operations of Tucker for the three months
ended March 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
------
<S> <C>
Revenues............................................ $3,972
Operating loss...................................... (218)
Net income.......................................... 759
</TABLE>
Questor Drilling Corp. -- On July 15, 1994, Patterson acquired certain
assets of Questor Drilling Corp. ("Questor"), a Delaware corporation wholly
owned by Phibro Energy USA, Inc. ("Phibro"), pursuant to the terms of an Asset
Purchase Agreement between Patterson and Questor, dated July 8, 1994. The assets
acquired consisted of: (a) nine drilling rigs and related equipment, consisting
primarily of 16 rig hauling trucks, and (b) a yard facility consisting of
approximately 11 acres of real estate and improvements located thereon. The
purchase price for the assets consisted of a cash payment of $4,500,000 and
250,000 shares of Patterson's common stock. The total value of the transaction
was $6,375,000. The purchase price was determined through arm's-length
negotiation between Questor and Patterson. Neither Questor nor Phibro is an
affiliate of Patterson. The operating results have been included in the
consolidated operating results of Patterson since the date of acquisition.
3. CASH
Included in cash as of December 31, 1994 and 1995 was approximately
$967,000 and $1,687,000, respectively, of monthly oil and gas sales to be
distributed to revenue owners subsequent to year-end.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1994 and
1995:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Drilling rigs and equipment...................................... $ 43,746,485 $ 57,598,179
Producing oil and gas properties, successful efforts method of
accounting..................................................... 11,215,663 15,387,584
Undeveloped oil and gas properties, successful efforts method of
accounting..................................................... 338,032 251,500
Other equipment.................................................. 9,904,372 11,460,737
Buildings........................................................ 2,747,992 2,743,138
Land............................................................. 361,248 361,248
------------ ------------
68,313,792 87,802,386
Less accumulated depreciation, depletion and amortization........ (46,775,762) (53,417,041)
------------ ------------
$ 21,538,030 $ 34,385,345
=========== ===========
</TABLE>
F-12
<PAGE> 61
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Loan agreement with The CIT Group/Equipment Financing, Inc. entered
into March, 1995, with a revolving credit facility of $7,000,000;
monthly payments of interest only at the one month London Interbank
Offered Rate (5.72% at December 31, 1995) plus 3%; revolving credit
facility converts to 54 month term loan requiring principal and
interest in monthly installments commencing on October 14, 1996;
collateralized by 18 drilling rigs; matures March, 2001............. $ -- $ 7,000,000
Note payable entered into July, 1994 in the original amount of
$5,000,000 to U. S. Bancorp Leasing and Financial; 84 monthly
installments (currently $83,356) including interest at the one month
London Interbank Offered Rate (5.72% at December 31, 1995) plus
3.75%, payments subject to increase or decrease by the lender (as a
result of changes in interest rate); collateralized by nine drilling
rigs; matures July, 2001............................................ 4,776,544 4,207,704
Line of credit with Norwest Bank Texas, Wichita Falls, N.A.
(formerly Parker Square Bank, N.A.) entered into September, 1994,
with a facility of $1,000,000. The line of credit note was renewed
and increased to $2,385,833 in June, 1995. The line was amended and
restated and increased to $3,500,000 in December, 1995; monthly
payments of interest only at the Wall Street Journal prime rate
(8.5% at December 31, 1995) plus .25%; collateralized by certain of
the Company's oil and gas properties; matures December 1, 1997...... -- 1,999,403
Line of credit with Financial Services Partnership of Snyder Texas,
an entity affiliated with the Company's Chairman of the Board/Chief
Executive Officer and the Company's President/Chief Operating
Officer, with a facility of $710,000 originally due May, 1994. The
line of credit was renewed in December, 1993, bearing interest at
8%, payable monthly, and is collateralized by accounts receivable
and other intangibles. In December, 1994, the maturity date of the
line of credit was extended to December, 1996. In December, 1995,
the maturity date of the line of credit was extended to December,
1997................................................................ 709,000 609,000
Note payable entered into during December, 1993 in the original
amount of $1,750,000 to Snyder National Bank; monthly principal
payments of $29,167 plus interest at Chase Manhattan Bank's prime
rate (8.5% at December 31, 1994); collateralized by the Company's
drilling rigs and real estate; scheduled maturity December, 1998.
The note was paid prior to its maturity in 1995..................... 1,400,000 --
---------- ----------
6,885,544 13,816,107
Less current maturities............................................. (918,834) (909,634)
---------- ----------
$5,966,710 $12,906,473
========== ==========
</TABLE>
F-13
<PAGE> 62
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The CIT Group/Equipment Financing, Inc. ("CIT") Loan Agreement and the
Norwest Bank Texas, Wichita Falls, N.A. ("Norwest") line of credit contain a
number of representations, warranties and covenants, the breach of which, at the
election of CIT or Norwest, would accelerate the maturity date of the loans. The
covenants include:
- Maintenance on a quarterly basis of a consolidated cash flow coverage
ratio of at least 1.5:1 (sum of net income, plus depreciation, depletion
and amortization, less dividends paid and extraordinary items in the
prior four quarters; divided by the sum of the current portion of
long-term debt and capitalized lease obligations coming due in the
following four quarters).
- Maintenance on a consolidated basis of tangible net worth of at least
$12,000,000 (CIT) and $18,000,000 (Norwest).
- Maintenance on a consolidated basis of a ratio of total liabilities to
tangible net worth of not greater than 1.75:1.
- Without written consent of CIT and/or Norwest, the Company cannot conduct
any business not being conducted by the Company on March 14, 1995, nor
liquidate, dissolve or merge into any other entity.
- The Company shall not pay, or authorize the payment of, any dividends on
any stock, debenture or other security without the prior written consent
of Norwest.
The U.S. Bancorp Leasing and Financial note payable contains a provision
that the Company may prepay the note in whole, but not in part, by remitting to
the lender an amount equal to the principal balance at the time of such
prepayment and an administrative fee equal to a specified percentage of such
balance as follows:
<TABLE>
<CAPTION>
MONTH OF PREPAYMENT AMOUNT OF FEE
- ------------------- -------------
<S> <C> <C>
1-12........................................... 4%
13-24.......................................... 3%
25-36.......................................... 2%
37-48.......................................... 1%
</TABLE>
The Financial Services Partnership note payable contains a covenant that
requires the Company to maintain a minimum ratio of "accounts receivable trade"
to "loan balance outstanding" of 1.5:1.
Other restrictive covenants under the terms of all debt agreements require
that the underlying collateral not be subjected to impairment, sold, conveyed,
transferred, encumbered, mortgaged, pledged, assigned or hypothecated in any
manner without express written consent of the lenders.
At December 31, 1995, the Company was in compliance with all loan
covenants.
Unused credit available under revolving notes payable and line of credit
agreements totaled $1,600,000 at December 31, 1995. A commercial bank has issued
a letter of credit to the Company's workers' compensation insurance carrier on
behalf of the Company in the amount of $150,000. Additionally, the Company
maintains a letter of credit in the amount of $475,000 with a bank for the
benefit of an insurance company as collateral for retrospective premiums and
retained losses which could become payable under the terms of the Company's
insurance contract which existed prior to consummation of the merger with
Tucker. The Company pays a fee in the amount of one percent per annum on the
unused balance. The letter of credit expires on November 30, 1996 with provision
for an indefinite number of annual extensions of the expiration date. No amounts
have been drawn under the letter of credit.
The Company has pledged as collateral a U.S. Treasury bill, maturing on
November 14, 1996 with a book value of approximately $524,000 as of March 31,
1996, against the letter of credit.
F-14
<PAGE> 63
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Five year maturities of notes payable -- Scheduled maturities of notes
payable subsequent to December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996............................................ $ 909,634
1997............................................ 4,446,407
1998............................................ 1,895,985
1999............................................ 1,958,973
2000............................................ 2,027,402
Thereafter...................................... 2,577,706
-----------
Total................................. $13,816,107
===========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Commitments -- On July 15, 1994, the Company issued 250,000 shares of
common stock as part of the purchase price of certain assets. The terms of the
transaction included a registration rights agreement that, among other matters,
provided in the event the holder of the shares ("Holder") still held the shares
on April 1, 1996, but prior to April 1, 1997, at the request of the Holder,
during such period, the Company would use its best efforts to arrange for the
purchase of the shares at the best available price; provided, however, that if
the price were less than $7.50 per share (before deduction of any brokerage
commission), the Company would pay to the Holder the difference between $7.50
per share and the consideration received by the Holder (See Note 7).
During September 1995, the Holder sold the 250,000 shares to Metropolitan
Life Insurance Company Separate Account EN ("MetLife"). At the time of the sale
to MetLife, MetLife and the Company amended and restated the registration rights
agreement ("Amended and Restated Agreement") in its entirety. The Amended and
Restated Agreement provides that the Company, upon written notice from MetLife,
or any transferee of the 250,000 shares, on or after February 1, 1996, shall
file, at the Company's expense, a "shelf" registration statement with the
commission and keep the registration statement effective until the earlier to
occur of (i) such time as all of the registered shares have been sold, (ii) two
years from the effective date of the registration statement, or (iii) the date
on which such shares become available for resale under Rule 144(k) of the
Securities Act of 1933. The provision relating to the $7.50 price guarantee was
eliminated.
Supplemental executive retirement plan -- Effective April 1, 1991 the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan (the
"Plan") was established for certain officers and key employees. Pursuant to
agreements, as amended on April 22, 1996 and May 16, 1996 with related
participants of the Plan, the Company is obligated to pay each participant, or
the designated beneficiary, a lump sum at such participant's death, disability
or retirement. The amount to be paid to each participant is equal to the
participant's vested benefit at such date, limited however to related benefits
received from underlying insurance policies as described below. These
obligations are unsecured general liabilities of the Company. As of December 31,
1995 there were seven participants in the Plan and benefits accrue to the
participants in equal annual amounts over ten years of service beginning April
1, 1991. Fully vested benefits are in the aggregate approximately $1,498,000.
The estimated present value of the future benefit obligations as of April 1,
1991 will be accrued over the same ten year period as the benefits vest. As of
December 31, 1995 approximately $237,000 has been accrued as a liability and
approximately $44,000 has been expensed. As of December 31, 1994, approximately
$193,000 had been accrued and approximately $50,900 was expensed under the Plan.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants, and an annuity from which future
premiums on the life insurance policies will be paid. These assets are included
as other assets at a book value of approximately $568,000 and $528,000 at
December 31, 1994, respectively.
F-15
<PAGE> 64
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The insurance company which is the issuer of the life insurance and annuity
contracts owned by the Company is currently under the supervision of the
Michigan Commissioner of Insurance pursuant to an Order of Rehabilitation.
Although the insurance company has continued to pay death benefits and scheduled
annuity benefits, cash surrender values reflected above may be subject to change
and access to such cash surrender values may be limited pending the negotiation
of assumption reinsurance agreements.
Contingencies -- (a) The Company's drilling and oil and gas exploration and
production operations are subject to inherent risks, including blowouts,
cratering, fire and explosions which could result in personal injury or death,
suspended drilling operations, damage to or destruction of equipment, damage to
producing formations and pollution or other environmental hazards. As a
protection against these hazards, the Company maintains general liability
insurance coverage of $1,000,000 per occurrence with a $3,000,000 aggregate and
excess liability and umbrella coverages of up to $15,000,000 per occurrence with
a $15,000,000 aggregate. The Company believes it is adequately insured for
public liability and property damage to others with respect to its operations.
However, such insurance may not be sufficient to protect the Company against
liability for all consequences of well disasters, extensive fire damage or
damage to the environment. The Company also carries insurance to cover physical
damage to or loss of its rigs; however, it does not carry insurance against loss
of earnings resulting from such damage or loss.
The Company's lenders which have a security interest in the drilling rigs
are named as loss payees on the physical damage insurance on such rigs. The
Company has never been fined or incurred liability for pollution or other
environmental damage in connection with its operations.
(b) In April, 1993, a wrongful death and survivorship suit was filed
against the Company and the operator of a well in the 59th Judicial District
Court of Grayson County, Texas (Case No. 93-0721). The suit arose out of a
drilling rig accident in Gonzales County, Texas on February 7, 1993. An employee
of the Company died in the accident. The survivorship action was brought against
the operator by the decedent's estate, and the wrongful death action was brought
against the Company and the operator by family members. In addition, another
employee of the Company was injured in the accident and has joined the suit
against the operator as a plaintiff. The Company was engaged in drilling a
horizontal well under a contract with the operator of the well when the accident
occurred. The suit asserts, among other things, a claim for gross negligence
against the Company and a claim for negligence and gross negligence against the
operator. The Company's defense has been assumed by the insurance carrier under
the Company's workers' compensation policy.
The Company has been informed by the insurance carrier that the accident
constitutes a single occurrence under the policy, subject to a $100,000
deductible. The operator has made a claim against the Company under the
Company's drilling contract with the operator for indemnification. The claims
against the Company and the operator have been settled, but the terms of the
settlement must be approved by the Court. The settlement amounts are less than
the coverage available under the Company's workers' compensation policy and
general liability policy. The Company's general liability insurance carrier has
determined that the operator's claim for indemnification against the Company is
covered by the Company's general liability policy (subject to a $25,000
deductible), but is assessing whether the amount of the settlement agreed to by
the operator and the defense costs claimed by the operator are reasonable.
(c) In March, 1994, a suit was filed against the Company, Patterson
Petroleum, Inc., an employee of the Company and the operator of a well, in the
71st Judicial District Court of Harrison County, Texas (Case No. 94-0255). The
suit arose out of a drilling rig accident in Burleson County, Texas in January,
1994. An individual died in the accident. The action was brought on behalf of
the decedent's minor child. Another child intervened in the suit. The Company
was engaged in drilling a horizontal well under a contract with the operator of
the well when the accident occurred. The suit asserted a claim for negligence
against the company and the other defendants. The Company's and Patterson
Petroleum's defense was assumed by the insurance carrier under the Company's
general liability policy, which is subject to a $25,000 deductible. This case
has been settled within the limits of liability coverage.
F-16
<PAGE> 65
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) In addition, the Company is also involved in various routine litigation
incident to its business. In the Company's opinion, none of these proceedings
will have a material adverse effect on the Company.
7. STOCKHOLDERS' EQUITY
In January, 1993, the Company sold 97,554 shares of treasury stock to the
existing stockholders of the Company (including officers and directors) on a
proportionate share ownership basis. The shares were sold for $0.54 per share
and the proceeds were used to retire a note payable to SSI Oil & Gas, Inc., a
company then indirectly owned by the Chairman of the Board/Chief Executive
Officer, and currently owned 50% by an affiliate of the Company's Chairman of
the Board/Chief Executive Officer and 50% by the President/Chief Operating
Officer.
On October 19, 1993, the Company reincorporated in the State of Delaware in
a transaction pursuant to which the Company merged with and into a new Delaware
company that was formed as a wholly owned subsidiary of the Company. The new
Delaware company had the authority to issue 5,000,000 shares of common stock,
par value $0.01 per share, and 1,000,000 shares of Preferred Stock, par value
$0.01 per share. The Plan and Agreement of Merger provided for the exchange of 1
share of common stock of the new Delaware company for 1.51214 shares of common
stock of the Company. The new Delaware company is the surviving corporation, and
immediately after the merger had 1,803,604 shares of common stock issued and
1,550,000 outstanding and no shares of preferred stock issued or outstanding.
The merger has been retroactively applied to the share information presented in
the financial statements.
In November, 1993, the Company completed an initial public offering of
745,000 shares of common stock and 745,000 redeemable warrants at a price of
$6.75 per share of common stock and $0.25 per redeemable warrant. Also, on
December 21, 1993, the underwriters of the Company's public offering exercised a
portion of their overallotment option to purchase 90,000 additional shares of
common stock and 111,750 additional redeemable warrants. Net proceeds from the
offering totaled approximately $4,700,000.
In July, 1995, the Company elected to redeem all of its outstanding
redeemable warrants (856,750) at the redemption price of $0.05 per warrant. The
redemption date was September 11, 1995 (the "Redemption Date"). Any right to
exercise a redeemable warrant terminated on September 8, 1995, the business day
immediately preceding the Redemption Date. As of September 26, 1995, the Company
issued 426,874 shares of common stock upon the exercise of 853,748 redeemable
warrants at $7.50 per share. Of the remaining 3,002 redeemable warrants, 2,002
were redeemed and the remaining warrants expired. The Company received
approximately $2,995,000 from the exercise of the redeemable warrants. The funds
were included in the Company's working capital and have been used for general
corporate purposes.
In November, 1995, the Company issued a total of 35,577 shares of common
stock to the underwriters of the Company's initial public offering pursuant to
their exercise of 75,315 redeemable warrants. The redeemable warrants were
issued to the underwriters pursuant to the partial exercise of underwriter
warrants issued as partial compensation for their underwriting services in
connection with the initial public offering. Total proceeds received by the
Company for the exercise of the underwriters warrants and the redeemable
warrants was approximately $281,000.
In July, 1994, the Company acquired certain assets of Questor pursuant to
the terms of an Asset Purchase Agreement between the Company and Questor, dated
July 8, 1994. The purchase price for the assets consisted of a cash payment of
$4,500,000 and 250,000 shares of the Company's common stock, par value $0.01 per
share. The total value of the transaction was $6,375,000.
In September, 1994, the Board of Directors of the Company approved a
resolution that all shares of Common stock, par value $.01 per share, of the
Company then issued but not outstanding (the "Treasury Stock") be retired. The
Board of Directors further approved a resolution that the Treasury Stock resume
the status of authorized and unissued shares of common stock.
F-17
<PAGE> 66
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May, 1995, the Company acquired three drilling rigs and related
equipment from a non-affiliated person. The purchase price for the rigs
consisted of $367,500 cash, 97,500 shares of the Company's common stock and
warrants to purchase an additional 75,000 shares at an exercise price of $9.00
per share. The total value of the transaction was $1,089,750. The Company has
granted certain registration rights to the seller with respect to the 97,500
shares and the 75,000 shares purchasable upon exercise of the warrants
(collectively the "registrable securities") consisting of (a) a one-time right
after December 1, 1995, but prior to December 1, 1998, to cause the Company to
file, at the Company's expense, a registration statement with the Securities and
Exchange Commission (the "Commission" ) covering the registrable securities,
provided that the number of shares that may be sold in any given calendar month
in connection with such registration statement may not exceed the greater of (i)
37,500 shares or (ii) the greater of 0.196 times the average monthly trading
volume of the Company's common stock on the Nasdaq National Market over the
preceding 12 calendar months, and (b) the right to join the registrable
securities in any registration statements filed by the Company with the
Commission.
At December 31, 1995, the Company has 4,747,083 shares of common stock
issued and outstanding and no shares of preferred stock issued or outstanding.
8. STOCK OPTIONS AND WARRANTS
Employee Stock Incentive Plan -- In August, 1993, the Company adopted the
Patterson Energy, Inc. 1993 Stock Incentive Plan (the "Stock Incentive Plan").
The purpose of the Stock Incentive Plan is to provide continuing incentives to
the Company's key employees, which may include, but shall not necessarily be
limited to, members of the Board of Directors (excluding members of the
Compensation Committee) and officers of the Company. The Stock Incentive Plan
provides for an authorization of 175,000 shares of common stock for issuance
thereunder. Under the Stock Incentive Plan, the Company may grant to key
employees awards of stock options and restricted stock or any combination
thereof. The Company may grant both incentive stock options ("incentive stock
options") intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended, and options which are not qualified as incentive stock
options. The options become immediately exercisable in the event of a change in
control (as defined in the Stock Incentive Plan) of the Company. Under the Stock
Incentive Plan the exercise price of incentive stock options must be at least
equal to the fair market value of the stock on date of grant and the exercise
price of non-incentive stock options may not be less than 80% of the fair market
value on date of grant.
Stock options covering a total of 166,000 shares of common stock have been
granted to date under the Stock Incentive Plan to five executive officers and 15
other employees of the Company, including Mr. Patterson (options covering 70,000
shares or approximately 42% of the total options granted). The outstanding
options were variously granted on March 31 and October 27, 1995. Each of the
options has a 10-year term. The options granted on March 31, 1995 are
exercisable at a price of $7.25 per share; while the options granted on October
27, 1995 are exercisable at a per share price of $12.50. These exercise prices
were equal to the fair market value of the stock on the respective grant dates.
The options vest in equal annual increments of 20% beginning on the date of
grant and continuing on each succeeding anniversary date. No options have been
exercised at December 31, 1995.
In March, 1983, the Board of Directors of Tucker approved and implemented
an Incentive Stock Option Plan (including stock appreciation rights) which was
amended in 1988 to allow for granting of nonqualified stock options, and in 1991
was further amended to eliminate stock appreciation rights. The purpose of the
Plan was to attract and retain key employees and directors and to provide such
persons with a proprietary interest in Tucker through the granting and exercise
of stock options. The maximum number of shares of common stock available for
issuance under the plan was 126,910 shares. The proceeds from the sale of common
stock pursuant to the plan were to be added to the general funds of Tucker and
used for general corporate purposes.
F-18
<PAGE> 67
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June, 1994 the Board of Directors of Tucker adopted the Tucker Drilling
Company, Inc. 1994 Non Qualified Stock Option Plan. Officers and directors were
not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan was 20,720 shares.
Each of the plans provide that options may be granted to purchase shares at
prices not less than the fair market value at date of grant. The exercise period
is governed by option agreements, but in no event may the exercise period extend
beyond ten years from the date of grant. As discussed at Note 2, existing stock
options and other employee incentive plans of Tucker effectively became plans to
purchase or receive common stock of Patterson on consummation of the Merger.
Accordingly, stock rights inherent in such plans are affected by the Exchange
Ratio.
Non-Employee Directors' Stock Option Plan -- In June, 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan (the "Outside Directors'
Plan"). The purpose of the Outside Directors' Plan is to encourage and provide
incentive for high level performance by non-employee directors of the Company.
An aggregate of 30,000 shares of Common Stock are reserved for issuance
under the Outside Directors' Plan to directors who are not employees of the
Company. The exercise price of options will be the fair market value of stock on
the date of grant. Outside directors are automatically granted options to
purchase 5,000 shares initially and an additional 1,000 shares for each
subsequent year that they serve up to a maximum of 10,000 shares per director.
Each option is exercisable one year after the date of grant and expires five
years from the date of grant. The options become immediately exercisable in the
event of a change of control (as defined in the Outside Directors' Plan) of the
Company. On June 6, 1995, each of the outside directors of Patterson was
automatically granted an option covering 5,000 shares with an exercise price of
$9.00 per share. No other options have been granted to date under the Outside
Directors' Plan, and none have been exercised as of December 31, 1995.
Public relations services stock options -- During November, 1994, February,
1995, and July, 1995, the Company issued options covering a total of 125,000
shares of common stock to two consultants as partial compensation for public
relations services rendered to the Company. The respective options were fully
exercisable upon grant date. In November, 1994, 32,500 options were granted at
$7.50 per share and 12,500 options were granted at $8.50 per share. In February,
1995, 20,000 options were granted at $8.775 per share and in July, 1995, 60,000
options were granted at $9.625 per share. The options expire five years from
date of grant. No options have been exercised at December 31, 1995.
Underwriters' warrants -- In November, 1993, the underwriters of the
Company's initial public offering were issued warrants as partial consideration
for their underwriting services for the initial public offering. The warrants
give the underwriters the right to purchase 75,315 shares of the Company's
common stock at a price of $8.68 per share and 75,315 redeemable warrants at
$.375 per warrant. In November, 1995, 75,315 Redeemable Warrants were issued to
the underwriters due to a partial exercise of the warrants. These Redeemable
Warrants were immediately exercised by the underwriters at a price of $7.50 per
share resulting in the issuance of 35,577 shares of the Company's common stock.
The right to purchase 75,315 shares of the Company's common stock under the
underwriters' warrants will expire in November, 1998.
Stock purchase warrants -- In May, 1995, the Company issued 75,000 warrants
exercisable at $9.00 per share as partial consideration for the purchase of
three drilling rigs and related equipment (See Note 7). The warrants were
exercisable upon issuance and expire on December 31, 1997. No warrants have been
exercised at December 31, 1995.
F-19
<PAGE> 68
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table contains information concerning stock options and
warrants:
<TABLE>
<CAPTION>
SHARES AVERAGE EXERCISE PRICE
------- ----------------------
<S> <C> <C> <C>
<CAPTION>
GRANTED
- -----------------------
<S> <C> <C> <C>
1993................................................ 112,973 $ 8.29
1994................................................ 53,880 7.86
1995................................................ 331,000 9.67
<CAPTION>
EXERCISED
- -----------------------
<S> <C> <C> <C>
1993................................................ -- $ --
1994................................................ 5,476 7.93
1995................................................ 56,158 7.62
<CAPTION>
SURRENDERED
- -----------------------
<S> <C> <C> <C>
1993................................................ -- $ --
1994................................................ 444 8.28
1995................................................ 1,776 8.28
<CAPTION>
OUTSTANDING AT YEAR END
- -----------------------
<S> <C> <C> <C>
1993................................................ 230,263 $ 8.16
1994................................................ 278,223 8.10
1995................................................ 551,289 9.08
<CAPTION>
EXERCISABLE AT YEAR END
- -----------------------
<S> <C> <C> <C>
1993................................................ 208,951 $ 8.14
1994................................................ 259,131 8.09
1995................................................ 401,385 8.76
</TABLE>
9. LEASES
Rent expense for office space and certain tools and equipment under monthly
rental agreements and operation leases in 1993, 1994 and 1995 was $518,525,
$792,885, and $1,042,000, respectively.
For the years ended December 31, 1993 and 1994, the Company paid $13,800 in
lease payments for each year. During April, 1995, the Company acquired a 57.85%
undivided interest in each of two drilling rigs in which the Company owned the
remaining 42.15% interest. The interests were acquired from Navajo Rigs, Inc.
("Navajo"), an affiliated entity, for a purchase price of $433,875 in cash
pursuant to a merger of Navajo into Patterson. The acquired interests were
leased by the Company on a month-to-month basis prior to the acquisition.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
-------- --------- -----------
<S> <C> <C> <C>
Federal:
Current....................................... $ 41,213 $ 105,019 $ 138,825
Deferred income tax benefit................... -- (406,515) (1,000,324)
-------- --------- -----------
41,213 (301,496) (861,499)
State:
Current....................................... 82,096 108,330 74,735
-------- --------- -----------
Total income tax expense (benefit)............ $123,309 $(193,166) $ (786,764)
======== ========= ==========
</TABLE>
F-20
<PAGE> 69
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate.......................................... 34.0% 34.0% 34.0%
Net operating loss carryforward............................. (34.0) (34.0) (34.0)
Reduction of valuation allowance............................ -- (8.5) (41.4)
State franchise taxes....................................... 4.7 2.3 3.1
Alternative minimum taxes................................... 2.4 2.2 5.8
----- ----- -----
Effective tax rate.......................................... 7.1% (4.0)% (32.5)%
===== ===== =====
</TABLE>
There are $53,516 and $51,810 of accrued Federal income taxes in accrued
expenses at December 31, 1994 and 1995, respectively. There is $54,101 of
prepaid Federal income taxes in other current assets at December 31, 1995. There
are $139,835 and $135,642 of accrued state income taxes in accrued expenses at
December 31, 1994 and 1995, respectively.
As of January 1, 1993, the deferred tax asset valuation allowance of
approximately $6,405,000 was due primarily to net operating loss ("NOL")
carryforwards which were not expected to be utilized before their respective
expiration dates or which benefits the Company was unable to predict whether
they would more likely than not be realized. During 1994 and 1995, the Company
changed its estimate with respect to the future benefits of the NOL
carryforwards and, accordingly, reduced the related valuation allowance. To the
extent the valuation allowance was reduced, the related tax benefit was credited
to income.
The tax effect of significant temporary differences representing deferred
tax assets and changes therein were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, NET JANUARY 1, NET JANUARY 1, NET DECEMBER 31,
1993 CHANGE 1994 CHANGE 1995 CHANGE 1995
---------- ------ ---------- ------- ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards... $ 6,335 $(774) $ 5,561 $(2,001) $ 3,560 $(891) $ 2,669
Investment tax credit
carryforwards.................... 469 -- 469 -- 469 -- 469
AMT credit carryforwards............. 62 41 103 103 206 76 282
Depletion carryforwards.............. 492 64 556 (143) 413 199 612
Property and equipment............... -- 38 38 21 59 (59) --
Other................................ 157 (9) 148 137 285 (13) 272
------- ----- ------- ------- ------- ------ -------
7,515 (640) 6,875 (1,883) 4,992 (688) 4,304
Valuation allowance................ (6,405) 396 (6,009) 2,223 (3,786) 1,691 (2,095)
------- ----- ------- ------- ------- ------ -------
Deferred tax assets.............. 1,110 (244) 866 340 1,206 1,003 2,209
Deferred tax liabilities:
Property and equipment basis
difference....................... (1,110) 244 (866) 67 (799) (3) (802)
------- ----- ------- ------- ------- ------ -------
Net deferred tax asset........... $ -- $ -- $ -- $ 407 $ 407 $1,000 $ 1,407
======= ===== ======= ======= ======= ====== =======
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $7,990,000 and alternative minimum tax ("AMT") NOL carryforwards
of approximately $5,788,000 at December 31, 1995. In addition, the Company had
AMT credit carryforwards of $204,000 and statutory depletion carryforwards of
approximately $1,801,000 at December 31, 1995, which may be carried forward
indefinitely as a credit against the regular tax liability. If unused, the
aforementioned tax NOL carryforwards will expire in various amounts in years
1998 to 2008. During the years ended December 31, 1993, 1994 and 1995, the
Company utilized approximately $2,277,000, $5,891,000, and $2,481,000
respectively, of NOL carryforwards. The Company had investment tax credit
carryforwards of approximately $469,000 at December 31, 1995, which, if unused,
will expire at various dates through 2001.
F-21
<PAGE> 70
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company's NOL carryforwards became subject to an annual
limitation due to a change of over 50% in the stock ownership of the Company as
defined in Internal Revenue Service Code Section 382(g). Such limitations will
be imposed upon the net earnings of the Company excluding any contribution from
the operations acquired in the Merger ("Patterson Income") and separately
imposed upon the net earnings generated from the operations of the Tucker assets
acquired in the Merger ("Tucker Income"). The NOL carryforwards that can now be
utilized to offset Patterson income in any year will be equal to approximately
$1,808,000, which is determined by the value of Patterson's equity on August 2,
1995, the day prior to ownership change, times 5.88%, the federal long-term
exempt rate on that date as published by the U.S. Treasury Department.
Similarly, the NOL carryforwards that can now be utilized to offset Tucker
income will be limited to approximately $1,540,000 which is determined by the
value of Tucker's equity on July 29, 1996, the day prior to consummation of the
Merger, times 5.78%, the federal long-term exempt rate on that date.
11. EMPLOYEE BENEFITS
Profit Sharing Plan -- Effective January 1, 1992, the Company established a
401(k) profit sharing plan for all eligible employees. Company contributions are
discretionary. For the year ended December 31, 1993, no contributions were made
by the Company. In February, 1995, the Company made a contribution of
approximately $70,000, which was accrued in the year ended December 31, 1994. In
February, 1996, the Company approved a contribution of approximately $100,000,
which was accrued in the year ended December 31, 1995.
F-22
<PAGE> 71
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS SEGMENTS
The Company is engaged in contract drilling of oil and gas wells and oil
and gas exploration, development and production. Total revenues by business
segment include sales to affiliated customers. Information concerning the
Company's business segments for the years ended December 31, 1993, 1994 and 1995
is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Contract drilling......................... $37,746,477 $54,822,766 $57,599,180
Oil and gas............................... 5,146,301 4,706,782 6,844,769
----------- ----------- -----------
Total revenues.............................. $42,892,778 $59,529,548 $64,443,949
=========== =========== ===========
Income (loss) from operations:
Contract drilling......................... $ 2,625,008 $ 6,012,356 $ 3,675,782
Oil and gas............................... 45,294 (489,263) (50,554)
Other net................................. (126,205) (121,611) (126,542)
----------- ----------- -----------
2,544,097 5,401,482 3,498,686
----------- ----------- -----------
General corporate income (expense)(a)..... (536,088) (415,387) (165,635)
Interest income........................... 62,327 193,417 145,774
Interest expense.......................... (330,739) (366,152) (1,064,523)
----------- ----------- -----------
Income before income taxes................ $ 1,739,597 $ 4,813,360 $ 2,414,302
=========== =========== ===========
Identifiable assets:
Contract drilling......................... $22,418,335 $31,886,409 $43,286,628
Oil and gas............................... 7,852,384 10,163,670 10,348,443
Other..................................... 3,648,880 7,458,724 9,355,774
----------- ----------- -----------
Total assets................................ $33,919,599 $49,508,803 $62,990,845
=========== =========== ===========
Depreciation, depletion and amortization:
Contract drilling......................... $ 2,766,539 $ 3,524,635 $ 4,979,775
Oil and gas............................... 1,761,953 1,265,683 2,416,378
Other..................................... 126,205 121,611 126,542
----------- ----------- -----------
Total depreciation, depletion and
amortization.............................. $ 4,654,697 $ 4,911,929 $ 7,522,695
=========== =========== ===========
Capital expenditures:
Contract drilling......................... $ 3,354,629 $10,297,980 $15,634,539
Oil and gas............................... 1,883,727 2,968,625 5,106,895
Other..................................... 19,671 21,718 42,340
----------- ----------- -----------
Total expenditures.......................... $ 5,258,027 $13,288,323 $20,783,774
=========== =========== ===========
</TABLE>
- ---------------
(a) General corporate income (expense) consists primarily of interest income and
unallocated general and administrative expenses.
No customer accounted for more than 10% of the Company's consolidated
revenues for the years ended December 31, 1993, 1994 and 1995.
F-23
<PAGE> 72
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OIL AND GAS EXPENDITURES
Gross oil and gas expenditures by the Company in the United States for the
years ended December 31, 1993, 1994 and 1995 are summarized below:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Property acquisition costs........................ $ 188,107 $ 860,759 $1,186,859
Exploration costs................................. 1,462,648 2,332,926 3,736,937
Development costs................................. 737,939 967,933 1,385,130
---------- ---------- ----------
$2,388,694 $4,161,618 $6,308,926
========== ========== ==========
</TABLE>
The aggregate amount of capitalized costs of oil and gas properties as of
December 31, 1993, 1994 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Proved properties.............................. $11,595,196 $11,215,663 $15,387,584
Accumulated depreciation, depletion and
amortization................................. (8,589,933) (7,445,261) (9,009,244)
----------- ----------- -----------
Net proved properties................ $ 3,005,263 $ 3,770,402 $ 6,378,340
=========== =========== ===========
</TABLE>
14. SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION AND RELATED DATA
(UNAUDITED)
OIL AND GAS RESERVE QUANTITIES
The following table sets forth information with respect to quantities of
net proved developed oil and gas reserves, and changes in those reserves for the
years ended December 31, 1993, 1994 and 1995. The quantities were estimated by
an independent petroleum engineer for the years ended December 31, 1993, 1994
and 1995. The Company's proved developed oil and gas reserves are located
entirely within the United States.
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ----------
<S> <C> <C>
Estimated quantity, January 1, 1993.......................... 280,876 1,962,204
Revision in previous estimates............................... 34,657 161,732
Extensions, discoveries and other additions.................. 177,273 1,119,152
Sales of reserves-in-place................................... (459) (10,088)
Production................................................... (145,574) (710,386)
-------- ---------
Estimated quantity, January 1, 1994.......................... 346,773 2,522,614
Revision in previous estimates............................... 125,485 468,746
Extensions, discoveries and other additions.................. 299,623 1,872,512
Purchases.................................................... 27,400 181,495
Sales of reserves-in-place................................... (75,193) (416,328)
Production................................................... (124,019) (859,791)
-------- ---------
Estimated quantity, January 1, 1995.......................... 600,069 3,769,248
Revision in previous estimates............................... (59,429) 549,322
Extensions, discoveries and other additions.................. 405,364 2,272,738
Purchases.................................................... 2,280 40,386
Sales of reserves-in-place................................... -- --
Production................................................... (191,342) (1,361,770)
-------- ---------
Estimated quantity, January 1, 1996.......................... 756,942 5,269,924
======== =========
</TABLE>
F-24
<PAGE> 73
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Oil and gas revenues.............................. $3,913,746 $3,593,786 $5,399,536
Gain on sale of oil and gas properties............ -- 151,287 38,394
Gain on sale of undeveloped properties............ -- 48,506 66,755
---------- ---------- ----------
3,913,746 3,793,579 5,504,685
Costs and expenses (benefit):
Production costs................................ 1,207,003 1,150,590 1,715,155
Exploration expenses............................ 363,943... 1,493,676 1,137,557
Depreciation, depletion and amortization........ 2,086,258 1,192,328 2,289,070
Write-down due to impairment of long-lived
assets....................................... -- -- 159,403
Income tax (benefit)............................ 140,123 (20,745) 69,190
---------- ---------- ----------
3,797,327 3,815,849 5,370,375
---------- ---------- ----------
Results of operations for oil and gas
producing activities......................... $ 116,419 $ (22,270) $ 134,310
========== ========== ==========
</TABLE>
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND GAS
RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Future gross revenues................................. $ 9,236 $15,336 $22,436
Future development and production costs............... 3,508 6,772 8,623
Future income tax expense(a).......................... 566 1,055 2,158
------- ------- -------
Future net cash flows................................. 5,162 7,509 11,655
Discount at 10% per annum............................. (1,153) (1,943) (2,987)
------- ------- -------
Standardized measure of discounted future net cash
flows............................................... $ 4,009 $ 5,566 $ 8,668
======= ======= =======
</TABLE>
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net
operating loss attributable to oil and gas operations and investment tax
credit carryforwards as of year-end; statutory depletion and tax credits
applicable to future oil and gas-producing activities are also considered
in the income tax computation.
F-25
<PAGE> 74
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT 10% PER ANNUM
The principal changes in the aggregate standardized measure of discounted
future net cash flows attributable to the Company's proved developed oil and gas
reserves are shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure at beginning of year............. $ 3,539 $ 4,009 $ 5,566
Sales and transfers of oil and gas produced, net of
production costs.................................... (2,707) (2,337) (3,891)
Net changes in sales price and future production and
development costs................................... (390) (1,516) 807
Extensions, discoveries and improved recovery, less
related costs....................................... 2,771 4,070 6,278
Sales of minerals-in-place............................ -- (727) --
Revision of previous quantity estimates............... 863 2,226 667
Accretion of discount................................. 354 401 574
Changes in production rates and other................. (154) (71) (230)
Net change in income taxes............................ (267) (489) (1,103)
------- ------- -------
Standardized measure at end of year................... $ 4,009 $ 5,566 $ 8,668
======= ======= =======
</TABLE>
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of demand deposits, temporary
cash investments and trade receivables.
The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
1994 and 1995, the Company's demand deposits and temporary cash investments
consisted of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under
$100,000 and cash on hand............................... $ 571,446 $ 563,743
Deposit in FDIC and SIPC-insured institutions over
$100,000 and cash on hand............................... 4,258,509 4,984,675
Investment in U.S. Treasury securities.................... 985,875 --
Mutual fund collateralized by U.S. Treasury obligations
and repurchase agreements which are collateralized by
U.S. Treasury securities................................ 2,336,268 6,664,034
----------- -----------
8,152,098 12,212,452
Less outstanding checks and other reconciling items....... (1,307,039) (2,867,958)
----------- -----------
Cash and cash equivalents................................. 6,845,059 9,344,494
Investment in U.S. Treasury securities (at cost as of
March 31)............................................... 2,570,459 524,323
----------- -----------
$ 9,415,518 $ 9,868,817
========== ==========
</TABLE>
Concentrations of credit risk with respect to trade receivables are
primarily focused on contract drilling receivables. The concentration is
mitigated by the diversification of customers for which the Company provides
drilling services. No significant losses from individual contracts were
experienced during the years
F-26
<PAGE> 75
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1994 and 1995. Included in general and administrative expense
for the period ended December 31, 1993, is a provision for 100% of a doubtful
receivable in the approximate amount of $355,500. Included in general and
administrative expense for the periods ended December 31, 1994 and 1995 are
provisions for doubtful receivables of $107,757 and $137,757, respectively.
The carrying values of cash and cash equivalents, marketable securities and
trade receivables approximate fair value due to the short-term maturity of these
assets.
16. RELATED PARTY TRANSACTIONS
Use of assets -- The Company leases a 1981 Beech King-Air 90 airplane owned
by an affiliate of the Company's Chairman of the Board/Chief Executive Officer.
Under the terms of the lease, the Company pays a monthly rental of $9,200 and
the costs of fuel, insurance, taxes and maintenance of the aircraft. From July,
1992, until January, 1995, the Company and another affiliate of the Chairman of
the Board/Chief Executive Officer were co-lessees of the aircraft. Under the
agreement the Company paid a monthly rental of $4,500 plus the Company's
proportionate share of fuel and shares the insurance, taxes and maintenance
equally with co-lessee. The Company paid approximately $105,461, $126,497, and
$174,455 for the lease of the airplane during 1993, 1994 and 1995, respectively.
Purchase of oilfield equipment and related parts -- In October, 1994, the
Company purchased oilfield equipment and parts from an entity currently owned
50% by an affiliate of the Company's Chairman of the Board/Chief Executive
Officer and 50% by the President/Chief Operating Officer. The amount of the
purchase was $150,000 and the Company had a related accounts payable of $125,000
to this entity at December 31, 1994.
Contract drilling services -- A company owned in part by a relative of the
Chairman of the Board/Chief Executive Officer, contracted drilling services from
the Company during 1993, 1994 and 1995. Revenues for 1993, 1994 and 1995 include
approximately $960,000, $338,000, and $597,700, respectively, for these
services.
Sales of oil -- A company owned in part by a relative of the Chairman of
the Board/Chief Executive Officer, acted as the first purchaser of oil produced
from leases operated by the Company during 1995. Sales of oil to that entity,
both royalty and working interest (including the Company) were approximately
$5,870,000.
Joint operation of oil and gas properties -- The Company operates certain
oil and gas properties in which the Chairman of the Board/Chief Executive
Officer, the President/Chief Operating Officer and other persons or entities
related to the Company purchased a joint interest ownership with the Company and
other industry partners. The Company made oil and gas production payments (net
of royalty) of $3,802,766, $2,765,303, and $3,907,116 from these properties in
1993, 1994 and 1995, respectively, to the aforementioned persons or entities.
These persons or entities reimbursed the Company for joint operating costs of
$3,605,569, $2,347,547, and $5,174,970 in 1993, 1994 and 1995, respectively.
Common ownership in Navajo Rigs -- Certain officers, directors and
stockholders of the Company were also shareholders in Navajo Rigs (See Note 7).
Note payable to related parties -- Note payable to related parties is
listed in Note 5.
Sale of treasury stock to existing stockholders -- In January, 1993, the
Company sold 97,554 shares of treasury stock to the existing stockholders of the
Company (including officers and directors) on a proportionate share ownership
basis. The shares were sold for $0.54 per share and the proceeds were used to
retire a note payable to an affiliate of the Company's Chairman of the
Board/Chief Executive Officer (See Note 7).
F-27
<PAGE> 76
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED)
Effective March 31, 1996, the Company revised its estimates relative to the
realization of the future benefits of its net operating loss carryforwards and,
accordingly, fully reduced the related valuation allowance recognizing a net
deferred income tax benefit of $1,610,000. The Company continues to maintain a
valuation allowance of approximately $470,000 as it does not appear likely that
the Company will realize the benefit of certain other deferred tax assets prior
to their respective expirations.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" during the fiscal quarter ended March 31, 1996. The Statement
established accounting standards for determining the impairment of the Company's
long-lived assets. Implementation of the Statement did not result in any
adjustments to the carrying values of such assets.
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" during the fiscal quarter ended March
31, 1996. The Statement defines a fair value based method of accounting (i.e.,
using an option pricing model such as Black-Scholes) for employee stock options
or similar equity instrument plans, but also allows an entity to measure
compensation costs for those plans using the intrinsic value (the amount by
which the market price of the underlying stock exceeds the underlying price of
the option) based method of accounting as prescribed by Accounting Principles
Board Opinion No. 25. The Company has elected to continue using the intrinsic
value based method as allowed by the Statement.
On June 6, 1996, pursuant to the terms of the Company's Non-Employee
Directors' Stock Option Plan, options to purchase a total of 2,000 shares were
granted. The Company did not incur any compensation related expenses as a result
of this transaction. For the nine months ended September 30, 1996, stock options
to purchase 180,000 shares of Patterson's common stock were granted in which no
compensation expense was incurred. Furthermore, significant compensation expense
would not have been incurred had a fair value based method of accounting (i.e.,
Black-Scholes) been applied to the above described activity.
On July 12, 1996, pursuant to the terms of the Underwriter's Warrant
Agreement dated November 2, 1993, as amended on November 15, 1994 and June 18,
1996, the Company authorized the issuance of 38,224 shares of Patterson's common
stock upon exercise of the 75,316 warrants. In lieu of a cash payment to
Patterson, the warrant holders chose to forfeit 37,092 shares of common stock
back to Patterson, in order to receive 38,224 shares of Patterson's common
stock. The number of shares forfeited and received by the respective warrant
holders was determined using the stated exercise price of the warrants ($8.68),
the fair market value of Patterson's common stock on the date of the exercise
($17.625) and the difference between the stated exercise price and the fair
market value on the date of exercise ($8.95). The difference of $8.95 was
multiplied by the total number of outstanding warrants (75,316) and then divided
by the fair market value ($17.625) to determine the number of shares to be
received.
On July 30, 1996, prior to consummation of the merger on that date, the
stockholders of Patterson at a special meeting thereof, approved an amendment to
Patterson's Certificate of Incorporation providing for an increase in the number
of authorized shares of Patterson's common stock from 5,000,000 shares to
9,000,000 shares and the issuance of 1,577,514 shares of Patterson's common
stock in connection with the merger.
On September 27, 1996, Patterson Drilling entered into a loan agreement
(the "Loan Agreement") with The CIT Group/Equipment Financing, Inc. ("CIT")
providing for a credit facility (the "Loan") of the lesser of 68% of the
collateral value or $22,000,000. The Loan is recourse and collateralized by the
40 drilling rigs, currently owned by Patterson Drilling, related drilling
equipment and any drilling rigs and/or drilling equipment acquired with the
proceeds.
F-28
<PAGE> 77
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Loan is a short-term loan until August 31, 1997 (the "Short-Term Loan
Period"), at which time (the "Long-Term Loan Conversion Date") the Loan will be
converted into a 60-month term loan. No advances under the Loan may be made
after the Long-Term Loan Conversion Date. During the Short-Term Loan Period,
Patterson Drilling must repay all amounts under the Loan Agreement in monthly
installments of $50,000 plus accrued interest through January 31, 1997, and
monthly installments of $100,000 plus accrued interest thereafter until the
Long-Term Loan Conversion Date; and then, commencing on that date, Patterson
Drilling must pay principal and interest in monthly installments in the amount
necessary to amortize 75% of the balance of the Loan outstanding on the
Long-Term Conversion Date, with the final installment payable on August 31, 2002
(the "Maturity Date"), to include a balloon amount sufficient to discharge all
accrued and unpaid interest, unpaid principal and unpaid premiums, outstanding
under the Loan Agreement and related secured promissory note (the "Note").
Interest on the outstanding principal balance of the Note is payable monthly in
arrears at a rate of interest, computed on the basis of a 365-day year and
actual days elapsed, equal to the LIBOR Rate plus 2.75% or, if the LIBOR Rate
becomes impracticable, the interest rate will be the prime rate, from time to
time, of The Chase Manhattan Bank, New York, New York, plus 1%.
The Loan Agreement required the payment of a $20,000 commitment fee and
requires payment of a revolving loan fee of 0.25% per year on the unused portion
of the Loan during the Short-Term Loan Period. The Loan Agreement contains a
number of representations, warranties and covenants of Patterson Drilling and
Patterson, the breach of which, at the election of CIT would accelerate the
Maturity Date of the Loan. The covenants of Patterson include (i) maintenance on
a quarterly basis of a consolidated cash flow coverage ratio of at least 2:1.0
(sum of Patterson's net income on a consolidated basis, plus depreciation,
depletion and amortization, less dividends paid and extraordinary items of
income in the prior four quarters, divided by the sum of the current portion of
long-term debt and capitalized lease obligations coming due in the following
four quarters); (ii) maintenance on a consolidated basis of tangible net worth
of at least $36,000,000; and (iii) maintenance on a consolidated basis of a
ratio of total liabilities to tangible net worth of not greater than 1.25:1.0.
In addition, without the prior written consent of CIT, Patterson cannot, among
other things, conduct any business not being conducted by it on September 27,
1996, or liquidate, dissolve or merge into any other entity or materially change
its management.
On October 24, 1996, Patterson acquired 100% of the stock of a
privately-owned, non-affiliated contract drilling company for a purchase price
of $13 million. The acquisition included, among other things, six oil and gas
contract drilling rigs, related drilling equipment, three trucks, one yard and
shop facility and net working capital of $4.3 million. The acquisition was
funded with the remaining credit facility provided by the CIT Loan discussed in
Note 7 above and existing cash of the Company.
During November and December, 1996, in two separate transactions, the
Company acquired 15 drilling rigs and other assets. The total consideration paid
for these assets was approximately $4.2 million consisting of $2.4 million cash,
a $400,000 promissory note payable and 52,000 shares of the Company's common
stock, valued, for purposes of this transaction at approximately $1.4 million.
In December, 1996, the Company repaid amounts then outstanding under a line
of credit note payable in the amount of $609,000 with Financial Services
Partnership of Snyder, an entity related to the Company's Chairman of the
Board/Chief Executive Officer and the Company's President/Chief Operating
Officer. The line of credit was paid prior to its maturity which was December,
1997.
F-29
<PAGE> 78
GLOSSARY OF INDUSTRY TERMS
The following are definitions of certain industry terms used in this Prospectus:
Bbls....................... Refers to barrels of 42 U.S. gallons and represents
the basic unit for measuring the production of
crude oil and condensate.
BOE........................ Refers to barrels of oil equivalent. In reference
to natural gas, natural gas equivalents are
determined using the rate of six Mcf of natural gas
(including natural gas liquids) to one Bbl of crude
oil or condensate.
Daywork Contracts.......... Drilling contracts pursuant to which the contractor
is compensated based on a negotiated rate per day
that the drilling rig is utilized.
Completion................. Those processes necessary before production occurs
from a well and after the drillers have reached the
producing formation.
Developed Acreage.......... Lease acres spaced or assigned to productive wells.
Development Well........... A well drilled within the proved area of an oil or
gas reservoir to a depth known to be productive.
Dry Hole................... An exploratory or development well found to be
incapable of producing either oil or gas in paying
quantities (i.e., proceeds of production exceed
operating expenses).
Exploratory Well........... A well drilled to find and produce oil and gas in
an unproved area, to find a new reservoir in a
field previously found to be productive of oil or
gas in another reservoir, or to extend a known
reservoir.
Footage Contracts.......... Drilling contracts pursuant to which the contractor
is compensated based on a rate-per-foot-drilled
basis at completion of the well.
Formation.................. A succession of sedimentary beds that were
deposited continuously and under the same general
condition. Formations are usually named for the
town or area in which they were first recognized,
often at the place where the formation outcrops.
For example, the Austin Chalk formation outcrops at
Austin, Texas.
Gross Acre................. An acre in which a working interest is owned. The
number of gross acres is the total number of acres
in which a working interest is owned.
Gross Well................. A well in which a working interest is owned. The
number of gross wells is the total number of wells
in which a working interest is owned.
Horizontal Drilling........ High angle directional drilling with lateral
penetration of one or more productive reservoirs.
Leasehold Interest......... Full or partial interest in oil and gas mineral
rights, fee rights, or other rights authorizing the
owner of such interest to drill for, produce, and
sell oil and gas upon payment of delay rentals,
bonuses, and/or royalties. Leases are generally
acquired from federal and state governments and
private landowners.
MBOE....................... Refers to 1,000 BOE.
MMcf....................... Refers to a volume of 1,000,000 cubic feet under
prescribed conditions of pressure and temperature.
Mcf........................ Refers to a volume of 1,000 cubic feet under
prescribed conditions of pressure and temperature
and represents the basic unit for measuring volumes
of produced gas.
Net Acre................... Deemed to exist when the sum of the fractional
ownership working interests in gross acres equals
one. The number of net acres is the sum of
G-1
<PAGE> 79
the fractional ownership working interests owned in
gross acres expressed as whole numbers and
fractions thereof.
Net Well................... Deemed to exist when the sum of fractional
ownership working interests in gross wells equals
one. The number of net wells is the sum of the
fractional ownership working interests owned in
gross wells expressed as whole numbers and
fractions thereof.
Operator................... Any person, partnership, corporation, or other
entity engaged in the business of exercising direct
supervision over the drilling or production from an
oil and/or gas well, usually pursuant to the terms
of an operating agreement with the working interest
owners in the well.
Producing Properties....... Properties that contain one or more wells that
produce oil and/or gas in paying quantities.
Productive Well............ A well that is found capable of producing oil
and/or gas in paying quantities.
Proved Reserves............ Estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and
engineering data demonstrate with reasonable
certainty to be recoverable in future years from
known reservoirs under existing economic
conditions; i.e., prices and costs as of the date
the estimate is made.
Proved Developed
Reserves................... Proved oil and gas reserves which can be expected
to be recovered through existing wells with
existing equipment and operating methods.
Rig Utilization Rate or
Utilization Rate......... Rig utilization is based on a 365-day year for rigs
available for service during the periods indicated.
A rig is utilized when it is operating or being
moved, assembled or dismantled under contract.
SEC PV-10 Value............ The present value of estimated future revenues to
be generated from the production of proved reserves
calculated in accordance with Securities and
Exchange Commission guidelines, net of estimated
production and future development costs, using
prices and costs as of the date of estimation
without future escalation, without giving effect to
non-property related expenses such as general and
administrative expenses, debt service, future
income tax expense and depreciation, depletion and
amortization, and discounted using an annual
discount rate of 10%.
Turnkey Contracts.......... Drilling contracts pursuant to which the contractor
receives a pre-determined fixed payment in
consideration for, and only upon completion of,
drilling to a specified depth and performing
certain other negotiated services.
Undeveloped Acreage........ Leased acres on which wells have not been drilled
or completed to a point that would permit the
production of commercial quantities of oil and gas,
regardless of whether such acreage contains proved
reserves.
Working Interest........... The operating interest under a lease, the owner of
which has the right to explore for and produce oil
and gas covered by the lease. The full working
interest bears 100% of the costs of exploration,
development, production and operation, and is
entitled to the portion of the gross proceeds of
production which remains after proceeds allocable
to royalty and overriding royalty interests or
other lease burdens have been deducted.
3-D Seismic................ Seismic data that yields a three-dimensional
picture of the subsurface.
G-2
<PAGE> 80
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Disclosure Regarding Forward-Looking
Statements.......................... 11
The Company........................... 12
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business and Properties............... 23
Management............................ 34
Principal and Selling Stockholders.... 37
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 43
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Independent Accountants............... 46
Available Information................. 46
Incorporation of Certain Documents by
Reference........................... 47
Index to Consolidated Financial
Statements.......................... F-1
Glossary of Industry Terms............ G-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,727,000 Shares
LOGO
PATTERSON ENERGY, INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 16. EXHIBITS.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT ITEM 601 CROSS
NUMBER REFERENCE DOCUMENT AS FORM S-3 EXHIBIT
------ -------------- ------------------------------------------------------------
<C> <C> <S>
1.1 1 Form of Underwriting Agreement
2.1 2 Agreement and Plan of Merger, dated as of April 22, 1996,
among Patterson Drilling Company and Tucker Drilling
Company, Inc. and amendment thereto, dated May 16, 1996(1)
2.2 2 Stock Purchase Agreement, dated as of October 23, 1996, by
and among Patterson Drilling Company and H. Gene Sledge,
Joyce A. Sledge, David W. Sledge and Michael G. Sledge(2)
4.1 4 Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock and
Preferred Stock(3)
4.2 4 Rights Agreement, dated as of January 2, 1997, between
Patterson Energy, Inc. and Continental Stock Transfer &
Trust Company, as Rights Agent(4)
4.3 4 Form of Certificate of Designation of Series A Participating
Preferred Stock(4)
5.1 5 Opinion of Baker & Hostetler LLP re: legality of the shares
to be offered
15.1 15 Letter of Coopers & Lybrand L.L.P. re: unaudited interim
financial information
23.1.1 23 Consent of Coopers & Lybrand L.L.P.
23.2.1 23 Consent of Arthur Andersen LLP
23.3 23 Consent of M. Brian Wallace, independent petroleum
engineer(3)
23.4 23 Consent of Baker & Hostetler LLP (included in Exhibit 5.1)
24.1 24 Powers of Attorney (included on signature page of initial
Form S-3 filed with the Commission on December 18, 1996)
</TABLE>
- ---------------
(1) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996.
(3) Filed as an Exhibit to Form S-3 (Registration No. 333-18123) filed with the
Commission on December 18, 1996.
(4) Incorporated by reference to Item 2, "Exhibits" to Form 8-A dated January
10, 1997.
II-1
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused Amendment No. 2 to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Snyder, State of Texas on the 27th day of
January, 1997.
PATTERSON ENERGY, INC.
By: /s/ CLOYCE A. TALBOTT
--------------------------------
Cloyce A. Talbott
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of January 27, 1997, by the following
persons in the capacities indicated:
<TABLE>
<S> <C>
/s/ CLOYCE A. TALBOTT Chairman of the Board, Director and Chief
- ----------------------------------------------------- Executive Officer
Cloyce A. Talbott
Principal Executive Officer
* President, Chief Operating Officer and
- ----------------------------------------------------- Director
A. Glenn Patterson
* Director
- -----------------------------------------------------
Robert C. Gist
* Director
- -----------------------------------------------------
Kenneth E. Davis
* Director
- -----------------------------------------------------
Vincent A. Rossi, Jr.
/s/ JAMES C. BROWN Vice President -- Finance, Secretary,
- ----------------------------------------------------- Treasurer and Chief Financial Officer
James C. Brown
Principal Accounting Officer
*By: /s/ CLOYCE A. TALBOTT
-------------------------------------------------
Cloyce A. Talbott
Attorney-in-Fact
</TABLE>
II-2
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT ITEM 601 CROSS
NUMBER REFERENCE DOCUMENT AS FORM S-3 EXHIBIT
- ------ -------------- --------------------------------------------------------------------
<C> <C> <S>
1.1 1 Form of Underwriting Agreement
2.1 2 Agreement and Plan of Merger, dated as of April 22, 1996, among
Patterson Drilling Company and Tucker Drilling Company, Inc. and
amendment thereto, dated May 16, 1996(1)
2.2 2 Stock Purchase Agreement, dated as of October 23, 1996, by and among
Patterson Drilling Company and H. Gene Sledge, Joyce A. Sledge,
David W. Sledge and Michael G. Sledge(2)
4.1 4 Excerpt from Restated Certificate of Incorporation of Patterson
Energy, Inc. regarding authorized Common Stock and Preferred
Stock(3)
4.2 4 Rights Agreement, dated as of January 2, 1997, between Patterson
Energy, Inc. and Continental Stock Transfer & Trust Company, as
Rights Agent(4)
4.3 4 Form of Certificate of Designation of Series A Participating
Preferred Stock(4)
5.1 5 Opinion of Baker & Hostetler LLP re: legality of the shares to be
offered
15.1 15 Letter of Coopers & Lybrand L.L.P. re: unaudited interim financial
information
23.1.1 23 Consent of Coopers & Lybrand L.L.P.
23.2.1 23 Consent of Arthur Andersen LLP
23.3 23 Consent of M. Brian Wallace, independent petroleum engineer(3)
23.4 23 Consent of Baker & Hostetler LLP (included in Exhibit 5.1)
24.1 24 Powers of Attorney (included on signature page of initial Form S-3
filed with the Commission on December 18, 1996)
</TABLE>
- ---------------
(1) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated October 23, 1996.
(3) Filed as an Exhibit to Form S-3 (Registration No. 333-18123) filed with the
Commission on December 18, 1996.
(4) Incorporated by reference to Item 2, "Exhibits" to Form 8-A dated January
10, 1997.
<PAGE> 1
DRAFT 1/8/97
PATTERSON ENERGY, INC.
1,727,000 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
January ___, 1997
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Each of Patterson Energy, Inc., a Delaware corporation (the
"Company"), and the selling securityholders set forth on Schedule 2 attached
hereto (the "Selling Securityholders") hereby confirms its agreement with the
several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom
you have been duly authorized to act as representatives (in such capacities,
the "Representatives"), as set forth below. If you are the only Underwriters,
all references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell, and each of the Selling
Securityholders proposes to sell, to the several Underwriters an aggregate of
1,500,000 shares and 227,000 shares, respectively (the "Firm Securities"), of
the Company's Common Stock, par value $.01 per share ("Common Stock"). The
Company also proposes to issue and sell to the several Underwriters not more
than 259,050 additional shares of Common Stock if requested by the
Representatives as provided in Section 4 of this Agreement. Any and all shares
of Common Stock to be purchased by the Underwriters pursuant to such option are
referred to herein as the "Option Securities," and the Firm Securities and any
Option Securities are collectively referred to herein as the "Securities."
- --------------------
(1) Plus an option to purchase up to 259,050 additional shares to cover over-
allotments.
<PAGE> 2
2. Representations and Warranties of the Company, Talbott and
Patterson. The Company, Cloyce A. Talbott ("Talbott") and A. Glenn Patterson
("Patterson") jointly and severally represent and warrant to, and agree with,
each of the several Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-18123) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed.
After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall identify the
Preliminary Prospectus (as hereinafter defined) that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b)
under the Act or (B) if the Company does not rely on Rule 434 under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been filed, in such
registration statement), with such changes or insertions as are required by
Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the
case of either clause (i)(A) or (i)(B) of this sentence as have been provided
to and approved by the Representatives prior to the execution of this
Agreement, or (ii) if such registration statement, as it may have been amended,
has not been declared by the Commission to be effective under the Act, an
amendment to such registration statement, including a form of prospectus, a
copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The Company may also
file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for the purpose of registering certain additional
Securities, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each
prospectus subject to completion filed with such registration statement or any
amendment thereto (including the prospectus subject to completion, if any,
included in the Registration Statement or any amendment thereto at the time it
was or is declared effective); the term "Prospectus" means:
-2-
<PAGE> 3
(A) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed pursuant to
Rule 424(b)(7) under the Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the
Act and if no prospectus is required to be filed pursuant to Rule
424(b) under the Act, the prospectus included in the Registration
Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or
suspending use of any Preliminary Prospectus. When any Preliminary Prospectus
was filed with the Commission, it (i) contained all statements required to be
stated therein in accordance with, and complied in all material respects with
the requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (i) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus
or any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to
be so filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or is declared
effective) and on the Firm Closing Date and any Option Closing Date (both as
hereinafter defined), the Prospectus, as amended or supplemented at any such
time, (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (b) do
not apply to statements or omissions made in any Preliminary
-3-
<PAGE> 4
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective, (i) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (ii) either the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act, or the Commission has received payment of such filing fee.
(d) The Company and each of its subsidiaries have been duly
organized and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation and are duly qualified
to transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not amount
to a material liability or disability to the Company and its subsidiaries,
taken as a whole.
(e) The Company and each of its subsidiaries have full power
(corporate and other) to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(f) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except for directors' qualifying shares and as otherwise set
forth in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus, are owned beneficially by the Company free and
clear of any security interests, liens, encumbrances, equities or claims.
(g) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date or the
related Option Closing Date (as the case may be), after payment therefor in
-4-
<PAGE> 5
accordance herewith, will be validly issued, fully paid and nonassessable. No
holders of outstanding shares of capital stock of the Company are entitled as
such to any preemptive or other rights to subscribe for any of the Securities,
and no holder of securities of the Company has any right which has not been
fully exercised or waived to require the Company to register the offer or sale
of any securities owned by such holder under the Act in the public offering
contemplated by this agreement.
(h) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe
for or purchase from the Company or any such subsidiary any such capital stock
or any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities or obligations,
or any such warrants, rights or options.
(j) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) fairly present the financial position of
the Company and its consolidated subsidiaries and the results of operations and
changes in financial condition as of the dates and periods therein specified.
Such financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Summary Selected Financial Data" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included therein.
(k) Coopers & Lybrand L.L.P., who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), are
independent public accountants as required by the Act and the applicable rules
and regulations thereunder.
(l) Arthur Andersen LLP, who have certified certain financial
statements relating to Tucker Drilling Company, Inc., which the Company
acquired in July 1996, and delivered their report with respect to the audited
consolidated financial statements and schedules
-5-
<PAGE> 6
included in the Registration Statement and the Prospectus with respect thereto
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by the Act and the
applicable rules and regulations thereunder.
(m) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms.
(n) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and no such proceedings have been threatened against the Company
or any of its subsidiaries or with respect to any of their respective
properties; and no contract or other document is required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement that is not described therein (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) or filed as
required.
(o) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (ii)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties are bound, or the charter documents or
by-laws of the Company or any of its subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of its
subsidiaries.
(p) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from any
labor dispute or any legal or governmental proceeding and there has not been
any material
-6-
<PAGE> 7
adverse change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(q) The Company has not, directly or indirectly, (i) taken any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) since the filing of the Registration Statement (A) sold,
bid for, purchased, or paid anyone any compensation for soliciting purchases
of, the Securities (except for the sale of the Securities by the Company under
this Agreement) or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Securityholders under this Agreement).
(r) The Company and each of its subsidiaries have (i) good and
defensible title to their interests in oil and gas properties owned by them,
(ii) good and marketable title in fee simple to all other real property owned
by them and (iii) good and marketable title to all personal property owned by
them, in each case free and clear of any security interests, liens,
encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company or
such subsidiary, and any real property and buildings held under lease by the
Company or any such subsidiary are held under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
or such subsidiary, in each case except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(s) The participation agreements, joint development agreements,
joint operating agreements, farm-out agreements and other agreements described
in the Prospectus or any Preliminary Prospectus relating to the Company's
rights with respect to the ownership, lease or operation of oil and gas
properties, the acquisition of interests in oil and gas properties or the
exploration for, development of or production of oil and gas reserves thereon
constitute valid and binding agreements of the Company and its subsidiaries
that are parties thereto and, to the best knowledge of the Company, of the
other parties thereto, enforceable in accordance with their terms, except as
enforceability may be subject to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.
(t) The information underlying the estimates of the reserves of
the Company and its subsidiaries, which was supplied by the Company to M. Brian
Wallace ("Wallace"), an
-7-
<PAGE> 8
independent petroleum engineer, for purposes of auditing the reserve reports
and estimates of the Company, including, without limitation, production, costs
of operation and development, current prices for production, agreements
relating to current and future operations and sales of production, was true and
correct in all material respects on the dates such estimates were made and such
information was supplied and was prepared in accordance with customary industry
practices; Wallace is an independent petroleum engineer with respect to the
Company; other than normal production of the reserves and intervening spot
market product price fluctuations described in the Prospectus or any
Preliminary Prospectus, the Company is not aware of any facts or circumstances
that would result in a material adverse change in the reserves, or the present
value of future net cash flows therefrom, as described in the Prospectus or any
Preliminary Prospectus; estimates of such reserves and present values as
described in the Prospectus or any Preliminary Prospectus comply in all
material respects to the applicable requirements of Regulation S-X and Industry
Guide 2 under the Act.
(u) Except as described in the Prospectus or any Preliminary
Prospectus, as of the date hereof, (i) all royalties, rentals, deposits and
other amounts due on the oil and gas properties of the Company have been
properly and timely paid, and no proceeds from the sale or production
attributable to the oil and gas properties of the Company are currently being
held in suspense by any purchaser thereof, except where such amounts due could
not, singly or in the aggregate, have a material adverse effect on the
financial condition or results of operations of the Company and its
subsidiaries taken as a whole and (ii) there are no claims under take-or-pay
contracts pursuant to which natural gas purchasers have any make-up rights
affecting the interest of the Company in its oil and gas properties, except
where such claims would not, singly or in the aggregate, have a material
adverse effect on the financial condition or results of operations of the
Company and its subsidiaries, taken as a whole.
(v) As of the date hereof, the aggregate undiscounted monetary
liability of the Company for petroleum taken or received under any operating or
gas balancing and storage agreement relating to its oil and gas properties that
permits any person to receive any portion of the interest of the Company in any
petroleum or to receive cash or other payments to balance any disproportionate
allocation of petroleum would not, in the aggregate, have a material adverse
effect on the financial condition or results of operations of the Company and
its subsidiaries, taken as a whole.
(w) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (1) the Company
and its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock; and (3) there has not been any
material change in the capital
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<PAGE> 9
stock, short-term debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) No labor dispute with the employees of the Company or any of
its subsidiaries exists or is threatened or imminent that could reasonably be
expected to result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(y) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any such subsidiary has been refused
any insurance coverage sought or applied for; and neither the Company nor any
such subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(z) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except (i) for restrictions imposed by general
corporate law of the jurisdiction in which any such subsidiary may be organized
or (ii) as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
(iii) restrictions which would not, singly or in the aggregate, result in a
material adverse change in the condition (financial or otherwise), net worth,
business prospects or results of operations of the Company and its
subsidiaries, taken as a whole.
(aa) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, except
where a failure to possess any such items would not result in a material
adverse change in the condition (financial or otherwise), net worth, business
prospects or results of operations of the Company and its subsidiaries taken as
a whole, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling
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<PAGE> 10
or finding, would result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries taken as a whole, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(ab) The Company has filed all foreign, federal, state and local
tax returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith, or as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(ac) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to occupational
safety and health or to the storage, handling or transportation of hazardous or
toxic materials; the Company and its subsidiaries have received all permits,
licenses or other approvals required of them under applicable federal and state
occupational safety and health and environmental laws and regulations to
conduct their respective businesses; and the Company and each such subsidiary
is in compliance with all terms and conditions of any such permit, license or
approval, except in each case any such violation, failure to receive required
permits, licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals which would not, singly or in
the aggregate, result in a material adverse change in the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(ad) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter
as to the matters covered thereby.
(ae) Except (i) for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, (ii) as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) and (iii) for investments that are not
material to the Company and its subsidiaries taken as a whole, neither the
Company nor any such subsidiary owns any shares of stock or any other equity
securities of any corporation or has any equity interest in any firm,
partnership, association or other entity.
(af) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, lease or other agreement
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<PAGE> 11
or instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties is bound or may be affected, except for any such default or event
that will not, individually or in the aggregate, result in a material adverse
change in the condition (financial or otherwise), net worth, business prospects
or results of operations of the Company and its subsidiaries taken as a whole.
(ag) The Company has not distributed and, prior to the Option
Closing Date will not distribute, any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or other materials, if any, permitted by the
Act.
3. Representations and Warranties of the Selling Securityholders.
Each Selling Securityholder, severally and not jointly, represents and warrants
to, and agrees with, each of the several Underwriters that:
(a) Such Selling Securityholder has full power (corporate and
other) to enter into this Agreement and to sell, assign, transfer and deliver
to the Underwriters the Securities to be sold by such Selling Securityholder
hereunder in accordance with the terms of this Agreement; the execution and
delivery of this Agreement have been duly authorized by all necessary corporate
action of such Selling Securityholder; and this Agreement has been duly
executed and delivered by such Selling Securityholder.
(b) Such Selling Securityholder has duly executed and delivered a
power of attorney and custody agreement (with respect to such Selling
Securityholder, the "Power-of-Attorney" and the "Custody Agreement,"
respectively), each in the form heretofore delivered to the Representatives,
appointing Cloyce A. Talbott as such Selling Securityholder's attorney-in-fact
(the "Attorney-in-Fact") with authority to execute, deliver and perform this
Agreement on behalf of such Selling Securityholder, and appointing Continental
Stock Transfer & Trust Co. as custodian thereunder (the "Custodian").
Certificates in negotiable form, endorsed in blank or accompanied by blank stock
powers duly executed, with signatures appropriately guaranteed, representing the
Securities to be sold by such Selling Securityholder hereunder have been
deposited with the Custodian pursuant to the Custody Agreement for the purpose
of delivery pursuant to this Agreement. Such Selling Securityholder has full
power (corporate and other) to enter into the Custody Agreement and the
Power-of-Attorney and to perform its obligations under the Custody Agreement.
The execution and delivery of the Custody Agreement and the Power-of-Attorney
have duly authorized by all necessary corporate action of such Selling
Securityholder; the Custody Agreement and the Power-of-Attorney have been duly
executed and delivered by such Selling Securityholder and, assuming due
authorization, execution and delivery by the Custodian, are the legal, valid,
binding and enforceable instruments of such Selling Securityholder. Such
Selling Securityholder agrees that each of the Securities represented by the
certificates on deposit with the Custodian is subject to the
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<PAGE> 12
interests of the Underwriters hereunder, that the arrangements made for such
custody, the appointment of the Attorney- in-Fact and the right, power and
authority of the Attorney-in-Fact to execute and deliver this Agreement, to
agree on the price at which the Securities (including such Selling
Securityholder's Securities) are to be sold the Underwriters, and to carry out
the terms of this Agreement, are to that extent irrevocable and that the
obligation of such Selling Securityholder hereunder shall not be terminated,
except as provided in this Agreement or the Custody Agreement, by any act of
such Selling Securityholder, by operation of law or otherwise, whether in the
case of any individual Selling Securityholder by the death or incapacity of
such Selling Securityholder, in the case of a trust or estate by the death of
the trustee or trustees or the executor or executors or the termination of such
trust or estate, or in the case of a corporate or partnership Selling
Securityholder by its liquidation or dissolution or by the occurrence of any
other event. If any individual Selling Securityholder, trustee or executor
should die or become incapacitated or any such trust should be terminated, or
if any corporate or partnership Selling Securityholder shall liquidate or
dissolve, or if any other event should occur, before the delivery of such
Securities hereunder, the certificates for such Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the respective
terms and conditions of this Agreement as if such death, incapacity,
termination, liquidation or dissolution or other event had not occurred,
regardless of whether or not the Custodian or the Attorney-in-Fact shall have
received notice thereof.
(c) Such Selling Securityholder has good and marketable title to
the Securities to be sold by such Selling Securityholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided herein,
such Selling Securityholder will convey good and marketable title to such
Securities, free and clear of any interests, liens, encumbrances, equities,
claims or other defects.
(d) Such Selling Securityholder has not, directly or indirectly,
(i) taken any action designed to cause or result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities or (ii) since the filing of the Registration
Statement (A) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities or (B) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling
Securityholders under this Agreement).
(e) Such Selling Securityholder has reviewed the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
and the Registration Statement, and the information regarding such Selling
Securityholder set forth therein under the caption "Principal and Selling
Stockholders" is complete and accurate.
(f) The sale by such Selling Securityholder of Securities pursuant
hereto is not prompted by any adverse information concerning the Company that
is not set forth in the
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<PAGE> 13
Registration Statement or the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(g) The sale of the Securities to the Underwriters by such Selling
Securityholder pursuant to this Agreement, the compliance by such Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or blue sky laws and,
if the registration statement filed with respect to the Securities (as amended)
is not effective under the Act as of the time of execution hereof, such as may
be required (and shall be obtained as provided in this Agreement) under the Act
and the Exchange Act or (ii) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under any
indenture, mortgage, deed of trust, lease or other agreement or instrument to
which such Selling Securityholder or any of its subsidiaries is a party or by
which such Selling Securityholder or any of such Selling Securityholder's
properties are bound, or the charter documents or by-laws of such Selling
Securityholder or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to such Selling Securityholder or any of its subsidiaries.
(h) None of the Selling Securityholders has distributed and, prior
to the Option Closing Date will not distribute, any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or other materials, if
any permitted by the Act.
4. Purchase, Sale and Delivery of the Securities. (a) On the
basis of the representations, warranties, agreements and covenants herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to issue and sell, and each of the Selling Securityholders, severally
and not jointly agrees to sell, to each of the Underwriters, and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company
and each of the Selling Securityholders, severally and not jointly, at a
purchase price of $_______ per share, the number of Firm Securities set forth
opposite the name of such Underwriter in Schedule 1 hereto. One or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company and each of the Selling
Securityholders to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the accounts designated by the Company and each of the Selling
Securityholders. Such delivery of and payment for the Firm Securities shall be
made at the offices of Andrews & Kurth L.L.P., Texas Commerce Tower,
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<PAGE> 14
600 Travis, Suite 4200, Houston, Texas 77002 at 9:30 A.M., New York time, on
, or at such other place, time or date as the Representatives and the Company
may agree upon or as the Representatives may determine pursuant to Section 9
hereof, such time and date of delivery against payment being herein referred to
as the "Firm Closing Date". The Company and each of the Selling
Securityholders will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representatives at the
offices in New York, New York of the Company's transfer agent or registrar or
of Prudential Securities Incorporated at least 24 hours prior to the Firm
Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The purchase price
to be paid for any Option Securities shall be the same price per share as the
price per share for the Firm Securities set forth above in paragraph (a) of
this Section 4, plus if the purchase and sale of any Option Securities takes
place after the Firm Closing Date and after the Firm Securities are trading
"ex-dividend", an amount equal to the dividends payable on such Option
Securities. The option granted hereby may be exercised as to all or any part
of the Option Securities from time to time within thirty (30) days after the
date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange
is open for trading). The Underwriters shall not be under any obligation to
purchase any of the Option Securities prior to the exercise of such option.
The Representatives may from time to time exercise the option granted hereby by
giving notice in writing or by telephone (confirmed in writing) to the Company
setting forth the aggregate number of Option Securities as to which the several
Underwriters are then exercising the option and the date and time for delivery
of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representatives and Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set
forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of the total number
of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section
4, except that reference
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<PAGE> 15
therein to the Firm Securities and the Firm Closing Date shall be deemed, for
purposes of this paragraph (b), to refer to such Option Securities and Option
Closing Date, respectively.
(c) The Company and each Selling Securityholder hereby acknowledge
that the wire transfer by or on behalf of the Underwriters of the purchase price
for any shares does not constitute closing of a purchase and sale of the shares.
Only execution and delivery of a receipt for shares by the Underwriters
indicates completion of the closing of a purchase of the shares from the Company
and each Selling Securityholder. Furthermore, in the event that the
Underwriters wire funds to the Company and each Selling Securityholder prior to
the completion of the closing of a purchase of shares, the Company and each
Selling Securityholder hereby acknowledge that until the Underwriters execute
and deliver a receipt for the shares, by facsimile or otherwise, the Company and
each Selling Securityholder will not be entitled to the wired funds and shall
return the wired funds to the Underwriters as soon as practicable (by wire
transfer of same-day funds) upon demand. In the event that the closing of a
purchase of shares is not completed and the wire funds are not returned by the
Company and each Selling Securityholder to the Underwriters on the same day the
wired funds were received by the Company and each Selling Securityholder, the
Company and each Selling Securityholder agree to pay to the Underwriters in
respect of each day the wire funds are not returned by the Company or any of the
Selling Securityholders, as the case may be, in same-day funds, interest on the
amount of such wire funds in an amount representing the Underwriters' cost of
financing as reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one
of the Representatives, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment shall relieve
such Underwriter or Underwriters from any of its or their obligations
hereunder.
5. Offering by the Underwriters. Upon your authorization of the
release of the Firm Securities, the several Underwriters propose to offer the
Firm Securities for sale to the public upon the terms set forth in the
Prospectus.
6. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto to become effective as promptly as
possible. If required, the Company will file the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rules 434
and 424(b) under the Act. During any time when a prospectus relating to the
Securities is
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<PAGE> 16
required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the continuance of
sales of or dealings in the Securities in accordance with the provisions hereof
and of the Prospectus, as then amended or supplemented, and (ii) will not file
with the Commission the Prospectus, Term Sheet or the amendment referred to in
the second sentence of Section 2(a) hereof, any amendment or supplement to such
Prospectus, Term Sheet or any amendment to the Registration Statement or any
Rule 462(b) Registration Statement of which the Representatives previously have
not been advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the Representatives shall
not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Representatives or counsel for the Underwriters,
any amendments to the Registration Statement or amendments or supplements to
the Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the
time when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of
each such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (i) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, (ii) the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, (iii) the institution, threatening or
contemplation of any proceeding for any such purpose or (iv) any request made
by the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent
the issuance of any such stop order and, if any such stop order is issued, to
obtain the withdrawal thereof as promptly as possible.
(c) The Company will arrange for the qualification of the
Securities for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
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<PAGE> 17
(d) If, at any time prior to the later of (i) the final date when
a prospectus relating to the Securities is required to be delivered under the
Act or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 6(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a conformed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as
a prospectus relating to the Securities is required to be delivered under the
Act, as many copies of each Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto as the Representatives may reasonably request.
Without limiting the application of clause (iii) of the preceding sentence, the
Company, not later than (A) 6:00 P.M., New York City time, on the date of
determination of the public offering price, if such determination occurred at
or prior to 10:00 A.M., New York City time, on such date or (B) 2:00 P.M., New
York City time, on the business day following the date of determination of the
public offering price, if such determination occurred after 10:00 A.M., New
York City time, on such date, will deliver to the Underwriters, without charge,
as many copies of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming orders that
are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally
available to its securityholders and to the Representatives a consolidated
earnings statement of the Company and its subsidiaries that satisfies the
provisions of Section 11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
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<PAGE> 18
convertible into, or exchangeable or exercisable for, shares of Common Stock
for a period of 90 days after the date hereof, except (i) pursuant to this
Agreement, (ii) for issuances pursuant to the exercise of employee or director
stock options outstanding on the date hereof, (iii) pursuant to the terms of
convertible securities or warrants of the Company outstanding on the date
hereof and (iv) for the grants of options pursuant to option plans existing on
the date hereof.
(i) The Company will not, directly or indirectly, (i) take any
action designed to cause or to result in, or that has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (B) pay or agree to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of the Securities by the Selling
Securityholders under this Agreement).
(j) The Company will obtain the agreements described in Section
9(j) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to
the effect set forth above, consult with you concerning whether or not to
disseminate a press release or other public statement, responding to or
commenting on such rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company
shall both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with Rule
111 promulgated under the Act by the earlier of (i) 10:00 P.M. Eastern time on
the date of this Agreement and (ii) the time confirmations are sent or given,
as specified by Rule 462(b)(2).
(m) The Company will use its best efforts to cause the Securities
to be duly included for quotation on the Nasdaq National Market prior to the
Firm Closing Date. The Company will ensure that the Securities remain included
for quotation on the Nasdaq National Market following the Firm Closing Date.
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<PAGE> 19
7. Covenants of Selling Securityholders.
(a) Each Selling Securityholder will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, pledge, offer of sale,
contract of sale, grant of any option to purchase or other sale or disposition)
of any shares of Common Stock legally or beneficially owned by such Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 120 days after the date
hereof.
(b) Such Selling Securityholder will not, directly or indirectly,
for 120 days from the date of this Agreement (i) take any action designed to
cause or result in, or that has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities or
(ii) (a) sell, bid for, purchase, or pay anyone any compensation for soliciting
purchases of, the Securities or any other securities of the Company convertible
into, or exchangeable or exercisable for, shares of Common Stock (except for
the sale of the Securities by the Selling Securityholders under this
Agreement).
(c) Each of the Selling Securityholders agrees to deliver to you
prior to or at the Firm Closing Date (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
8. Expenses. The Company will pay all costs and expenses
incident to the performance of its obligations under this Agreement, whether or
not the transactions contemplated herein are consummated or this Agreement is
terminated pursuant to Section 11 hereof, including all costs and expenses
incident to (i) the printing or other production of documents with respect to
the transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto, any
Rule 462(b) Registration Statement, any Preliminary Prospectus and the
Prospectus and any amendment or supplement thereto, this Agreement and any blue
sky memoranda, (ii) all arrangements relating to the delivery to the
Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (vii) any quotation of the Securities on the Nasdaq
National Market, (viii) any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters), and (ix) advertising
relating to the
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<PAGE> 20
offering of the Securities (other than as shall have been specifically approved
by the Representatives to be paid for by the Underwriters). If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 9 hereof is not satisfied
because this Agreement is terminated pursuant to Section 13(a) hereof or
because of any failure, refusal or inability on the part of the Company to
perform all obligations and satisfy all conditions on its part to be performed
or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including counsel fees and disbursements) that
shall have been incurred by them in connection with the proposed purchase and
sale of the Securities. The Company shall not in any event be liable to any of
the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
9. Conditions of the Underwriters' Obligations. The obligations
of the several Underwriters to purchase and pay for the Firm Securities shall
be subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and each Selling Securityholder
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's and each Selling Securityholder's officers made pursuant to the
provisions hereof, to the performance by the Company and each Selling
Securityholder of its covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any amendment
thereto filed prior to the Firm Closing Date has not been declared effective as
of the time of execution hereof, the Original Registration Statement or such
amendment and, if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have been declared effective not later than
the earlier of (i) 11:00 A.M., New York time, on the date on which the
amendment to the registration statement originally filed with respect to the
Securities or to the Registration Statement, as the case may be, containing
information regarding the public offering price of the Securities has been
filed with the Commission and (ii) the time confirmations are sent or given as
specified by Rule 462(b)(2), or with respect to the Original Registration
Statement, or such later time and date as shall have been consented to by the
Representatives; if required, the Prospectus or any Term Sheet that constitutes
a part thereof and any amendment or supplement thereto shall have been filed
with the Commission in the manner and within the time period required by Rules
434 and 424(b) under the Act; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been issued, and no
proceedings for that purpose shall have been instituted or threatened or, to
the knowledge of the Company or the Representatives, shall be contemplated by
the Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
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<PAGE> 21
(b) The Representatives shall have received an opinion dated the
Firm Closing Date of Baker & Hostetler, counsel for the Company, to the effect
that:
(i) the Company and each of the subsidiaries listed on
Schedule 3 hereto (the "Subsidiaries") have been duly incorporated and
are validly existing as corporations in good standing under the laws
of their respective jurisdictions of incorporation and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership
or leasing of their respective properties or the conduct of their
respective businesses requires such qualification, except where the
failure to be so qualified does not amount to a material liability or
disability to the Company and the Subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have
corporate power to own or lease their respective properties and
conduct their respective businesses as described in the Registration
Statement and the Prospectus, and the Company has corporate power to
enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and, except for directors' qualifying shares
and as otherwise set forth in the Prospectus, are owned beneficially
by the Company free and clear of any perfected security interests or,
to the best knowledge of such counsel, any other security interests,
liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization"
and under "Description of Capital Stock--Common Stock" and "--Preferred
Stock;" all of the issued shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable, and to the knowledge of such counsel have been issued in
compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Firm
Securities have been duly authorized by all necessary corporate action
of the Company and, when issued and delivered to and paid for by the
Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the Securities have been duly included for
trading on the Nasdaq National Market; to the knowledge of such
Counsel, except for such rights as have been waived as of the date
hereof, no holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to
subscribe for any of the Securities; and, assuming that the Company has
sent written notice to all holders of securities of the Company who
have the right to register the offer or sale of any securities owned by
such holders under the Act in connection with the public
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<PAGE> 22
offering contemplated by this Agreement, and there is no holder of
such securities who has not waived such registration rights or failed
to exercise such registration rights within the time permitted by the
notice;
(v) the statements set forth under the heading
"Description of Capital Stock" in the Prospectus, insofar as such
statements purport to summarize certain provisions of the capital
stock of the Company, provide a fair summary of such provisions; and
the statements set forth under the heading "Business and
Properties--Government Regulation and Environmental" in the
Prospectus, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a
fair summary in all material respects of such legal matters, documents
and proceedings;
(vi) the execution and delivery of this Agreement have
been duly authorized by all necessary corporate action of the Company
and this Agreement has been duly executed and delivered by the
Company;
(vii) to such counsel's knowledge (A) no legal or
governmental proceedings are pending to which the Company or any of
the Subsidiaries is a party or to which the property of the Company or
any of the Subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described
therein, and no such proceedings have been threatened against the
Company or any of the Subsidiaries or with respect to any of their
respective properties and (B) no contract or other document is
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required;
(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do
not (A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, or (B) conflict
with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, lease or other agreement or instrument, known to such
counsel, to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries or any of their
respective properties are bound, or the charter documents or by-laws
of the Company or any of the Subsidiaries, or any statute or any
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator known to such counsel and
applicable to the Company or the Subsidiaries, except that no opinion
is expressed as to state securities or blue sky laws for purposes of
this subparagraph;
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<PAGE> 23
(ix) the Registration Statement is effective under the
Act; any required filing of the Prospectus, or any Term Sheet that
constitutes a part thereof, pursuant to Rules 434 and 424(b) has been
made in the manner and within the time period required by Rules 434
and 424(b); and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose
have been instituted or threatened or are contemplated by the
Commission; and
(x) the Registration Statement originally filed with
respect to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than
the financial statements and other financial information contained
therein, as to which such counsel need express no opinion) comply as
to form in all material respects with the applicable requirements of
the Act and the rules and regulations of the Commission thereunder.
(xi) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different," as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment
thereto (including such information that is permitted to be omitted
pursuant to Rule 430A).
Such counsel shall also state that they have no reason to believe that
the Registration Statement (except for the financial statements and
other financial and reserve information included in the Registration
Statement, as to which they have not been asked to comment), as of its
effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus (except as indicated above), as of its date or the date of
such opinion, included or includes any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the
date of such opinion.
(c) The Representatives shall have received an opinion, dated the
Firm Closing Date, of Andrews & Kurth L.L.P., Texas Commerce Tower,
600 Travis, Suite 4200, Houston, Texas 77002, counsel for the
Underwriters, with respect to the issuance and sale of the Firm
Securities, the Registration Statement and the Prospectus, and
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<PAGE> 24
such other related matters as the Representatives may reasonably
require, and the Company shall have furnished to such counsel such
documents as they may reasonably request for the purpose of enabling
them to pass upon such matters. In rendering such opinion, such
counsel may rely as to all matters of law upon the opinion of Baker &
Hostetler referred to in paragraph (b) above.
(d) The Selling Securityholders shall have furnished to
the Representatives an opinion from Baker & Hostetler, counsel for
Patterson, Talbott, SSI Oil and Gas, Inc. and the H.A. Talbott and
Audrey Talbott Children's Trust, and an opinion from Howell Moore &
Gough, counsel for Phoenix Drilling, Inc., Imperial Equipment Co. and
Rig 1 Group, Inc., each dated the Closing Date, to the effect that:
(i) Such Selling Securityholder has full corporate power
to enter into this Agreement, the Custody Agreement and the
Power-of-Attorney and to sell, transfer and deliver the Securities
being sold by such Selling Securityholder hereunder in the manner
provided in this Agreement and to perform its obligations under the
Custody Agreement; the execution and delivery of this Agreement, the
Custody Agreement and the Power-of-Attorney have been duly authorized
by all necessary corporate action of such Selling Securityholder; this
Agreement has been duly executed and delivered by such Selling
Securityholder; assuming due authorization, execution and delivery by
the Custodian, the Custody Agreement and the Power-of-Attorney are the
legal, valid, binding and enforceable instruments of such Selling
Securityholder, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and subject, as to
enforceability, to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law);
(ii) the delivery by each Selling Securityholder to the
several Underwriters of certificates for the Securities being sold
hereunder by each Selling Securityholder against payment therefor as
provided herein, will convey good and marketable title to such
Securities to the several Underwriters, free and clear of all security
interests, liens, encumbrances, equities, claims or other defects;
(iii) the sale of the Securities to the Underwriters by
such Selling Securityholder pursuant to this Agreement, the compliance
by such Selling Securityholder with the other provisions of this
Agreement, the Custody Agreement and the consummation of the other
transactions herein contemplated do not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained and such as
may be required under state securities or blue sky laws, or (ii) to the
knowledge of such Counsel, conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which such Selling Securityholder or any of
its subsidiaries or any of such Selling Securityholder's properties are
bound, or the charter documents or by-laws of such Selling
Securityholder or any of its subsidiaries or any statute or any
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<PAGE> 25
judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to such Selling
Securityholder or any of its subsidiaries.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of
responsible officers of the Selling Securityholders and public
officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the
date of such opinion.
(e) The Representatives shall have received a certificate from
each Selling Securityholder, signed by an appropriate officer of such
Selling Securityholder, dated the Closing Date, to the effect that:
(i) the representations and warranties of such Selling
Securityholder in this Agreement are true and correct as if made on
and as of the Closing Date;
(ii) to the extent that any statements or omissions are
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto in reliance upon and
in conformity with written information furnished to the Company by
such Selling Securityholder specifically for use therein, the
Registration Statement, as amended as of the Closing Date, does not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Closing Date,
does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and
(iii) such Selling Securityholder has performed all
covenants and agreements on its part to be performed or satisfied at
or prior to the Closing Date.
(f) The Representatives shall have received from Coopers & Lybrand
L.L.P. a letter or letters dated, respectively, the date hereof and
the Firm Closing Date, in form and substance satisfactory to the
Representatives, to the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the
Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules and pro forma financial statements examined
by them and included in the
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<PAGE> 26
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries, carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the
comments set forth in this paragraph (iii), a reading of the minute
books of the shareholders, the board of directors and any committees
thereof of the Company and each of its consolidated subsidiaries, and
inquiries of certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting
matters, nothing came to their attention that caused them to believe
that:
(A) the unaudited consolidated condensed
financial statements of the Company and its consolidated
subsidiaries included in the Registration Statement and the
Prospectus do not comply in form in all material respects with
the applicable accounting requirements of the Act and the
related published rules and regulations thereunder or are not
in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited consolidated financial statements included in the
Registration Statement and the Prospectus; and
(B) at a specific date not more than five
business days prior to the date of such letter, there were any
changes in the capital stock or long-term debt of the Company
and its consolidated subsidiaries or any decreases in
stockholders' equity of the Company and its consolidated
subsidiaries, in each case compared with amounts shown on the
September 30, 1996 unaudited consolidated condensed balance
sheet included in the Registration Statement and the
Prospectus, or for the period from October 1, 1996 to such
specified date there were any decreases, as compared with the
corresponding period in the preceding year, in total revenues,
net revenues, net income before income taxes or total or per
share amounts of net income of the Company and its
consolidated subsidiaries, except in all instances for
changes, decreases or increases set forth in such letter;
(iv) they have carried out certain specified procedures,
not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the
general accounting records of the Company and its consolidated
subsidiaries and are included in the Registration Statement and the
Prospectus, and have compared such amounts, percentages and financial
information with such records of the Company and its consolidated
subsidiaries and
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<PAGE> 27
with information derived from such records and have found them to be
in agreement, excluding any questions of legal interpretation; and
(v) on the basis of a reading of the unaudited pro forma
consolidated condensed financial statements included in the
Registration Statement and the Prospectus, carrying out certain
specified procedures that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(v), inquiries of certain officials of the Company and its
consolidated subsidiaries who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in
the unaudited pro forma consolidated condensed financial statements,
nothing came to their attention that caused them to believe that the
unaudited pro forma consolidated condensed financial statements do not
comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts
in the compilation of such statements.
In the event that the letter referred to above sets forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letter shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives,
make it impractical or inadvisable to proceed with the purchase and delivery of
the Securities as contemplated by the Registration Statement.
References to the Registration Statement and the Prospectus in this
paragraph (f) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(g) The Representatives shall have received from Arthur Andersen
LLP a letter or letters dated, respectively, the date hereof and the Firm
Closing Date in form and substance satisfactory to the Representatives.
(h) Wallace, an independent petroleum engineering consultant,
shall have delivered to you on the date of this Agreement a letter and also on
the Closing Date a letter dated the Closing Date, in each case in form and
substance reasonably satisfactory to you, stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified information with respect to the oil and
gas reserves attributable to the properties previously owned by Tucker Drilling
Company, Inc., is given or incorporated in the Prospectus or any Preliminary
Prospectus as of the date not more than five days prior to the date of such
letter), the conclusions and findings of such individual with respect to the
Company's oil and gas reserves as well as such other information as the
Representatives or their counsel may reasonably request.
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<PAGE> 28
(i) The Representatives shall have received a certificate, dated
the Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the Firm
Closing Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading, and the Prospectus, as amended or supplemented
as of the Firm Closing Date, does not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and the Company has
performed all covenants and agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to the Firm Closing
Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and
no proceedings for that purpose have been instituted or threatened or,
to the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(j) The Representatives shall have received from each person who
is a director or officer of the Company an agreement to the effect that such
person will not, directly or indirectly, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of an option to purchase or other sale or disposition)
of any shares of Common Stock or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 120
days after the date of this Agreement.
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<PAGE> 29
(k) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company.
(l) Prior to the commencement of the offering of the Securities,
the Securities shall have been included for trading on the Nasdaq National
Market.
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
10. Indemnification and Contribution. (a) The Company and, subject
to the further provisions of this Section 10(a) and the provisions of Section
10(e), Talbott and Patterson jointly and severally agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Securities
Exchange Act of 1934 (the "Exchange Act"), against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any untrue statement or alleged untrue statement made
by the Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of
any material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any
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<PAGE> 30
amendment or supplement thereto or any Application, a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or
(iv) any untrue statement or alleged untrue statement of
any material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films and tape recordings,
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement
or any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representatives or by a Selling Securityholder
specifically for use therein; and provided further that neither Talbott nor
Patterson will be liable in any such case to the extent that any such loss,
claim, damage or other liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by another Selling Securityholder specifically for use
therein. This indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company, Talbott and Patterson will not,
without the prior written consent of the Underwriter or Underwriters
purchasing, in the aggregate, more than fifty percent (50%) of the Securities,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such Underwriter or
any person who controls any such Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(b) Each Selling Securityholder, severally and not jointly, agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement or any amendment thereto, each
Underwriter and each person who controls the Company or any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities, joint or several, to which the
Company, any such director, officer, such Underwriter or any such controlling
person may become subject under the Act, the Exchange Act or otherwise,
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<PAGE> 31
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement
or any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or (ii) the omission or the alleged omission
to state therein a material fact required to be stated in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with the written
information furnished to the Company by such Selling Securityholder for use
therein. Subject to the limitations set forth in the immediately preceding
sentence, each Selling Securityholder, severally and not jointly, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company, any such director, officer, such Underwriter or any such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which any Selling Securityholder may
otherwise have. Each Selling Securityholder will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not any such Underwriter or any person who
controls any such Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of all of the Underwriters and such controlling persons
from all liability arising out of such claim, action, suit or proceeding.
(c) Each Underwriter will, severally and not jointly, indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement or any amendment thereto, each Selling
Securityholder and each person, if any, who controls the Company or such
Selling Securityholder within the meaning of Section 15 of the Act or Section
20 of the Exchange Act against any losses, claims, damages or liabilities,
joint or several, to which the Company, any such director or officer of the
Company, such Selling Securityholder or any such controlling person of the
Company or such Selling Securityholder may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, or any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or necessary to make the
statements therein not misleading,
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<PAGE> 32
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein; and, subject to the limitation set forth immediately preceding this
clause, will reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company, any such director, officer or controlling person or
such Selling Securityholder in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 10, notify the indemnifying party of the commencement
thereof; but the failure so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section 10. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such
action on behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel to defend such
action on behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 10 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that in
connection with such action the indemnifying party shall not be liable for the
expenses of more than one separate counsel (in addition to local counsel) in
any one action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or circumstances,
designated by the Representatives in the case of paragraph (a) of this Section
10, representing the indemnified parties under such paragraph (a) who are
parties to such action or actions) or (ii) the indemnifying party does not
promptly retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying
-32-
<PAGE> 33
party. After such notice from the indemnifying party to such indemnified
party, the indemnifying party will not be liable for the costs and expenses of
any settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(e) The indemnification obligations of Talbott and Patterson
pursuant to Section 10(a) are subject to the following additional provisions:
(i) Neither Talbott nor Patterson shall have any
liability under this Agreement in an amount exceeding the amount of
cash received by each of them respectively upon the sale of his Common
Stock; provided, however, that Talbott shall also be liable in an
amount equal to up to one-half of the amount of cash received by SSI
Oil & Gas, Inc. ("SSI") and up to one-half of the amount of cash
received by the H. A. Talbott and Audrey Talbott Children's Trust and
Patterson will also be liable in an amount equal to up to one-half of
the amount of cash received by SSI.
(ii) There shall be no limitation on the ability of an
Underwriter to file suit or bring a proceeding for indemnification
under Section 10(a), including a cross-claim against Talbott or
Patterson; provided, however, prior to or concurrently with filing
such a suit or bringing such a proceeding against Talbott or
Patterson, the Underwriter must file suit or bring a proceeding
against the Company for satisfaction of such claim unless the Company
is Bankrupt (as defined below).
(iii) It shall be a condition to the obligations of Talbott
and Patterson to indemnify an indemnified party pursuant to Section
10(a) the Company is Bankrupt.
(iv) The Company will be considered "Bankrupt" for
purposes of this Section 10(e) if a decree or order by a court having
jurisdiction shall have been entered adjudging the Company a bankrupt
or insolvent, or the Company shall institute proceedings to be
adjudicated a voluntary bankrupt, or a creditor shall institute
proceedings against the Company to have it declared bankrupt or
insolvent and the same shall not have been stayed or discussed within
60 days, or the Company shall consent to the filing of a bankruptcy
proceeding against it, or shall file a pleading or consent seeking
reorganization or similar relief under the federal or similar
applicable state bankruptcy law, or shall consent to the filing of any
such pleading, or shall consent to the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency, or shall
make an assignment for the benefit of creditors, or shall admit in
writing its inability to pay its debts generally as they come due.
(f) In circumstances in which the indemnity agreement provided for
in the preceding paragraphs of this Section 10 is unavailable or insufficient,
for any reason other
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<PAGE> 34
than a failure by the indemnified party to give timely notice as required by
this Section 10, to hold harmless an indemnified party in respect of any
losses, claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, Talbott,
Patterson and the Selling Securityholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Securityholders bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company, the
Selling Securityholders or the Underwriters, the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in
the circumstances. The Company, the Selling Securityholders and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the equitable
considerations referred to above in this paragraph (f). Notwithstanding any
other provision of this paragraph (f), no Underwriter shall be obligated to
make contributions hereunder that in the aggregate exceed the total public
offering price of the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion to
their respective underwriting obligations and not joint, and contributions
among Underwriters shall be governed by the provisions of the Prudential
Securities Incorporated Master Agreement Among Underwriters. For purposes of
this paragraph (f), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement or
any amendment thereto and each person, if any, who controls the Company
-34-
<PAGE> 35
or any Selling Securityholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, shall have the same rights to contribution as
the Company or such Selling Securityholder, as the case may be.
11. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or
Option Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase. If one or more Underwriters so default with respect to an
aggregate number of Securities that is more than ten percent of the aggregate
number of Firm Securities or Option Securities, as the case may be, to be
purchased by all of the Underwriters at such time hereunder, and if
arrangements satisfactory to the Representatives are not made within 36 hours
after such default for the purchase by other persons (who may include one or
more of the non-defaulting Underwriters, including the Representatives) of the
Securities with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
the Company other than as provided in Section 12 hereof. In the event of any
default by one or more Underwriters as described in this Section 11, the
Representatives shall have the right to postpone the Firm Closing Date or the
Option Closing Date, as the case may be, established as provided in Section 4
hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Securities or Option Securities, as the case may be. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 11. Nothing herein shall relieve any
defaulting Underwriter from liability for its default.
12. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Securityholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, any Selling Securityholder, any Underwriter or any controlling
person referred to in Section 10 hereof and (ii) delivery of and payment for
the Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 8 and 10 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
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<PAGE> 36
13. Termination. (a) This Agreement may be terminated with
respect to the Firm Securities or any Option Securities in the sole discretion
of the Representatives by notice to the Company and each of the Selling
Securityholders given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company or either of the
Selling Securityholders shall have failed, refused or been unable to perform
all obligations and satisfy all conditions on its part to be performed or
satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing
Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in
the sole judgment of the Representatives, sustained any material loss
or interference with their respective businesses or properties from
fire, flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any material adverse
change, or any development involving a prospective material adverse
change (including without limitation a change in management or control
of the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries taken as a whole, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(ii) trading in the Common Stock shall have been suspended
by the Commission or the Nasdaq National Market;
(iii) trading generally on the New York Stock Exchange or the
Nasdaq National Market shall have been suspended or minimum or maximum
prices shall have been established on either such exchange or market
system;
(iv) a banking moratorium shall have been declared by New
York or United States authorities; or
(v) there shall have been (A) an outbreak or escalation
of hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 13
shall be without liability of any party to any other party except as provided
in Section 12 hereof.
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<PAGE> 37
14. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page, in the stabilization
legend on the inside cover page, and under the heading "Underwriting" in any
Preliminary Prospectus or the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 10 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
15. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be delivered or sent by mail,
telex or facsimile transmission and confirmed in writing to Prudential
Securities Incorporated, One New York Plaza, New York, New York 10292,
Attention: Equity Transactions Group (facsimile: (212) 778- 4312); if sent to
the Company, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Company at 4510 Lamesa Highway, P.
O. Box Drawer 1416, Snyder, Texas 79550, Attention: James C. Brown, Chief
Financial Officer (facsimile: (915) 573-0281); if sent to the Selling
Securityholders, shall be delivered or sent by mail, telex or facsimile
transmission and confirmed in writing to the Selling Securityholders at 4510
Lamesa Highway, P. O. Box Drawer 1416, Snyder, Texas 79550, Attention: Cloyce
A. Talbott or A. Glenn Patterson (facsimile: (915) 573-0281).
16. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company, the Selling
Securityholders and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company contained in Section 10 of this Agreement shall also be for the benefit
of any person or persons who control any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, (ii) the indemnities
of the Underwriters contained in Section 10 of this Agreement shall also be for
the benefit of the directors of the Company, the officers of the Company who
have signed the Registration Statement and any person or persons who control
the Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and shall also be for the benefit of any person or persons who
control any Selling Securityholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and (iii) the indemnities of the Selling
Securityholders contained in Section 10 of this Agreement shall also be for the
benefit of the directors of the Company, the officers of the Company who have
signed the Registration Statement or any amendment thereto and any person or
persons who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and shall also be for the benefit of any person
or persons who control any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
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<PAGE> 38
17. Applicable Law. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
18. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each of the Selling Securityholders
accepts for itself and in connection with its properties, generally and
unconditionally, the nonexclusive jurisdiction of the aforesaid courts and
waives any defense of forum non conveniens and irrevocably agrees to be bound by
any judgment rendered thereby in connection with this Agreement. Each of the
Selling Securityholders designates and appoints Cloyce A. Talbott and Joe
Howell, and each or either of them, and such other persons as may hereafter be
selected by each of the Selling Securityholders irrevocably agreeing in writing
to so serve, as its agent to receive of each of their behalf service of all
process in any such proceedings in any such court, such service being hereby
acknowledged by the Selling Securityholder to be effective and binding service
in every respect. A copy of any such process so served shall be mailed by
registered mail to the Selling Securityholder at its address provided in Section
15 hereof; provided, however, that, unless otherwise provided by applicable law,
any failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by a Selling Securityholder refuses to accept
service, such Selling Securityholder hereby agrees that service of process
sufficient for personal jurisdiction in any action against the Selling
Securityholder in the State of New York may be made by registered or certified
mail, return receipt requested, to the Selling Securityholder at its address
provided in Section 15 hereof, and the Selling Securityholder hereby
acknowledges that such service shall be effective and binding in every respect.
Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of any Underwriter to bring
proceedings against the Selling Securityholder in the courts of any other
jurisdiction.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 39
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and
each of the several Underwriters.
Very truly yours,
PATTERSON ENERGY, INC.
By:
---------------------------------------
Name:
Title:
SELLING SECURITYHOLDERS
By:
---------------------------------------
Name: , as Custodian
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By:
-------------------------------------
Name:
Title:
For itself and on behalf of the Representatives.
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<PAGE> 40
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Securities to
Underwriters be Purchased
- ------------ ------------
<S> <C>
Prudential Securities Incorporated . . . . . . . . . . . . . .
Morgan Keegan & Company, Inc. . . . . . . . . . . . . . . . . .
Raymond James & Associates, Inc.. . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . .
-----------
</TABLE>
<PAGE> 41
SCHEDULE 2
<TABLE>
<CAPTION>
Number of Optional
Number of Shares to be Sold if
Firm Shares Maximum Option
Name to be Sold Exercised
---- ---------- ---------
<S> <C> <C>
The Company 1,500,000 1,759,050
The Selling Securityholders
Cloyce A. Talbott 49,840 49,840
A. Glenn Patterson 30,000 30,000
SSI Oil and Gas, Inc. 57,298 57,298
H. A. Talbott and Audrey Talbott 37,862 37,862
Children's Trust
Phoenix Drilling, Inc. 28,000 28,000
Imperial Equipment Co. 19,750 19,750
Rig I Group, Inc. 4,250 4,250
----------- --------------
Total 1,727,000 1,986,050
=========== ==============
</TABLE>
<PAGE> 42
SCHEDULE 3
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION STATES QUALIFIED TO DO BUSINESS IN
- ---------------------------------------------------- ------------- ------------------------------------------------------
<S> <C> <C>
PATTERSON DRILLING COMPANY DE TX
PATTERSON DRILLING PROGRAMS, INC. TX ---
PATTERSON PETROLEUM, INC. TX ---
PATTERSON PETROLEUM TRADING COMPANY, INC. TX ---
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[BAKER & HOSTETLER LLP LETTERHEAD]
January 27, 1997
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, Texas 79549
Gentlemen:
We have acted as counsel to Patterson Energy, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Act"), on Form S-3 (File No. 333-18123) (the
"Registration Statement") of (i) 1,759,050 shares of the authorized but unissued
shares of Common Stock, Par Value $.01 per share (the "Common Stock") of the
Company, including Preferred Stock Purchase Rights (the "Rights") issuable
pursuant to the Rights Agreement, dated as of January 2, 1997, between the
Company and Continental Stock Transfer & Trust Company (the "Company Shares"),
and (ii) 227,000 shares of the issued and outstanding Common Stock of the
Company held by the "Selling Stockholders," as that term is defined in the
Prospectus included as a part of the Registration Statement. (The Company Shares
and Selling Stockholder Shares are collectively referred to herein as the
"Shares".)
In connection with this opinion, we have examined the Restated Certificate
of Incorporation of the Company. In addition, we have examined, and have relied
as to matters of fact upon, such other documents, corporate records and other
instruments, and have made such other and further investigations, as we have
deemed relevant and necessary as a basis for the opinion hereinafter set forth.
In our examinations, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, photostatic or
conformed copies and the authenticity of the original of all such latter
documents.
Based upon the foregoing, we are of the opinion that (i) the Company is
authorized to issue and to sell the Company Shares; and the Company Shares, when
issued, will be validly issued, fully paid and nonassessable and (ii) the
Selling Stockholders Shares have been validly issued and are fully paid and
nonassessable.
We hereby consent (i) to be named in the Registration Statement, and in the
Prospectus that constitutes a part thereof, as attorneys passing upon the
validity of the issuance of the Company Shares on behalf of the Company, and
(ii) to the filing of this opinion as an exhibit to the Registration Statement.
This opinion is to be used solely for the purpose of the registration of
the Shares and may not be used for any other purpose.
Very truly yours,
/s/ Baker & Hostetler LLP
BAKER & HOSTETLER LLP
/scb
<PAGE> 1
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Patterson Energy, Inc.
Registration on Form S-3
We are aware that our report dated December 18, 1996 on our review of the
interim consolidated balance sheet of Patterson Energy, Inc. as of September 30,
1996, the related interim consolidated statements of income and cash flows for
each of the nine month periods ended September 30, 1996 and 1995, and the
consolidated statement of stockholders' equity for the nine month period ended
September 30, 1996 is included in this registration statement. Pursuant to Rule
436(c) under the Securities Act of 1933, this report should not be considered a
part of the registration statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 27, 1997
<PAGE> 1
EXHIBIT 23.1.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 of
(i) our report dated February 28, 1996, except as to the Tucker Drilling
Company, Inc. merger discussed in Note 2 for which the date is September 13,
1996, on our audits of the consolidated financial statements of Patterson
Energy, Inc. We also consent to the incorporation by reference of (ii) our
report dated February 28, 1996, on our audits of the consolidated financial
statements of Patterson Energy, Inc. which report is included in Patterson
Energy, Inc.'s Annual Report on Form 10-KSB for the year ended December 31,
1995, and (iii) our report dated September 13, 1996 on our audits of the
supplemental consolidated financial statements of Patterson Energy, Inc. which
report is included in Patterson Energy, Inc.'s Current Report on Form 8-K/A
(Amendment No. 2) dated July 30, 1996. We also consent to the reference to our
firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
Dallas, Texas
January 27, 1997
<PAGE> 1
EXHIBIT 23.2.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this Registration Statement and to the incorporation by
reference in this Registration Statement of our report dated May 16, 1996,
included in the Patterson Energy, Inc., Current Report on Form 8-KA (Amendment
No. 2) dated July 30, 1996, and to all references to our firm included in this
Registration Statement.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
January 27, 1997
