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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22664
PATTERSON ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2504748
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
P.O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS 79550
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (915) 573-1104
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1998 was $368,804,331, based upon the average bid
and asked prices on the Nasdaq National Market.
As of March 23, 1998, the registrant had outstanding 31,538,412 shares of
common stock, $.01 Par Value, its only class of voting stock.
DOCUMENT INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference into Part III
of this Annual Report on Form 10-K: Definitive Proxy Statement for the
registrant's 1998 Annual Meeting of Stockholders.
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PART I
The "Company" or "Patterson" is used in this Report to refer to Patterson
Energy, Inc. and its consolidated subsidiaries. The Company may from time to
time make written or oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and its reports to stockholders. Items 1 and 2 contain forward-looking
statements and are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, statements relating to the drilling and completion of wells, well
operations, utilization rates of drilling rigs, reserve estimates (including
estimates for future net revenues associated with such reserves and the present
value of such future net reserves), business strategies and other plans and
objectives of the Company's management for future operations and activities and
other such matters. The words "believes," "budgeted," "plans," "intends,"
"strategy," or "anticipates" and similar expressions identify forward-looking
statements. The Company does not undertake to update, revise or correct any of
the forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading: "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995" beginning on page 10.
---------------------
ALL NUMERICAL INFORMATION CONTAINED IN THIS REPORT RELATING TO THE
COMPANY'S COMMON STOCK REFLECTS THE TWO-FOR-ONE SPLITS OF THE COMPANY'S COMMON
STOCK EFFECTED IN JULY 1997 AND IN JANUARY 1998, RESPECTIVELY.
---------------------
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
OVERVIEW
Patterson is one of the leading providers of domestic land drilling
services to major and independent oil and natural gas companies. Formed in 1978
and reincorporated in 1993 as a Delaware corporation, the Company focuses its
operations primarily in Texas and southeast New Mexico. The Company currently
has a drilling fleet of 114 drilling rigs, 108 of which are currently operable.
The Company is also engaged in the development, exploration, acquisition and
production of oil and natural gas; however, due to the substantial growth in the
Company's drilling contract operations during fiscal years 1996 and 1997, the
oil and natural gas operations are no longer material to the Company's overall
operations.
The Company has established a reputation for reliability, high quality
drilling 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, 82 are capable of drilling to depths greater than 10,000 feet,
including 11 that are capable of drilling to depths greater than 15,000 feet.
During the fiscal year ended December 31, 1997, the Company drilled 1,115 wells
for 193 non-affiliated different customers maintaining an average utilization
rate of 89%.
Over the past four years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
increased its contract drilling fleet by 101 drilling rigs. From 1993 (prior to
giving effect to the 1996 merger with Tucker Drilling Company, Inc. which was
treated as a pooling of interests for financial accounting purposes) to 1997,
the Company's consolidated operating revenues increased from $25 million to $191
million, and earnings before interest expense, income taxes, depreciation,
depletion and amortization (EBITDA) increased from $4.3 million to $54 million.
The Company's headquarters are located at 4510 Lamesa Highway, Snyder,
Texas, and its telephone number at that address is (915) 573-1104. The Company
also has small offices in Austin, Houston, Dallas, Midland, San Angelo, and
Wichita Falls, Texas, and eleven yard facilities variously located in its areas
of operations.
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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.
Continued Growth Through Acquisition. The Company believes that
attractive acquisition opportunities continue to exist to further
expand its drilling rig fleet in its core geographic operating areas
as well as into other 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 was one of the lowest cost operators in
the U.S. land drilling industry during 1997. 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 uses its fleet of
trucks and trailers to rig down, transport and rig up its drilling
rigs, which further increases efficiency by reducing the time and
costs associated with these ancillary operations.
RECENT ACQUISITIONS
During June 1997, the Company acquired 21 operable contract drilling rigs,
related rolling stock, a shop and a yard from Wes-Tex Drilling Company
("Wes-Tex"), a privately-owned, non-affiliated contract drilling company based
in Abilene, Texas, and two entities affiliated with Wes-Tex. The purchase price
of approximately $35.4 million; consisted of $25 million in cash, 1.132 million
shares of the Company's Common Stock valued at $7.875 per share, a three-year
stock purchase warrant (valued at $1.56 per share) to purchase 800,000
additional shares of Common Stock of the Company at an exercise price of $8.00
per share and approximately $190,000 of other direct costs incurred relative to
the transaction. The acquisition was funded using $19 million of cash on hand
and $6 million provided by the Company's credit facility maintained with Norwest
Bank Texas, N.A. (the "Norwest Line").
During April, August, November and December 1997, in four separate
transactions with non-affiliated entities, the Company acquired 17 contract
drilling rigs, 14 of which were operable, other related drilling equipment and
rolling stock, five yards, two shops and an office. Total consideration paid for
these assets was $24.2 million, of which $6.96 million was funded using cash on
hand and $17.25 million was provided by the Norwest Line.
During February 1998, the Company acquired 15 operable drilling rigs and
related assets from Robertson Onshore Drilling Company ("Robertson Onshore")
pursuant to a merger of Robertson Onshore into a subsidiary of the Company in
consideration for approximately $40 million in cash. The purchase price was
funded using cash on hand of $3.25 million and proceeds of $36.75 million
provided by the Norwest Line. Robertson Onshore was a privately-held,
non-affiliated company based in Dallas, Texas.
During January 1998, the Company acquired Lone Star Mud, Inc., a
privately-held, non-affiliated company based in Midland, Texas, engaged in the
sale of drilling fluids to the oil and natural gas industry. The purchase price
consisted of $1.43 million cash and 571,328 shares of the Company's Common Stock
valued at $17.41 per share.
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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 114
drilling rigs, 108 of which are currently operable. Currently, 91 of the
operable drilling rigs are based in Texas (58 in west Texas, 17 in south Texas,
11 in east Texas and five in north Texas), 12 are based in southeast New Mexico
and five are based in Mississippi. The drilling rigs have rated maximum depth
capabilities ranging from 7,000 feet to 25,000 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.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant importance to
prospective customers. The Company has and will continue to strive to maintain
its drilling fleet in good working condition. In addition to normal repair and
maintenance expenses, the Company spends significant funds each year on an
ongoing program of modifying and upgrading its drilling rigs. The Company also
strives to employ experienced and dedicated drilling supervisors for its various
drilling rigs in the field. The Company intends to continue its ongoing rig
maintenance program and to continue to retain high quality, experienced drilling
supervisors in order to build upon its reputation in the market place. In
addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
Drilling Contracts. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the
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Company generally does not incur any costs due to "in hole" 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 revenues attributable to
daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
TYPE OF REVENUES 1995 1996 1997
---------------- ---- ---- ----
<S> <C> <C> <C>
Daywork................................................. 51% 52% 62%
Footage................................................. 45 40 35
Turnkey................................................. 4 8 3
</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. There has been a substantial shortage of
drill pipe in the contract drilling industry in the United States over the past
four years which has caused the price of drill pipe to increase significantly.
This shortage fluctuates with the demand for contract drilling services.
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
three years ended December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Number of wells drilled.................................. 395 464 1,115
Average rigs available for service....................... 36 42 73
Average rig utilization rate(1).......................... 69% 76% 89%
</TABLE>
- ---------------
(1) 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.
Customers. For the year ended December 31, 1997, the Company drilled wells
for 193 nonaffiliated customers. This compares with 95 nonaffiliated customers
for the year ended December 31, 1996. No single customer accounted for 10% or
more of the Company's consolidated operating revenues for the fiscal year ended
December 31, 1997. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company's operations.
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The Company's customers in the past 12 months have included, among others,
Abraxas Petroleum Corporation, Apache Corporation, ARCO Permian, Burlington
Resources Oil & Gas Company, Chevron U.S.A., Cobra Oil & Gas Corporation,
Costilla Petroleum, Louis Dreyfus Natural Gas Company, Enron Oil & Gas Company,
Mitchell Energy Corporation, ORYX Energy Company, Santa Fe Resources and Union
Pacific Resources Company.
As of December 31, 1997 the Company was drilling a total of 60 wells, two
of which were being drilled for affiliated parties.
Drilling Rigs and Related Equipment. The following table provides certain
information concerning the drilling rigs owned by the Company to date:
<TABLE>
<CAPTION>
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
------------------ ---------- ---------------
<S> <C> <C>
7,000 to 10,000............................................ 32(1) --
10,001 to 15,000............................................ 64(2) 7
15,001 to 25,000............................................ 7(3) 4
--- --
Totals............................................ 103 11
=== ==
</TABLE>
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(1) Includes 4 inoperable rigs.
(2) Includes 1 inoperable rigs.
(3) Includes 1 inoperable rigs.
The Company owns 84 trucks and 115 trailers. This equipment is used to rig
down, transport and rig up the Company's drilling rigs which minimizes the
Company's dependency upon third parties for these ancillary services and further
enhances the efficiency of the Company's contract drilling operations.
Most repair work and overhaul of the Company's drilling rig equipment is
performed at the Company's yard facilities variously located in Texas and New
Mexico. The Company believes that its operable drilling rigs and related
equipment are in good operating condition. In addition to normal repair and
maintenance expenses, the Company historically has spent significant funds for
its ongoing program of modifying and upgrading its equipment.
OIL AND NATURAL GAS OPERATIONS
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 have been designed to complement its land drilling operations and
are primarily concentrated in three operating areas of Texas: (i) the Austin
Chalk Trend, (ii) the Permian Basin and (iii) South Texas. With the substantial
growth in the Company's contract drilling operations during fiscal years 1996
and 1997, the oil and natural gas operations of the Company are no longer
material to the Company's overall operations.
COMPETITION
The contract drilling industry is 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.
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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. 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.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated with compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material and the Company could incur liability for
noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental hazards which would
materially affect its operations.
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 an
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 Recover 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
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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.
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 damages. The occurrence of a
significant event, including pollution or environmental damages, 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 damages,
employer's liability, commercial general liability and workers compensation
insurance. The Company currently has general liability insurance of $1.0 million
per occurrence with an aggregate of $3.0 million and excess liability and
umbrella coverage's of up to $40.0 million per occurrence with a $40.0 million
aggregate. The Company's customers generally require the Company to have at
least $1.0 million 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.
EMPLOYEES
The Company employed approximately 1,725 full-time persons (64 office
personnel and 1,661 field personnel) at December 31, 1997. 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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ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings arising in the normal
course of its business. Management of the Company does not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a special meeting of stockholders on December 30, 1997.
The following table sets forth-certain information relating to each of the
matters voted upon at the meeting.
<TABLE>
<CAPTION>
VOTES
----------------------------------
WITHHELD/
MATTERS VOTED UPON FOR AGAINST ABSTAIN
------------------ ---------- ------- ---------
<S> <C> <C> <C>
1. Amend the Certificate of Incorporation of the Company
to increase the authorized common stock from 18,000,000
to 50,000,000 shares................................... 13,412,788 289,487 20,949
2. Amend the Patterson Energy, Inc. 1993 Stock Incentive
Plan increasing the number of shares of the Company's
common stock reserved for issuance under the plan from
1,400,000
shares to 2,800,000 shares............................. 13,127,009 557,282 1,646
</TABLE>
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to the future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
Volatility of Oil and Natural Gas Prices. The Company's revenue,
profitability and future rate of growth are substantially dependent
upon prevailing prices for oil and natural gas. In recent years, oil
and natural gas prices and, therefore, the level of drilling,
exploration, development and production, have been extremely volatile.
Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the U.S. and foreign governments
and international cartels. All of these factors are beyond the control
of the Company. Any significant or extended decline in oil and/or
natural gas prices will have a material adverse effect on the
Company's financial condition and operations and could impair access
to sources of capital. The price of oil rose to a six-year high of
$25.75 per barrel in January 1997, and fell to a ten-year low of
$11.00 per barrel in March 1998. These low level oil prices have
adversely impacted the Company's operations. See "Market Conditions
for Contract Drilling Services," below. Should oil prices remain at
these levels or continue to decline or natural gas prices decline, the
Company's operations could be further adversely affected.
Market Conditions for Contract Drilling Services The contract
drilling business experienced increased demand for drilling services
from 1995 through the third quarter of 1997 due to stronger oil and
natural gas prices. However, except for that period and other
occasional upturns, the market for onshore contract drilling services
has generally been depressed since mid-1982, when crude oil and
natural gas prices began to weaken. A particularly sharp decline in
demand for contract drilling services occurred in 1986 because of the
worldwide collapse in oil prices (to approximately $10.00 per Bbl in
April 1986 in the U.S.). Since this time and except during the
occasional upturns, there have been substantially more drilling rigs
available than necessary to meet demand in most operating and
geographic segments of the domestic drilling industry. As a result,
drilling contractors have had difficulty sustaining profit margins. In
addition to adverse effects that future declines in demand could have
on the Company, ongoing movement or reactivation of onshore drilling
rigs or new construction of drilling rigs could adversely affect rig
utilization rates and pricing, even in an environment of stronger oil
and natural gas prices and increased drilling activity. The Company
cannot predict either the future level of demand for its contract
drilling services or future conditions in the contract drilling
industry. The Company's rig utilization rate reached an all time high
of approximately 91.5% in the third quarter of 1997, but has weakened
since then due to a decrease in the demand for drilling rigs caused by
the reduction in the price of oil. This decrease in demand has put
downward pressure on the Company's contract drilling rates in certain
of its areas of operations.
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<PAGE> 11
Fluctuations in the Supply of Drill Pipe in the Contract Drilling
Industry. The increase in domestic drilling demand from mid-1995
through the third quarter of 1997 and related increase in contract
drilling activity resulted in a shortage of drill pipe in the
industry. This shortage caused the price of drill pipe to increase
significantly and required that orders for new drill pipe be placed
one year in advance. A return to higher demand levels for contract
drilling services could reinstate the problems associated with drill
pipe shortages.
Recent Rapid Growth; Associated Risks. The Company has
experienced rapid and substantial growth over the past four years in
its contract drilling operations and, if favorable opportunities arise
in the future, 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 continue to manage growth
effectively or that it will be successful in maintaining the market
share attributable to operable drilling rigs acquired by the Company.
If the Company is unable to manage its growth, its business, results
of operations or financial condition could be materially adversely
affected.
No Assurance of Additional Growth through Acquisitions. The
Company's growth has been enhanced materially by strategic
acquisitions that have substantially increased the Company's drilling
rig fleet. Although the land drilling industry has experienced
significant consolidation over the past couple of years, the Company
believes that significant acquisition opportunities are still
available. However, there can be no assurance that suitable
acquisition candidates can be found, and the Company is likely to
continue to face competition from other companies for available
acquisition opportunities. In addition, if the prices paid by buyers
of drilling rigs remain at current levels or continue to rise, the
Company may find fewer acceptable acquisition opportunities. There can
be no assurance that the Company will have sufficient capital
resources to complete acquisitions, that acquisitions can be completed
on terms acceptable to the Company or that any completed acquisition
would improve the Company's financial condition, results of
operations, business or prospects in any material manner.
Fluctuations in Availability of Qualified Drilling Rig
Personnel. The increase in domestic drilling demand from mid-1995
through the third quarter of 1997 and related increase in contract
drilling activity resulted in a shortage of qualified drilling rig
personnel in the industry. This increase adversely impaired the
Company's ability to attract and retain sufficient qualified personnel
and to market and operate its drilling rigs. Further, the labor
shortages resulted in wage increases, which impacted the Company's
operating margins. A return to higher demand levels for contract
drilling services could reinstate the problems associated with labor
shortages.
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.
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. Many of the
competitors in each of the Company's lines of business have
substantially greater financial and other resources than the Company.
Operating Hazards and Uninsured Risks. Contract drilling and oil
and natural gas activities are subject to a number of risks and
hazards which could cause serious injury or death to persons,
suspension of drilling operations and serious damage to equipment or
property of others and, in addition to environmental damage, could
cause substantial damage to producing formations and surrounding
areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of
toxic gases or extensive uncontrolled fires. In
11
<PAGE> 12
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. Under turnkey drilling contracts, the Company contracts to
drill a well to a contract depth under specified conditions for a fixed
price. The risks to the Company under this type of drilling contract are
substantially greater than on a well drilled on a daywork or footage basis
since the Company assumes most of the risks associated with the drilling
operations generally assumed by the operator of the well in a daywork or
footage contract, including risk of blowout, machinery breakdowns and
abnormal drilling conditions. Accordingly, if severe drilling problems are
encountered in drilling wells under a turnkey contract, the Company could
suffer substantial losses associated with that contract. For the years
ended December 31, 1996 and 1997, the percentage of the Company's contract
drilling revenues attributable to turnkey contracts was 8.0% and 3.0%,
respectively.
Environmental and Other Governmental Regulation Matters. The
Company's operations are subject to numerous domestic laws and
regulations that relate directly or indirectly to the drilling of oil
and natural gas wells, including laws and regulations controlling the
discharge of materials into the environment, requiring removal and
cleanup under certain circumstances or otherwise relating to the
protection of the environment. Laws and regulations protecting the
environment have generally become more stringent in recent years, and
may in certain circumstances impose strict liability, rendering a
person liable for environmental damage without regard to negligence or
fault on the part of such person. To date, the Company has not been
required to expend significant resources in order to comply with
applicable environmental laws and regulations nor has it incurred any
fines or penalties for noncompliance. However, compliance costs under
existing legal requirements and under any new requirements could
become material, and the Company could incur liability in the future
for noncompliance. Additional matters subject to governmental
regulation include discharge permits for drilling operations,
performance bonds, reports concerning operations, spacing of wells,
unitization and pooling of properties, disposal of produced water and
taxation. From time to time, regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow
of oil and natural gas wells below actual production capacity in order
to conserve supplies of oil and natural gas.
--------------------------
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, par value $0.01 per share is publicly traded on
the Nasdaq National Market and is quoted under the symbol "PTEN."
The following table sets forth the high and low sales prices of the
Company's Common Stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
First quarter............................................... $ 3.91 $ 2.81
Second quarter.............................................. 4.53 3.31
Third quarter............................................... 5.06 3.75
Fourth quarter.............................................. 7.56 4.38
1997:
First quarter............................................... $ 8.75 $ 5.50
Second quarter.............................................. 11.69 6.63
Third quarter............................................... 26.56 11.13
Fourth quarter.............................................. 32.63 14.38
</TABLE>
As of March 19, 1998, there were approximately 396 holders of record of the
Company's Common Stock.
The Company has not declared or paid cash dividends on its common stock in
the past and does not expect to declare or pay any cash dividends on its common
stock in the foreseeable future. The Company instead intends to retain its
earnings to support the operations and growth of its business. Any future cash
dividends would depend on future earnings, capital requirements, the Company's
financial condition and other factors deemed relevant by the Board of Directors.
The following subparagraphs set forth information concerning equity
securities sold by the Company during 1997 but not registered under the
Securities Act of 1993, as amended (the "Act"):
(a) During October 1997, the Company issued a total of 24,000 shares
of its Common Stock to a member of the Company's Board of Directors
pursuant to the exercise by the Board member of stock options previously
granted under the Company's Non-Employee Directors' Stock Option Plan. The
total exercise price for the shares was $62,250. No underwriter was
involved in the transaction, and no sales commissions, fees or similar
compensation were paid to any person in connection with the issuance of the
shares. The Company believes that the issuance of the shares was exempt
from the registration requirements of Section 5 of the Act by virtue of
Section 4(2), as a transaction not involving a public offering. More
specifically, the Company believes that the Board member was able to fend
for himself with access to information upon which an investment decision
could be made.
(b) During June and July 1997, options to purchase a total of 12,000
shares were granted under the Company's Non-Employee Directors' Stock
Option Plan to three of the Company's directors: Robert C. Gist -- options
to purchase 4,000 shares; Kenneth E. Davis -- options to purchase 4,000
shares; and Vincent A. Rossi, Jr. -- options to purchase 4,000 shares. No
sales commissions, fees or similar compensation were paid to any person in
connection with the grant of those options. The exercise price was the fair
market value of the Company's Common Stock on the respective grant dates.
The grant of the options and the continuing offer of the shares underlying
the options was exempt from the registration requirements of Section 5 of
the Act by virtue of Section 4(2) thereof, as transactions not involving a
public offering. More specifically, each of the optionees is a director of
the Company and is able to fend for himself with access to information upon
which an investment decision can be made.
(c) At various times during 1997, the Company issued a total of
420,000 shares of its Common Stock to consultants of the Company pursuant
to the exercise by the consultants of stock options
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<PAGE> 14
previously granted to them as partial compensation for public relation
services rendered to the Company. The total exercise price for the shares
was $910,502. No underwriter was involved in the transactions, and no sales
commissions, fees or similar compensation were paid to any person in
connection with the issuance of the shares. The Company believes that each
issuance of the shares was exempt from the registration requirements of
Section 5 of the Act by virtue of Section 4(2), as a transaction not
involving a public offering. More specifically, the Company believes that
the consultants were able to fend for themselves with access to information
upon which an investment decision could be made.
(d) During June 1997, the Company issued a total of 1.132 million
shares of its Common Stock valued at $7.875 per share and a three-year
stock purchase warrant (valued at $1.56 per share) to purchase 800,000
additional shares of the Company's Common Stock at an exercise price of
$8.00 per share to Wes-Tex and two entities affiliated with Wes-Tex as
partial consideration for the acquisition of 21 drilling rigs and related
assets. See Items 1 and 2, "Business and Properties -- Recent
Acquisitions," for additional information. No underwriter was involved in
the transaction and no sales commissions, fees or similar compensation were
paid to any person in connection with the issuance of the shares and the
stock purchase warrant. The Company believes that the issuance of the
shares and the stock purchase warrant was exempt from the registration
requirements of Section 5 of the Act by virtue of Rule 506 under Regulation
D of the Act. A Form D relating to this transaction and the issuance of the
shares and the stock purchase warrant was filed with the Securities and
Exchange Commission on or about June 20, 1997. The Company believes that
all conditions to reliance on Rule 506 were met.
(e) During November 1997, the Company issued a total of 800,000 shares
of its Common Stock pursuant to the exercise of the stock purchase warrant
referenced in subparagraph (d) above. The total exercise price for the
shares was $6.4 million. The Company believes that the issuance of the
shares was exempt from the registration requirements of Section 5 of the
Act by virtue of Section 4(2), as a transaction not involving a public
offering. More specifically, the Company believes that the warrant holder
was able to fend for himself with access to information upon which an
investment decision could be made.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1993, 1994, 1995, 1996 and 1997 and for each of the five years then ended were
derived from the consolidated financial statements of the Company which have
been audited by Coopers & Lybrand L.L.P., independent accountants. This
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements" and related notes thereto, included as Items 7 and 8,
respectively, of this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling.................................. $37,746 $54,823 $57,599 $73,590 $178,332
Other..................................... 5,147 4,707 6,845 10,118 12,445
------- ------- ------- ------- --------
Total............................. 42,893 59,530 64,444 83,708 190,777
------- ------- ------- ------- --------
Operating costs and expenses:
Drilling.................................. 30,631 43,036 46,505 59,564 128,416
Oil and natural gas....................... 1,920 2,654 2,828 4,014 4,757
Depreciation, depletion and
amortization........................... 4,655 4,912 7,523 9,960 17,497
General and administrative................ 4,014 4,793 5,063 5,416 6,786
------- ------- ------- ------- --------
Total............................. 41,220 55,395 61,919 78,954 157,456
------- ------- ------- ------- --------
Operating income............................ 1,673 4,135 2,525 4,754 33,321
------- ------- ------- ------- --------
Other income (expense)...................... 66 679 (111) (2,737) 1,787
------- ------- ------- ------- --------
Income before income taxes.................. 1,739 4,814 2,414 2,017 35,108
Income tax expense (benefit)................ 123 (193) (787) (2,254) 12,866
------- ------- ------- ------- --------
Net income.................................. $ 1,616 $ 5,007 $ 3,201 $ 4,271 $ 22,242
======= ======= ======= ======= ========
Net income per common share:
Basic..................................... $ 0.13 0.31 $ 0.18 $ 0.22 $ 0.78
======= ======= ======= ======= ========
Diluted................................... $ 0.13 0.31 $ 0.18 $ 0.21 $ 0.75
======= ======= ======= ======= ========
Weighted average number of common shares
outstanding:
Basic..................................... 12,704 16,120 17,517 19,167 28,492
======= ======= ======= ======= ========
Diluted................................... 12,704 16,120 18,082 20,086 29,505
======= ======= ======= ======= ========
BALANCE SHEET DATA:
Total assets................................ $33,920 $49,509 $62,991 $87,913 $203,200
Notes payable............................... 2,459 6,886 13,816 25,849 23,250
Stockholders' equity 23,385 30,310 37,656 43,482 146,932
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Item 7 contains forward-looking statements, which are made pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These statements include, without limitation, statements relating to
liquidity, financing of operations, continued volatility of oil and natural gas
prices, estimates of, and budgets for, capital expenditures in the oil and
natural gas segment and upgrades for certain of the drilling rigs acquired by
the Company in 1997, source and sufficiency of funds required for capital needs
and additional rig acquisitions (if further opportunities arise), future
utilization of net operating loss carryforwards, impact of inflation on the
Company's financial position and on the Company's earnings per share, and other
such matters. The words "believes," "budgeted," "expects" or "estimates" and
similar expressions identify forward-looking statements. The Company does not
undertake to update, revise or correct
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<PAGE> 16
any of the forward-looking information. Readers are cautioned that such
forward-looking statements should be read in conjunction with the Company's
disclosures under the heading: "Cautionary Statement for Purposes of the 'Safe
Harbor' Provisions of the Private Securities Litigation Reform Act of 1995"
beginning on page 10.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had working capital of approximately
$46.5 million and cash and cash equivalents of approximately $23.3 million as
compared to working capital of approximately $17.6 million and cash and cash
equivalents of $3.5 million at December 31, 1996. Included in the change in the
Company's working capital from fiscal year 1996 to 1997 were a $21 million
increase in accounts receivable-trade and an increase of $11.3 million in
current liabilities (excluding current maturities of notes payable) which
largely consisted of a $6.8 million increase in accrued state and federal income
taxes. The increases experienced in accounts receivable-trade and current
liabilities were attributable to the Company's significantly increased contract
drilling operations (as further described below). For the year ended December
31, 1997, the Company generated net cash flow from operations of approximately
$34.4 million, received proceeds of approximately $8.7 million from the exercise
of certain stock options and warrants, sold property and equipment for proceeds
of approximately $4.2 million, borrowed $23.25 million under an existing $60
million line of credit and raised through an equity offering an additional $59.4
million. These funds were used primarily to: acquire and refurbish drilling
rigs, related equipment and associated intangible assets totaling approximately
$74.5 million; fund leasehold acquisition, exploration and development totaling
approximately $9.8 million; reduce certain notes payable by approximately $25.9
million; and increase cash and cash equivalents by approximately $19.8 million.
During December 1997, the Company renegotiated its existing credit facility
with Norwest Bank Texas, N.A. (Norwest) providing for an advancing,
non-revolving line of credit of $60 million (the "Norwest Line"). The Norwest
Line calls for interest only payments at the London Interbank Offered Rate
(LIBOR) plus 2.375% through May 31, 1998, at which time the outstanding
principal amount will convert to a term note with a maturity date of January 1,
2001, and a seven-year amortization. As of December 31, 1997, the Company had
borrowed $23.25 million under the Norwest Line to partially fund its
acquisitions of the contract drilling assets of Wes-Tex Drilling Company (June
1997), McGee Drilling Company (August 1997), and V&B Drilling, Inc. (November
1997). During February 1998, the Company borrowed the remaining available credit
under the Norwest Line to supplement the funds required to purchase Robertson
Onshore Drilling Company ("Robertson Onshore"). The Company is currently
negotiating with Norwest to increase its credit facility to $70 million.
As briefly discussed above, the Company expended significant financial
resources during fiscal year 1997 and February 1998 expanding its contract
drilling operations. Through a series of strategic acquisitions during those
periods, the Company increased its operable drilling fleet by 50 drilling rigs.
The Company also enhanced its ability to upgrade and maintain its drilling fleet
using the additional parts and related equipment acquired in these transactions.
The transactions contributing to the Company's increased drilling operations are
described below. For further discussion see Items 1 and 2, "Business and
Properties -- Recent Acquisitions" and Note 2 of Notes to the Consolidated
Financial Statements included as a part of Item 8 of this report.
Ziadril, Inc. -- During April 1997, using $5.5 million of the proceeds
provided by its equity offering completed in January 1997, the Company acquired
five operable contract drilling rigs and other related property and equipment
from Ziadril, Inc., a privately owned, non-affiliated company based in Hobbs,
New Mexico.
Wes-Tex Drilling Company -- On June 12, 1997, the Company completed its
acquisition of the contract drilling operations of Wes-Tex Drilling Company
("Wes-Tex"), a privately owned, non-affiliated company based in Abilene, Texas.
Pursuant to the transaction, the Company acquired 21 operable drilling rigs, rig
hauling trucks and trailers and a yard and shop located in Abilene. As
consideration for the acquired assets, the Company paid $25 million cash ($19
million using proceeds provided by the Company's equity offering and $6 million
provided by the Norwest Line), 1.132 million shares of the Company's Common
Stock valued at $7.875 per share and a
16
<PAGE> 17
three-year stock purchase warrant valued at $1.248 million, exercisable at $8.00
per share, to purchase an additional 800,000 shares of the Company's Common
Stock.
McGee Drilling Company -- On August 1, 1997, the Company acquired three
operable contract drilling rigs for $4.25 million from McGee Drilling Company, a
privately owned, non-affiliated company based in Midland, Texas. The acquisition
was funded using proceeds provided by the Norwest Line.
V&B Drilling Inc. -- During November 1997, the Company acquired eight
drilling rigs (five of which are operable), four yards and a shop located in
Odessa, Texas and other related drilling equipment and rolling stock from V&B
Drilling Inc., a privately owned, non-affiliated company based in Midland,
Texas. The purchase price of $13 million was funded using proceeds provided by
the Norwest Line.
Circle R Drilling Ltd. 1981-A -- During November 1997, the Company acquired
a single operable drilling rig for $1.46 million from Circle R Drilling Ltd.
1981-A, a non-affiliated, Louisiana limited partnership.
Robertson Onshore Drilling Company -- On February 10, 1998, the Company
completed its merger with Robertson Onshore Drilling Company, a privately owned,
non-affiliated company based in Dallas, Texas. In consideration for $40 million
($36.75 million provided by the Norwest Line and $3.25 million using cash on
hand), the Company acquired 15 operable contract drilling and a yard and shop
located in Liberty City, Texas.
During January 1998, the Company completed the acquisition of Lone Star
Mud, Inc. ("Lone Star"), a privately-held, non-affiliated company based in
Midland, Texas for a purchase price of $1.43 million in cash and 571,328 shares
of the Company's Common Stock valued at $17.41 per share. Lone Star is a
provider of drilling fluids to the oil and natural gas industry. Management of
the Company viewed the acquisition as an opportunity to enter into a related
segment of the oilfield service industry, which would integrate well with the
Company's existing operations.
Management believes that the current level of cash and short-term
investments, together with cash generated from operations should be sufficient
to meet the Company's immediate capital needs. From time to time, the Company
reviews acquisition opportunities relating to its business. The timing, size or
success of any acquisition and the associated capital commitments are
unpredictable. Should further opportunities for growth requiring capital arise,
the Company believes it would be able to satisfy these needs through a
combination of working capital, cash from operations, and either debt or equity
financing. However, there can be no assurance that such capital would be
available.
RESULTS OF OPERATIONS
Comparison of the years ended December 31, 1997 and 1996
For the year ended December 31, 1997, contract drilling revenues were
approximately $178.3 million as compared to $73.6 million for the same period in
1996; an increase of approximately 142%. Average rig utilization increased
approximately 13% to 89% for the twelve months ended December 31, 1997. Direct
drilling costs were $128.4 million or 72% of drilling revenues for the year
ended December 31, 1997; while direct drilling costs were $59.6 million or 81%
of related drilling revenues for 1996. The increase in contract drilling
revenues and associated drilling costs was primarily attributable to the
addition of 35 drilling rigs to the Company's operable drilling fleet during
fiscal year 1997 and the addition of 13 operable drilling rigs during the fourth
quarter of 1996. General and administrative expense for the contract drilling
operations was approximately $5.4 million for the year ended December 31, 1997
as compared to approximately $4.0 million in 1996. As a result of the Company's
recent capital acquisitions, depreciation expense increased from approximately
$6.8 million in 1996 to approximately $12.5 million for the year ended December
31, 1997. These increased levels of depreciation expense are expected to
continue for the foreseeable future. For the twelve months ended December 31,
1997, income from the Company's contract drilling operations was
17
<PAGE> 18
approximately $32.7 million as compared to approximately $3.9 million in 1996.
This increased profitability was largely attributable to the increased rig
utilization rate attained during 1997 and, to a lesser extent, moderate
increases realized by the Company during 1997 in its daily drilling rates.
The Company derives substantially all of its operating revenues and profit
from its contract drilling operations; however, the Company realized revenues
from its oil and natural gas operations of approximately $12.4 million during
fiscal year 1997 as compared to approximately $8.3 million in 1996. For the year
ended December 31, 1997, the Company incurred approximately $11.1 million in
operating costs associated with its oil and natural gas activities, including
approximately $4.9 million of depreciation and depletion and $1.4 million of
general and administrative expense. This compares to approximately $8.5 million,
including approximately $3.1 million of depreciation and depletion and
approximately $1.4 million of general and administrative expense for the same
period ended in 1996. Operating income from the oil and natural gas operations
were approximately $2.4 million in 1997 as compared to $1.6 million in 1996.
For the year ended December 31, 1997, the Company incurred interest expense
of $1.045 million as compared to $1.6 million in 1996. The decrease in interest
expense related to the Company's early retirement of its notes payable during
the first quarter of 1997 using proceeds provided by its equity offering
completed during that time. However, the Company has since increased its
long-term debt obligations to $60 million requiring monthly interest payments at
LIBOR plus 2.375%. In 1997, the Company recognized a net gain on the sale of
property and equipment of $1.5 million as compared to approximately $546,000 in
1996. The increase in 1997 was largely attributable to the sale of the Company's
interest in an oil and natural gas property of approximately $813,000.
In 1997, as a result of the Company's increased profitability and reduced
benefit of certain deferred tax assets, the Company incurred income tax expense
of approximately $12.9 million as compared to a net income tax benefit of $2.3
million in 1996. As previously reported, the Company fully reduced its valuation
allowance existing against its deferred tax assets in prior periods recognizing
the related benefit. To the degree that the Company generates income in excess
of its remaining deferred tax assets, it will incur income tax expense at its
effective statutory rate.
Comparison of the years ended December 31, 1996 and 1995
THE FOLLOWING RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 1995
ARE BASED SOLELY ON HISTORICAL FINANCIAL INFORMATION THAT HAS BEEN RESTATED TO
REFLECT THE MERGER OF THE COMPANY AND TUCKER DRILLING COMPANY, INC. ON JULY 30,
1996 UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING.
For the year ended December 31, 1996, contract drilling revenues were
approximately $73.6 million as compared to $57.6 million for the same period in
1995, an increase of 28%. Average rig utilization for the same comparative
periods increased by approximately 7% to 76% for the year ended December 31,
1996. Direct drilling costs for each of the years ended December 31, 1996 and
1995 were approximately $59.6 million and $46.5 million, respectively,
representing approximately 81% of related contract drilling revenues for each of
the two years. The increase in contract drilling revenues and direct drilling
costs was due primarily to the acquisition of 13 operable drilling rigs during
October, November and December of the fiscal year ended 1996 and the increase in
the average rig utilization rate attained during the year. General and
administrative expense for the contract drilling segment was approximately $4.0
million and $3.7 million for the years ended December 31, 1996 and 1995,
respectively. Depreciation expense was approximately $6.8 million for the year
ended December 31, 1996 as compared to $5.1 million in 1995. The increase in
depreciation expense was due primarily to the Company's significant purchases of
approximately $5.9 million of new drill pipe during the 15 months ended December
31, 1996 as well as, the aforementioned additions to the Company's operable
drilling rig fleet. These higher levels of depreciation expense will continue
for the foreseeable future. For the year ended December 31, 1996, income from
operations of this segment was approximately $3.9 million as compared to
approximately $3.4 million in 1995.
Oil and natural gas revenues were approximately $8.3 million for the year
ended December 31, 1996, as compared to approximately $5.4 million in 1995. The
volume of crude oil and natural gas sold increased by 17% in 1996, as compared
to 1995. The average price per Bbl was $20.99 in 1996, as compared to $17.48 in
18
<PAGE> 19
1995, and the average price per Mcf of natural gas was $2.01 in 1996 as compared
to $1.51 in 1995. Lease operating and production costs were $3.91 per BOE in
1996, as compared to $3.61 per BOE in 1995. General and administrative expense
for the oil and gas segment was approximately $1.4 million for each of the two
years ended December 31, 1996. Exploration costs increased by approximately 26%
to approximately $466,000 for the year ended December 31, 1996 as a result of
the addition of an exploration office in West Texas as well as the Company's
continued utilization of 3-D seismic technology in its exploration and
production operations. Depreciation, depletion and amortization expense was
approximately $3.1 million in 1996, as compared to $2.4 million in 1995. This
increase was largely attributable to increased volumes of production as
described above. In 1996, impairment of certain of the Company's oil and gas
properties resulted in approximately $549,000 of expense as compared to $159,000
for the same period ended in 1995. Other revenues generated from the oil and
natural gas segment, consisting primarily of fees generated from the lease
operating activities of the segment, were approximately $1.8 million and $1.4
million at December 31, 1996 and 1995, respectively. For the year ended December
31, 1996, income from operations of the oil and gas segment was approximately
$1.6 million compared to a loss of approximately $51,000 for the same period in
1995.
For the year ended December 31, 1996, interest expense was approximately
$1.6 million as compared to $1.1 million in 1995. The increase was primarily
attributable to an approximate 92% increase in the average outstanding principal
balance of notes payable. Additional general corporate expense of approximately
$2.3 million was incurred during the year ended December 31, 1996 relative to
the acquisition of Tucker. In 1996, the Company recognized a net gain on the
sale of certain fixed assets of approximately $546,000 as compared to
approximately $374,000 recognized a year earlier. The increase was attributable
to the sale of six drilling rig generator sets and approximately 25,000 feet of
used drill pipe.
In 1996, the Company recorded net income tax benefits of approximately $2.3
million as compared to approximately $787,000 in 1995. The increase was
attributable to approximately $2.4 million of net deferred tax benefit generated
in the current year which was primarily a result of a 100% reduction of the
valuation allowance against existing deferred tax assets. The Company's deferred
tax assets consist primarily of net operating loss carryforwards which
management believes will be utilized in future periods to offset the net
earnings of those fiscal periods.
INCOME TAXES
At December 31, 1997, the Company had tax net operating loss ("NOL")
carryforwards of approximately $3.5 million. These NOL carryforwards expire at
various dates from 1998 through 2012, subject to certain limitations. Prior to
August 3, 1995, the Company realized substantial federal income tax savings due
to the NOL carryforwards. The utilization of these NOL carryforwards prior to
that date effectively reduced the current federal income tax rate from
approximately 34% to approximately 2.5%. During 1995, the Company's NOL
carryforwards became subject to an annual limitation due to a change of over 50%
in the stock ownership of the Company as defined in Internal Revenue Service
Code Section 382(g). The NOL carryforwards that can be utilized to offset net
income in any year will be equal to approximately $3.348 million. The NOL
limitation is determined by the value of Patterson's equity on August 2, 1995,
the day prior to the ownership change, times 5.88%, the Federal long-term exempt
rate on that date as published by the U.S. Treasury Department, or $1.808
million, and approximately $1.540 million which is determined by the value of
Tucker's equity on July 29, 1996, the day prior to consummation of the Merger,
times 5.78%, the Federal long-term exempt rate on that date.
During 1995 and 1996, the Company recognized the benefit of deferred income
taxes of approximately $1.0 million and $2.4 million, respectively. The benefit
of deferred income taxes during each of these periods represented management's
estimate of future benefits to be received by the Company primarily from its NOL
carryforwards. Deferred income taxes are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. As a result of fully
recognizing the benefit of its deferred income taxes, the Company will incur
deferred income
19
<PAGE> 20
tax expense as these benefits are utilized. The Company incurred deferred income
tax expense of approximately $2.5 million for the year ended December 31, 1997.
VOLATILITY OF OIL AND NATURAL GAS PRICES AND ITS IMPACT ON OPERATIONS
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. The sharp decline in crude oil prices beginning in the fourth
quarter of 1997 has adversely impacted the Company's operations. Should oil
prices remain at current levels or continue to decline or natural gas prices
begin to decline, the Company's operations could be adversely affected.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" for the year ended December 31,
1997. This statement establishes new standards for computing, presenting and
disclosing earnings per share data and requires restatement of all prior period
earnings per share data. The adoption of this statement resulted in the dual
presentation of earnings per share; Basic Earnings per Share ("Basic EPS") and
Diluted Earnings per Share ("Diluted EPS") on the Company's Consolidated
Statements of Income. Basic EPS is based on the weighted average number of
shares outstanding during the year. Diluted EPS includes common stock
equivalents, which are dilutive to earnings per share. For the years ended
December 31, 1995, 1996 and 1997, the dilutive securities, consisting of certain
common stock equivalents were approximately 565,000, 919,000 and 1.013 million,
respectively. In accordance with this statement, the Company has applied these
provisions on a retroactive basis.
The Company adopted the provisions of SFAS No. 129, "Disclosures of
Information about Capital Structure," effective for the year ended December 31,
1997. This statement consolidates existing pronouncements on required
disclosures about a company's capital structure including a brief discussion of
rights and privileges for securities outstanding. The adoption of this statement
had no material effect on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
financial statement periods beginning after December 15, 1997. Management does
not anticipate that this statement will have a significant effect on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management does
not anticipate that this statement will have a significant effect on the
Company's consolidated financial statements.
20
<PAGE> 21
YEAR 2000 COMPLIANCE PROGRAM
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 Issue (as defined below) and has
developed an implementation plan. The "Year 2000 Issue" is whether the Company's
computer systems will properly recognize date sensitive information when the
year changes to 2000, or "00." Systems that do not properly recognize such
information could generate erroneous data or cause a system to fail. The Company
uses purchased software programs for a variety of functions, including general
ledger, accounts payable and accounts receivable accounting packages. The
companies providing these software programs have represented that they are Year
2000 compliant. The Company's Year 2000 implementation plan also includes
ensuring that all individual workstations are Year 2000 compliant. Costs
associated with ensuring the Company's systems are Year 2000 compliant are not
expected to be material to the Company's operations. Additionally, the Company
does not anticipate an interruption in its operations relative to Year 2000
concerns of its customers and vendors. The Company believes that the Year 2000
Issue will not pose significant operational problems for the Company's computer
systems and, therefore, will not have a significant impact on the operations of
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements are filed as a part of this report at the end of Part
IV hereof beginning at page F-1, Index to Consolidated Financial Statements, and
are incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required by Part III is omitted from this report because
the Company will file a definitive Proxy Statement for the Company's 1998 Annual
Meeting of Stockholders (the "Proxy Statement") pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year covered by this Form 10-K and certain information included therein
is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1 of this report.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
financial statements or notes thereto.
(a)(3) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<C> <S>
2.1 -- Plan and Agreement of Merger dated October 14, 1993,
between Patterson Energy, Inc., a Texas corporation, and
Patterson Energy, Inc., a Delaware corporation, together
with related Certificates of Merger.(1)
2.2 -- Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)
2.2.1 -- Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)
2.3 -- Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc.(4)
2.4 -- Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.4.1 -- Amendment to Asset Purchase Agreement, dated June 4,
1997, among Patterson Energy Inc., Patterson Drilling
Company and Wes-Tex Drilling Company.(5)
2.5 -- Agreement, dated June 4, 1997, among Patterson Energy
Inc., Patterson Drilling Company, Greathouse Foundation
and Myrle Greathouse, Trustee under Agreement dated June
2, 1997.(5)
2.6 -- Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
McGee Drilling Company.(4)
2.7 -- Asset Purchase Agreement dated November 14, 1997 among
Patterson Energy, Inc., Patterson Drilling Company and V
& B Drilling Company.(6)
2.8 -- Asset Purchase Agreement dated November 20, 1997 among
Patterson Drilling Company and Circle R Drilling, Ltd.
1981-A.(6)
2.9 -- Asset Purchase Agreement, dated May 23, 1995, between
Perry E. Esping and Patterson Energy, Inc., together with
related Stock Purchase Warrant and Registration Rights
Agreement.(12)
2.10 -- Agreement and Plan of Merger dated January 20, 1998,
among Patterson Energy, Inc., Patterson Onshore Drilling
Company and Robertson Onshore Drilling Company.(7)
3.1 -- Restated Certificate of Incorporation.(8)
3.1.1 -- Certificate of Amendment to the Certificate of
Incorporation.(9)
3.1.2 -- Certificate of Amendment to the Certificate of
Incorporation.
3.2 -- Bylaws.(1)
</TABLE>
22
<PAGE> 23
<TABLE>
<C> <S>
4.1 -- Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock
and Preferred Stock.(10)
4.2 -- Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997.(11)
4.3 -- Stock Purchase Warrant of Patterson Energy, Inc., dated
June 12, 1997.(11)
10.1 -- Credit Agreement dated December 9, 1997 among Patterson
Energy, Inc., Patterson Drilling Company, Patterson
Petroleum, Inc., Patterson Trading Company, Inc. and
Norwest Bank Texas, N.A.(6)
10.1.1 -- Promissory Note dated December 9, 1997 among Patterson
Energy, Inc. and Norwest Bank Texas, N.A.(6)
10.1.2 -- Security Agreement dated December 9, 1997 between
Patterson Drilling Company and Norwest Bank Texas,
N.A.(6)
10.1.3 -- Corporate Guarantees of Patterson Drilling Company,
Patterson Petroleum, Inc. and Patterson Petroleum Trading
Company, Inc.(6)
10.2 -- Aircraft Lease, dated January 15, 1998,(effective January
1, 1998) between Talbott Aviation, Inc. and Patterson
Energy, Inc.
10.3 -- Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(12)
10.3.1 -- Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(13)
10.4 -- Crude Oil Purchase Contract, dated October 19, 1994,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(14)
10.4.1 -- Crude Oil Purchase Contract, dated October 24, 1995,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(13)
10.5 -- Patterson Energy, Inc. 1993 Stock Incentive Plan, as
amended(15)
10.6 -- Patterson Energy, Inc. Non-Employee Directors' Stock
Option Plan, as amended.(16)
10.7 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(13)
10.8 -- Consulting and Stock Option Agreement, dated as of
February 15, 1995, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(13)
10.9 -- Consulting and Stock Option Agreement, dated as of August
2, 1995, between Patterson Energy, Inc. and E. Peter
Hoffman, Jr.(13)
10.10 -- Model Form Operating Agreement.(17)
10.11 -- Form of Drilling Bid Proposal and Footage Drilling
Contract.(17)
10.12 -- Form of Turnkey Drilling Agreement.(17)
11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Independent Accountants, Coopers & Lybrand
L.L.P.
</TABLE>
23
<PAGE> 24
<TABLE>
<C> <S>
23.2 -- Consent of Independent Public Accountants, Arthur
Andersen LLP
27.1 -- Financial Data Schedule as of December 31, 1995, 1996 and
1997 and for each of the quarters ended March 31, 1996
and 1997, June 30, 1996 and 1997 and September 30, 1996
and 1997.
</TABLE>
- ---------------
(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2
to Registration Statement on Form SB-2 (File No. 33-68058-FW); filed
October 28, 1993.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.
(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.
(4) Incorporated herein by reference to Item 16, "Exhibits" to Amendment No. 1
to Registration Statement on Form S-3 (File No. 333-29035); filed August 5,
1997.
(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11, 1997.
(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24, 1997.
(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.
(8) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended September 30, 1996; filed
August 12, 1996.
(9) Incorporated herein by reference to Item 6. "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended June 30, 1997; filed
August 14, 1997.
(10) Incorporated by reference to Item 16, "Exhibits" to Registration Statement
on Form S-3 filed with the Securities Exchange Commission on December 18,
1996.
(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19, 1997.
(12) Incorporated by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2(File No.
33-68058-FW).
(13) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.
(16) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471); filed November 4, 1997.
(17) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
(b) Reports on Form 8-K.
Current reports on Form 8-K filed during the quarter ended December 31,
1997 related to:
(i) The announcement of Patterson Energy, Inc.'s consummation of V&B
Drilling, Inc. and Circle R Drilling, Ltd. 1981-A and its renegotiated
line of credit with Norwest Bank Texas, N.A. filed with the Commission
on December 24, 1997.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
Date: March 30, 1998 By: /s/ CLOYCE A. TALBOTT
------------------------------------
Cloyce A. Talbott
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of Patterson Energy,
Inc. and in the capacities indicated as of March 30, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CLOYCE A. TALBOTT Chairman of the Board, Chief Executive Officer
- ----------------------------------------------------- and Director
Cloyce A. Talbott
(Principal Executive Officer)
/s/ A. GLENN PATTERSON President, Chief Operating Officer and
- ----------------------------------------------------- Director
A. Glenn Patterson
/s/ JAMES C. BROWN Vice President -- Finance, Chief Financial
- ----------------------------------------------------- Officer, Secretary and Treasurer
James C. Brown
(Principal Accounting Officer)
/s/ ROBERT C. GIST Director
- -----------------------------------------------------
Robert C. Gist
/s/ KENNETH E. DAVIS Director
- -----------------------------------------------------
Kenneth E. Davis
/s/ VINCENT A. ROSSI, JR. Director
- -----------------------------------------------------
Vincent A. Rossi, Jr.
</TABLE>
25
<PAGE> 26
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants; Coopers & Lybrand
L.L.P..................................................... F-2
Report of Independent Public Accountants; Arthur Andersen
LLP....................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-4
Consolidated Statements of Income for each of the years
ended December 31, 1995, 1996 and 1997................. F-5
Consolidated Statements of Stockholders' Equity for each
of the years ended December 31, 1995, 1996 and 1997.... F-6
Consolidated Statements of Cash Flows for each of the
years ended December 31, 1995, 1996
and 1997............................................... F-7
Notes to Consolidated Financial Statements................ F-9
</TABLE>
F-1
<PAGE> 27
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, 1996 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 1995 financial statements of Patterson Drilling
Company (formerly Tucker Drilling Company, Inc.) which reflect 28 percent of
consolidated total operating revenues for the year ended 1995. 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, based on our audits and the report of the other auditors,
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, 1996 and 1997 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 27, 1998
F-2
<PAGE> 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Tucker Drilling Company, Inc.
We have audited the balance sheet of Tucker Drilling Company, Inc. (a
Delaware corporation) as of March 31, 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the year 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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tucker Drilling Company,
Inc. as of March 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
May 16, 1996
F-3
<PAGE> 29
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,494 $ 23,338
Marketable securities..................................... 544 566
Accounts receivable:
Trade, less allowance for doubtful accounts of $282,034
and $378,110 at December 31, 1996 and 1997,
respectively........................................... 23,743 44,732
Oil and natural gas sales.............................. 999 773
Costs of uncompleted drilling contracts in excess of
related billings....................................... 274 --
Deferred income taxes..................................... 1,483 2,309
Undeveloped oil and natural gas properties held for
resale................................................. 4,670 4,781
Other current assets...................................... 274 515
------- --------
Total current assets.............................. 35,481 77,014
Property and equipment, at cost, net........................ 51,308 100,405
Intangible assets, net...................................... -- 24,644
Other assets................................................ 1,124 1,137
------- --------
Total assets...................................... $87,913 $203,200
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable....................... $ 117 $ 1,467
Accounts payable:
Trade.................................................. 12,129 12,126
Revenue distribution................................... 2,432 3,352
Other.................................................. 965 1,569
Accrued expenses.......................................... 2,124 5,142
Accrued state and federal income taxes payable............ 122 6,874
------- --------
Total current liabilities......................... 17,889 30,530
------- --------
Deferred income taxes, net.................................. 96 3,268
Deferred liabilities........................................ 714 687
Notes payable, less current maturities...................... 25,732 21,783
------- --------
26,542 25,738
------- --------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock -- par value $.01; authorized 1,000,000
shares, no shares
issued................................................. -- --
Common stock -- par value $.01; authorized 50,000,000
shares with 19,774,364
and 30,967,084 issued and outstanding at December 31,
1996 and 1997, respectively............................ 198 310
Additional paid-in capital................................ 21,210 102,306
Retained earnings......................................... 22,074 44,316
------- --------
Total stockholders' equity........................ 43,482 146,932
------- --------
Total liabilities and stockholders' equity........ $87,913 $203,200
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 30
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Drilling.................................................. $57,599 $73,590 $178,332
Oil and natural gas sales................................. 5,400 8,299 10,773
Well operation fees....................................... 1,296 1,499 1,632
Other..................................................... 149 320 40
------- ------- --------
64,444 83,708 190,777
------- ------- --------
Operating costs and expenses:
Direct drilling costs..................................... 46,505 59,564 128,416
Lease operating and production............................ 1,509 2,012 2,274
Impairment of oil and natural gas properties.............. 159 549 355
Exploration costs......................................... 369 466 647
Dry holes and abandonments................................ 791 987 1,481
Depreciation, depletion and amortization.................. 7,523 9,960 17,497
General and administrative................................ 5,063 5,416 6,786
------- ------- --------
61,919 78,954 157,456
------- ------- --------
Operating income............................................ 2,525 4,754 33,321
------- ------- --------
Other income (expense):
Net gain on sale of assets................................ 374 546 1,499
Interest income........................................... 545 478 1,056
Interest expense.......................................... (1,065) (1,612) (1,045)
Non-recurring acquisition costs........................... -- (2,268) --
Other..................................................... 35 119 277
------- ------- --------
(111) (2,737) 1,787
------- ------- --------
Income before income taxes.................................. 2,414 2,017 35,108
------- ------- --------
Income tax expense (benefit):
Current................................................... 213 174 10,354
Deferred.................................................. (1,000) (2,428) 2,512
------- ------- --------
(787) (2,254) 12,866
------- ------- --------
Net income.................................................. $ 3,201 $ 4,271 $ 22,242
======= ======= ========
Net income per common share:
Basic..................................................... $ 0.18 $ 0.22 $ 0.78
======= ======= ========
Diluted................................................... $ 0.18 $ 0.21 $ 0.75
======= ======= ========
Weighted average number of common shares outstanding:
Basic..................................................... 17,517 19,167 28,492
======= ======= ========
Diluted................................................... 18,082 20,086 29,505
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 31
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1994........................ 16,675 $167 $ 14,782 $15,361 $ 30,310
Issuance of common stock and
warrants............................ 390 4 718 -- 722
Conversion of 3,414,992 redeemable
warrants............................ 1,707 17 2,978 -- 2,995
Conversion of 301,260 redeemable
warrants............................ 142 1 280 -- 281
Exercise of stock options.............. 74 1 146 -- 147
Net income............................. -- -- -- 3,201 3,201
------ ---- -------- ------- --------
December 31, 1995........................ 18,988 190 18,904 18,562 37,656
Issuance of common stock............... 208 2 1,428 -- 1,430
Exercise of stock options.............. 425 4 880 -- 884
Conversion of 301,260 redeemable
warrants............................ 153 2 (2) -- --
Net income............................. -- -- -- 4,271 4,271
Adjustment to conform fiscal years (see
Note 2)............................. -- -- -- (759) (759)
------ ---- -------- ------- --------
December 31, 1996........................ 19,774 198 21,210 22,074 43,482
Issuance of common stock............... 9,384 94 68,221 -- 68,315
Issuance of stock purchase warrant..... -- -- 1,248 -- 1,248
Exercise of stock options.............. 1,009 10 2,323 -- 2,333
Conversion of stock purchase warrant... 800 8 6,392 -- 6,400
Tax benefit related to exercise of
stock options....................... -- -- 2,912 -- 2,912
Net income............................. -- -- -- 22,242 22,242
------ ---- -------- ------- --------
December 31, 1997........................ 30,967 $310 $102,306 $44,316 $146,932
====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 32
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,201 $ 4,271 $ 22,242
Adjustments to reconcile net income to net cash from
operating activities:
Abandonment of oil and natural gas properties............. 109 121 --
Depreciation, depletion and amortization.................. 7,523 9,960 17,497
Impairment of oil and natural gas properties.............. 159 549 355
Net gain on sale of assets................................ (374) (546) (1,499)
Tax benefit related to exercise of stock options.......... -- -- 2,912
Deferred income tax expense (benefit)..................... (1,000) (2,428) 2,512
Increase (decrease) in deferred compensation
liabilities............................................. 52 349 (27)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable..... 1,680 (10,558) (20,989)
(Increase) decrease in oil and natural gas sales
receivable......................................... (259) (512) 226
Increase in undeveloped oil and natural gas
properties held for resale......................... (736) (2,548) (111)
(Increase) decrease in other current assets.......... (26) (99) 33
Increase (decrease) in trade accounts payable........ (1,762) 4,301 (3)
Increase in revenue distribution payable............. 699 828 920
Increase (decrease) in accrued state and federal
income taxes payable............................... -- (13) 6,752
Increase in accrued expenses......................... -- 649 3,018
Increase in other current payables................... 54 331 604
Net change in deposits on workers' compensation insurance
policy.................................................. 213 -- --
-------- -------- --------
Net cash provided by operating activities.......... 9,533 4,655 34,442
-------- -------- --------
Cash flows from investing activities:
Net sales (purchases) of investment securities............ 2,046 1,927 (22)
Acquisitions.............................................. -- (17,078) (49,400)
Purchases of property and equipment....................... (19,906) (6,895) (34,861)
Sales of property and equipment........................... 556 1,229 4,164
Change in other assets.................................... (84) (99) (13)
-------- -------- --------
Net cash used in investing activities.............. (17,388) (20,916) (80,132)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 9,375 17,469 23,250
Payments on notes payable................................. (2,444) (5,837) (25,849)
Issuance of common stock and redeemable warrants.......... 3,276 -- 59,400
Proceeds from exercise of stock options................... 147 914 8,733
-------- -------- --------
Net cash provided by financing activities.......... 10,354 12,546 65,534
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 2,499 (3,715) 19,844
Cash and cash equivalents at beginning of year.............. 6,845 7,209(1) 3,494
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 9,344 $ 3,494 $ 23,338
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................ $ 993 $ 1,657 $ 1,045
Income taxes............................................ 270 174 691
</TABLE>
- ---------------
(1) Amount does not agree to cash and cash equivalents as presented as a result
of conforming reporting periods (see Note 2).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 33
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Noncash investing and financing activities:
During 1997, the Company completed five separate asset acquisitions for an
aggregate purchase price of approximately $59.6 million of which, approximately
$49.4 million was paid in cash as follows (see Note 2):
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Fair value of assets acquired............................... $59,563
Less non-cash items:
Common stock issued....................................... (8,915)
Three-year stock purchase warrant......................... (1,248)
-------
Total cash paid $49,400
=======
</TABLE>
During the year ended December 31, 1996, 301,260 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 152,896
shares of the Company's common stock were issued and 148,364 shares of such
common stock were forfeited to the Company in lieu of a cash payment (see Note
9).
During the year ended December 31, 1996, the Company acquired three
drilling rigs from a non-affiliated entity. The related purchase price consisted
of $100,000 cash, a promissory note of $400,000 payable to the seller and the
issuance of 208,000 shares of the Company's common stock valued at $1.43 million
(see Notes 2, 7 and 9).
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, 390,000 shares of the Company's
common stock, valued for purposes of this transaction at $682,500 and warrants
to purchase an additional 300,000 shares at an exercise price of $2.25 per share
(amounts reflect effects of July 25, 1997 and January 23, 1998 stock splits),
valued at $39,750 for this transaction (see Note 9).
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 34
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies follows:
Principles of consolidation -- The consolidated financial statements
include the accounts of Patterson Energy, Inc. ("Patterson") and its
wholly-owned subsidiaries, Patterson Drilling Company, Patterson Petroleum,
Inc., Patterson Petroleum Trading Company, Inc. and Patterson Drilling Programs,
Inc. (collectively referred to herein as the "Company"). All significant
intercompany accounts and transactions have been eliminated.
Description of business -- The Company engages in onshore contract drilling
of oil and natural gas wells and, to a lesser extent, the development,
exploration, acquisition and production of oil and natural gas. The Company
provides contract drilling services to major oil and gas companies and
independent producers primarily in Texas and southeast New Mexico.
The contract drilling business experienced increased demand for drilling
services from 1995 through the third quarter of 1997 due to stronger oil and
natural gas prices. However, except for that period and other occasional
upturns, the market for onshore contract drilling services has generally been
depressed since mid-1982, when crude oil and natural gas prices began to weaken.
A particularly sharp decline in demand for contract drilling services occurred
in 1986 because of the worldwide collapse in oil prices. Since that time and
except during the occasional upturns, there have been substantially more
drilling rigs available than necessary to meet demand in most operating and
geographic segments of the domestic drilling industry. 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. The Company's rig utilization rate reached an all time high of
approximately 91.5% in the third quarter of 1997, but has weakened since then
due to a decrease in the demand for drilling rigs caused by the reduction in the
price of oil. Should oil prices remain at these levels or continue to decline or
natural gas prices decline, the Company's operations could be further adversely
affected.
Management estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Drilling operations -- The Company follows the percentage-of-completion
method of accounting for day work and footage drilling arrangements. Under this
method all drilling revenues, direct costs and appropriate portions of indirect
costs, related to the contracts in progress, are recognized as contract drilling
services are performed.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs
and appropriate portions of indirect costs (including maintenance, repairs and
depreciation) related to the contracts in progress are deferred and recognized
as revenues and expenses in the period the contracts are completed.
Provisions for losses are made on incomplete contracts when significant
losses are anticipated.
Undeveloped oil and natural gas properties held for resale -- Undeveloped
oil and gas properties held for resale represent leasehold interests in unproven
oil and natural gas properties which the Company expects to sell. Also included
are leasehold costs programmed for development under arrangements which will
provide
(continued)
F-9
<PAGE> 35
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
for reimbursement of such costs to the Company. Such properties are carried at
the lower of cost or net realizable value. The Company recognizes gains or
losses upon disposition or impairment of the properties.
Property and equipment -- Property and equipment (other than oil and
natural gas) -- Depreciation is provided on the straight-line method over the
estimated useful lives as defined below. The Company incurred depreciation
expense of approximately $5.1 million, $7 million and $11.7 million for the
years ended December 31, 1995, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Drilling rigs and related equipment......................... 2-15
Office furniture............................................ 3-10
Buildings................................................... 5-20
Automotive equipment........................................ 2-7
Other....................................................... 3-7
</TABLE>
Oil and natural gas properties -- The Company follows the successful
efforts method of accounting, using the field as its accumulation center for
capitalized costs. Under the successful efforts method of accounting, costs
which result directly in the discovery of oil and natural gas reserves and all
development costs are capitalized. Exploration costs which do not result
directly in discovering oil and natural gas reserves are charged to expense as
incurred. The capitalized costs, consisting of lease and well equipment, lease
acquisition costs and intangible development costs are depreciated, depleted and
amortized on the units-of-production method, based on petroleum engineer
estimates of recoverable proved developed oil and natural gas reserves of each
respective field. The Company incurred depletion expense of approximately $2.4
million, $3.0 million and $4.8 million for the years ended December 31, 1995,
1996 and 1997, respectively.
Impairment of long-lived assets -- In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," net capitalized
costs of long-lived assets in excess of estimated future net revenues are
reduced to reflect an amount which is expected to be recovered through the
future cash flows generated by the use of the related assets. Impairment of oil
and natural gas properties is periodically assessed on a field basis as
determined by an independent reserve engineer. The Company incurred
approximately $159,000, $549,000 and $355,000 of impairment to such properties
at December 31, 1995, 1996 and 1997, respectively.
Maintenance and repairs -- Maintenance and repairs are charged against
operations. Renewals and betterments which extend the life or improve existing
properties are capitalized.
Retirements -- Upon disposition or retirement of property and equipment
(other than oil and gas properties), the cost and related accumulated
depreciation are removed and the gain or loss thereon, if any, is credited or
charged to income. The Company recognizes the gain or loss on the sale of either
a part of a proved oil and gas property or of an entire proved oil and gas
property constituting a part of a field upon the sale or disposition of such.
The unamortized cost of the property or group of properties, a part of which was
sold or otherwise disposed of, is apportioned to the interest sold and the
interest retained on the basis of the fair value of those interests.
Intangible assets -- Intangible assets consist of goodwill and covenants
not to compete arising from business combinations (see Notes 2 and 5). The
values assigned to intangible assets, based in part upon independent appraisals,
are amortized on a straight line basis. Goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets of the acquired
business, is amortized over the
(continued)
F-10
<PAGE> 36
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
period of expected benefit of fifteen years. Covenants not to compete are
amortized over their contractual lives of five years. Amortization expense
charged to operations at December 31, 1997 was $942,452.
Earnings per share -- The Company adopted the provisions of SFAS No. 128,
"Earnings Per Share" for the year ended December 31, 1997. This statement
establishes new standards for computing, presenting and disclosing earnings per
share data and requires restatement of all prior period earnings per share data.
The adoption of this statement resulted in the dual presentation of earnings per
share; Basic Earnings per Share ("Basic EPS") and Diluted Earnings per Share
("Diluted EPS") on the Company's Consolidated Statements of Income. Basic EPS is
based on the weighted average number of shares outstanding during the year.
Diluted EPS includes common stock equivalents, which are dilutive to earnings
per share. For the years ended December 31, 1995, 1996 and 1997, the dilutive
securities, consisting of certain stock options and warrants as described in
Notes 9 and 10, were approximately 565,000, 919,000 and 1.013 million,
respectively. In accordance with this statement, the Company has applied these
provisions on a retroactive basis.
Stock splits -- On July 25, 1997 and January 23, 1998, the Company effected
two-for-one splits of its common stock. All information regarding earnings per
share, weighted average number of common shares outstanding, stock options and
warrants issued and exercised and all other related disclosures herein reflect
the effects of such stock splits for all periods presented (see Notes 9 and 19).
Income taxes -- Income taxes are based on earnings reported for financial
statement purposes. The provision for income taxes differs from the amounts
currently payable because of permanent and temporary differences in the
recognition of certain income and expense items for financial reporting and tax
reporting purposes.
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax basis of assets and
liabilities using enacted statutory rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets primarily result from
net operating loss carryforwards, certain accrued but unpaid insurance losses,
alternative minimum tax credit carryforwards and investment tax credit
carryforwards. Deferred tax liabilities primarily result from differences
between the financial statement and tax basis of the Company's fixed assets.
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.
Stock based compensation -- The Company grants stock options under
stock-based incentive compensation plans, (the "Plans"). The Company applies APB
Opinion 25 and related Interpretations in accounting for the Plans. In 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting
for Stock-Based Compensation" ("SFAS No. 123") which if fully adopted by the
Company, would change the methods the Company applies in recognizing the cost of
the Plans. Adoption of the cost recognition provisions of SFAS No. 123 is
optional and the Company decided not to elect these provisions. However, pro
forma disclosures as if the Company adopted the cost recognition provisions of
SFAS No. 123 in 1995 are required by SFAS No. 123 and are presented in Note 10.
Statement of cash flows -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash on deposit and unrestricted
certificates of deposit with original maturities of 90 days or less.
Recently issued accounting standards -- The Company adopted the provisions
of SFAS No. 129, "Disclosures of Information about Capital Structure," effective
for the year ended December 31, 1997. This
(continued)
F-11
<PAGE> 37
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
statement consolidates existing pronouncements on required disclosures about a
company's capital structure including a brief discussion of rights and
privileges for securities outstanding. The adoption of this statement had no
material effect on the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
financial statement periods beginning after December 15, 1997. Management does
not anticipate that this statement will have a significant effect on the
Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management does
not anticipate that this statement will have a significant effect on the
Company's consolidated financial statements.
Reclassifications -- Certain reclassifications have been made to the 1995
and 1996 consolidated financial statements in order for them to conform with the
1997 presentation. The reclassifications had no effect on net income or
stockholders' equity for these years.
2. MERGER AND ACQUISITIONS
Wes-Tex Drilling Company -- On June 12, 1997, the Company consummated an
acquisition to purchase 21 contract drilling rigs, related rolling stock, a shop
and a yard from Wes-Tex Drilling Company ("Wes-Tex"), a privately-owned,
non-affiliated contract drilling company based in Abilene, Texas. The purchase
price of approximately $35.4 million; consisted of $25 million in cash, 1.132
million shares of Patterson's common stock valued at $7.875 per share, a
three-year stock purchase warrant (valued at $1.56 per share) to purchase
800,000 additional shares of Patterson common stock at an exercise price of
$8.00 per share and approximately $190,000 of other direct costs incurred
relative to the transaction. The acquisition was funded using $19 million of
cash on hand and $6 million provided by the Company's credit facility maintained
with Norwest Bank Texas, N.A. (the "Norwest Line") (see Note 7). The purchase
price, as of the date of acquisition, was allocated based on estimated fair
values as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Contract drilling assets.................................... $17,450
Goodwill.................................................... 16,629
Covenants not to compete.................................... 1,273
-------
Total purchase price........................................ $35,352
=======
</TABLE>
The Company's operating results since the date of this transaction include
the operations of Wes-Tex. The following summary, prepared on a pro forma basis,
combines the consolidated results of operations as if Wes-Tex had been acquired
January 1, 1996, after including the impact of certain adjustments, such as
restatement of depreciation using fair values instead of book values of the
assets acquired, the increased
(continued)
F-12
<PAGE> 38
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
interest expense on the acquisition debt, increased amortization expense on
intangible assets, conforming accounting treatment of wells in progress and the
related income tax effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
--------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Revenues.................................................... $128,900 $213,863
Net income.................................................. 3,759 22,319
Net income per basic share.................................. 0.20 0.78
Net income per diluted share................................ 0.19 0.76
</TABLE>
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisition
been made as of the date indicated. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from combined operations.
Other 1997 asset acquisitions -- During 1997, in four separate transactions
with non-affiliated entities, the Company acquired 17 contract drilling rigs,
other related drilling equipment and rolling stock, five yards, two shops and an
office. Total consideration paid for these assets was $24.2 million, of which
$6.96 million was funded using cash on hand and $17.25 million was provided by
the Norwest Line. The related purchase prices as of the respective dates of
acquisition were allocated based on estimated fair values as follows (in
thousands):
<TABLE>
<S> <C>
Contract drilling assets.................................... $16,541
Goodwill.................................................... 7,269
Covenants not to compete.................................... 400
-------
Total purchase price.............................. $24,210
=======
</TABLE>
The aforementioned acquisitions completed during fiscal year 1997 have been
accounted for as purchases and the related results of operations and cash flows
of the acquired entities have been included in the consolidated financial
statements since their respective dates of acquisition.
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company executed the Agreement and Plan of Merger among Patterson
Energy, Inc., Patterson Drilling Company ("Patterson Drilling") and Tucker
Drilling Company, Inc. ("Tucker") (the "Merger Agreement") providing for the
merger of Patterson Drilling with and into Tucker. The merger was consummated on
July 30, 1996 after a required approval of the stockholders of both Patterson
and Tucker, with Tucker as the surviving corporation, wholly-owned by Patterson
and operating under the assumed name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock, as adjusted by the Exchange Ratio, upon the
terms of the governing stock option plans. A total of 6.310 million shares of
Patterson common stock was issued pursuant to the merger and an additional
298,368 shares of Patterson common stock were reserved for issuance under
(continued)
F-13
<PAGE> 39
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
the outstanding Tucker stock options. The merger was treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended, and was accounted for as a pooling of interests for financial
accounting purposes.
The consolidated financial statements give retroactive effect to the merger
which encompasses, among other things, combining the Company's previous
historical consolidated financial statements as of December 31, 1995 and for
each of the two years in the period ended December 31, 1995 with the previous
historical financial statements of Tucker as of March 31, 1996 and for each of
the two 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 the Company. As of January 1, 1996, the consolidated financial statements are
presented using the same fiscal periods. Consequently, the operations of Tucker
for the three months ended March 31, 1996 are reflected in the consolidated
financial statements of the Company for each of the years ended December 31,
1995 and 1996.
A corresponding stockholders' equity adjustment has been recorded at
December 31, 1996 as a result of including Tucker's operations for the three
months ended March 31, 1996 with Patterson's operations for each of the years
ended December 31, 1995 and 1996. Selected unaudited information related to the
operations of Tucker for the three months ended March 31, 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues.................................................... $3,972
Operating loss.............................................. (218)
Net income.................................................. 759
</TABLE>
Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling
Corporation -- During October 1996, the Company executed a Stock Purchase
Agreement (the "Purchase Agreement") with the owners of 100% of the outstanding
stock of Sledge Cattle Company, Inc. d/b/a Gene Sledge Drilling Corporation
("Sledge"), a non-affiliated contract drilling company. The Purchase Agreement
included, among other things, the acquisition of six oil and gas drilling rigs,
related drilling equipment and inventory, three rig hauling trucks and one yard
and shop facility for a purchase price of $14.728 million. The acquisition was
funded by a cash payment of $4.303 million and proceeds of $10.425 million
provided by a credit facility maintained with The CIT Group/Equipment Financing,
Inc. (see Note 7). At the date of acquisition, Sledge had working capital of
approximately $4.3 million and immediately following consummation of the
Purchase Agreement, certain assets, unrelated to the oil and natural gas
industry, were sold back to the previous owners of Sledge for $1.728 million.
The operating results of this acquisition are included in the Company's
consolidated statements of income from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if Sledge had been acquired as of January 1, 1995, after giving effect to
certain adjustments,
(continued)
F-14
<PAGE> 40
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
including the elimination of certain revenues and other income and expenses
attributed to the assets not acquired from Sledge, and increased interest
expense on the acquisition debt and related income tax effects.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues.................................................... $73,271 $90,806
Net income.................................................. 3,291 4,078
Net income per basic share.................................. 0.19 0.21
Net income per diluted share................................ 0.18 0.20
</TABLE>
The pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisition
been made as of the date indicated. In addition, they are not intended to be a
projection of future results and do not reflect any synergies that might be
achieved from combined operations.
Other 1996 asset acquisitions -- During November and December 1996, in two
separate transactions with non-affiliated entities, the Company acquired 15
contract drilling rigs and other related equipment. The total consideration paid
for these assets was $4.18 million consisting of $2.35 million cash, a $400,000
promissory note payable and the issuance of 208,000 shares of the Company's
common stock, valued for purposes of the transaction at $1.43 million (see Notes
7 and 9).
3. CASH
Included in cash as of December 31, 1996 and 1997 was approximately $2.4
million and $3.3 million respectively, of monthly oil and natural 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, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Drilling rigs and related equipment......................... $ 86,796 $144,104
Producing oil and gas properties............................ 18,071 24,024
Undeveloped oil and natural gas properties.................. 251 --
Other equipment............................................. 679 917
Buildings................................................... 3,177 3,771
Land........................................................ 885 984
-------- --------
109,859 173,800
Less accumulated depreciation, depletion and amortization... (58,551) (73,395)
-------- --------
$ 51,308 $100,405
======== ========
</TABLE>
(continued)
F-15
<PAGE> 41
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Goodwill.................................................... $23,708
Covenants not to compete.................................... 1,673
Other....................................................... 205
-------
25,586
Less accumulated amortization............................... (942)
-------
$24,644
=======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1996 and 1997
(in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Salaries, wages and related payroll taxes................... $ 687 $2,302
Workers' compensation liability............................. 866 1,615
Sales tax................................................... 184 548
Employee benefit plan contributions......................... 191 568
Other....................................................... 196 109
------ ------
$2,124 $5,142
====== ======
</TABLE>
7. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1996 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Line of credit agreement with Norwest Bank Texas, N.A.
entered into during December 1997 providing for an
advancing, non-revolving credit facility of $60 million,
monthly payments of interest only at the London Interbank
Offered Rate (LIBOR) plus 2.375% (8.285% at December 31,
1997) through May 1998 at which time the outstanding
principal balance will convert to a term loan with a
maturity date of January 1, 2001, and a seven-year
amortization period. The line of credit is collateralized
by certain accounts receivable, drilling rigs and other
related drilling equipment................................. $ -- $23,250
Loan agreement with The CIT Group/Equipment Financing, Inc.
entered into September 1996, with a revolving credit
facility of $22 million; monthly payments bearing interest
at LIBOR plus 2.75% (8.28% at December 31, 1996); revolving
credit facility converts to a 60-month term loan August 31,
1997; principal and interest monthly installments
commencing September 30, 1997; collateralized by certain of
the Company's drilling rigs and related drilling equipment;
matures August 31, 2002. This note was paid in full during
1997 prior to its contractual maturity..................... 21,850 --
</TABLE>
(continued)
F-16
<PAGE> 42
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE -- (CONTINUED)
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
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 million. The line of credit was
amended and restated in June and December 1995; and further
amended and restated in June 1996 increasing the facility
to $4 million; monthly payments of interest only at the
Wall Street Journal prime rate (8.25% at December 31,
1996); collateralized by certain of the Company's oil and
gas properties; matures December 1, 1997. This note was
paid in full during 1997 prior to its contractual
maturity................................................... 3,599 --
Promissory note payable dated December 5, 1996 in the
original principal amount of $400,000 payable to a
non-affiliated entity; uncollateralized, non-interest
bearing; monthly principal payments of $66,666; matured
June 1997.................................................. 400 --
------- -------
25,849 23,250
Less current maturities.................................. (117) (1,467)
------- -------
$25,732 $21,783
======= =======
</TABLE>
During February 1997, using proceeds provided by its equity offering
completed during January and February of 1997 (see Note 9), the Company paid,
prior to maturity, its notes payable and accrued interest amounts under loan
agreements with The CIT Group/Equipment Financing, Inc. and Norwest Bank Texas,
Wichita Falls, N.A. of approximately $25.8 million. The Company expensed
approximately $191,000 of prepayment penalties and an additional $74,000 in
deferred financing costs with the early retirement of such notes payable. These
amounts are included in interest expense at December 31, 1997 as management
considers these amounts immaterial to treat as an extraordinary item.
During June 1997, the Company entered into a line of credit agreement with
Norwest Bank Texas, N.A. (Norwest) providing for a credit facility of $30
million. The terms of its Norwest credit included interest only payments at
LIBOR plus 2.50% through December 31, 1997 at which time the outstanding
principal amount would convert to a term note with a maturity date of January 1,
2000, and a seven-year amortization. The Company borrowed $23.25 million under
the credit facility to partially fund its 1997 asset acquisitions (see Note 2).
During December 1997, the Company and Norwest renegotiated the terms of its
credit agreement replacing the aforementioned line of credit with a new
agreement (the "Norwest Line") providing for an advancing, non-revolving credit
facility of $60 million. The Norwest Line is payable interest only at LIBOR plus
2.375% through May 31, 1998, at which time the outstanding principal balance
converts to a term loan with a January 1, 2001 maturity date, and a seven-year
amortization period. Using proceeds of the Norwest Line, the Company paid a
$75,000 origination fee and all amounts then outstanding under its previous
Norwest credit facility, including principal of $23.25 million and accrued
interest of approximately $94,000.
(continued)
F-17
<PAGE> 43
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE -- (CONTINUED)
Five-year maturities of note payable -- Scheduled maturities of the Norwest
Line for the five years subsequent to December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 1,467
1999........................................................ 2,684
2000........................................................ 2,915
2001........................................................ 3,166
2002........................................................ 3,438
Thereafter.................................................. 9,580
-------
Total............................................. $23,250
=======
</TABLE>
The Norwest Line contains a number of representations, warranties and
covenants, the breach of which, at the election of Norwest, would accelerate the
maturity date of the outstanding principal balance.
The more restrictive covenants include:
- Maintenance on a quarterly basis of a ratio of consolidated cash flow to
current maturities of long-term debt of at least 2.0 to 1.0;
- Maintenance on a quarterly basis of a ratio of consolidated debt to
tangible net worth not to exceed 1.20 to 1.0;
- Maintenance on a quarterly basis of a ratio of current assets to current
liabilities of at least 1.25 to 1.0;
- Without written consent of Norwest, the Company cannot conduct any
business not currently being conducted by the Company, nor liquidate,
dissolve or merge into any other entity; and
- The Company shall not pay, or authorize the payment of, any dividends on
any stock, debenture or other security without the prior written consent
of Norwest.
Other restrictive covenants under the terms of the Norwest Line 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 Norwest. At December 31, 1997, the
Company was in compliance with all loan covenants.
The estimated fair value of the Company's long-term debt obligations
approximates its related carrying value because the underlying debt agreement
bears interest at current market rates.
Credit available under the Norwest Line totaled $36.75 million at December
31, 1997. During February 1998, the Company borrowed this amount in conjunction
with its acquisition of certain contract drilling assets (see Note 19).
The Company is currently negotiating with Norwest to increase the credit
facility under the Norwest Line to $70 million. If successfully amended, the
terms of the Norwest Line would not be changed other than to increase the
Company's debt to tangible net worth ratio to 1.40 to 1.00 and to increase the
Company's current assets to current liabilities ratio to 1.75 to 1.00.
A commercial bank has issued a letter of credit to the Company's workers'
compensation insurance carrier on behalf of the Company in the amount of
$150,000 which is fully collateralized by a certificate of deposit.
Additionally, the Company maintains a letter of credit in the amount of $475,000
with a bank for the
(continued)
F-18
<PAGE> 44
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE -- (CONTINUED)
benefit of an insurance company as collateral for retrospective premiums and
retained losses which could become payable under the terms of the Company's
insurance contract which existed prior to consummation of the merger with
Tucker. This letter of credit expires in November 1998, but provides for an
indefinite number of annual extensions of the expiration date. The Company has
pledged as collateral against the letter of credit a U.S. Treasury Bill,
maturing during March 1998, with a book value of approximately $566,000 as of
December 31, 1997. No amounts have been drawn under either letter of credit.
8. COMMITMENTS AND CONTINGENCIES
Supplemental Executive Retirement Plan -- Effective April 1, 1991 the
Tucker Drilling Company, Inc. Supplemental Executive Retirement Plan (the
"Plan") was established for certain officers and key employees. Pursuant to
agreements, as amended on April 22, 1996 and May 16, 1996 with related
participants of the Plan, the Company was obligated to pay each participant, or
the designated beneficiary, a lump sum at such participant's death, disability
or retirement. The amount to be paid to each participant was equal to the
participant's vested benefit at such date, limited, however, to related benefits
received from underlying insurance policies as described below. As of December
31, 1996, the Company incurred approximately $330,000 of expense to recognize
the Company's ultimate possible obligation under the Plan of approximately
$568,000.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants and an annuity from which future premiums
on the life insurance policies will be paid. These assets are included as other
assets at a book value of approximately $568,000 at December 31, 1996 and 1997.
The insurance company, which is the issuer of the life insurance and
annuity contracts owned by the Company, is currently under the supervision of
the Michigan Commissioner of Insurance pursuant to an Order of Rehabilitation.
Although the insurance company has continued to pay death benefits and scheduled
annuity benefits, cash surrender values reflected above may be subject to change
and access to such cash surrender values may be limited pending the negotiation
of assumption reinsurance agreements.
Contingencies -- The Company's contract drilling and oil and natural 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 million per occurrence with $3 million of aggregate
coverage and excess liability and umbrella coverages up to $40 million per
occurrence with a $40 million 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 lender who has a security
interest in the drilling rigs is named as loss payee on the physical damage
insurance on such rigs. The Company has never been fined or incurred liability
for pollution or other environmental damage in connection with its operations.
The Company is involved in various routine litigation incident to its
business. In the Company's opinion, none of these proceedings will have a
material adverse effect on the financial condition of the Company.
(continued)
F-19
<PAGE> 45
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY
On July 1, 1997, the stockholders of Patterson approved an amendment to
Patterson's Certificate of Incorporation increasing the number of authorized
shares of common stock from 9 million shares to 18 million shares. During
December 1997, the stockholders of Patterson approved a second amendment to
Patterson's Certificate of Incorporation further increasing the number of
authorized shares of common stock to 50 million shares.
During July and December 1997, the Company's Board of Directors authorized
two-for-one stock splits in the form of 100% stock dividends payable on July 25,
1997 and January 23, 1998, respectively. Par value of the Company's common stock
remained at $0.01 per share. Earnings per share and weighted average number of
common shares outstanding have been restated for all periods presented to
reflect the stock splits. As such, the Consolidated Statements of Stockholders'
Equity and pertinent footnote disclosures contained herein have been restated to
retroactively apply the effects of the stock splits.
During June 1997, the Company issued 1.132 million shares of common stock
valued at $7.875 per share as partial consideration for its acquisition of 21
contract drilling rigs and other related drilling equipment (see Note 2).
During January 1997, the Company completed a public offering of 7.052
million shares of common stock at a price of $7.6875 per share. During February
1997, the underwriters of the Company's public offering exercised their
overallotment option to purchase 1.2 million additional shares of common stock.
Net proceeds from the offering totaled approximately $59.4 million to the
Company.
In December 1996, the Company acquired three drilling rigs from a
non-affiliated party. The purchase price for the rigs consisted of $100,000
cash, a $400,000 promissory note and the issuance of 208,000 shares of the
Company's common stock valued at $1.43 million (see Note 2).
In July 1996, the stockholders of the Company approved an amendment to the
Company's Certificate of Incorporation providing for an increase of 4,000,000
shares in the total number of authorized shares of the Company's common stock
and the issuance of 6.310 million shares in connection with the Company's merger
with Tucker (see Note 2).
In July 1996, pursuant to the terms of the Underwriters' Warrant Agreement
dated November 2, 1993 as amended on November 15, 1994 and June 18, 1996, the
Company issued 152,896 shares of common stock upon the conversion of 301,260
warrants. In lieu of a cash payment for the exercise of such warrants, the
respective warrant holders elected to forfeit 148,364 shares of common stock
back to the Company.
In November 1995, the Company issued a total of 142,308 shares of common
stock to the underwriters of the Company's initial public offering pursuant to
their exercise of 301,260 redeemable warrants. The redeemable warrants were
issued to the underwriters pursuant to the partial exercise of underwriter
warrants issued as compensation for their underwriting services in connection
with the initial public offering. Total proceeds received by the Company for the
exercise of the underwriters warrants and the redeemable warrants was
approximately $281,000.
In July 1995, the Company elected to redeem all of its outstanding
redeemable warrants (3,427,000) at the redemption price of $0.0125 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. During September 1995, the Company
issued 1,707,496 shares of common stock upon the exercise of 3,414,992
redeemable warrants at $1.875 per share. The remaining 12,008 redeemable
warrants were redeemed for a nominal amount. The Company received approximately
$2.995 million from the exercise of the redeemable warrants.
(continued)
F-20
<PAGE> 46
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY -- (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, 390,000 shares of the Company's common stock and warrants to
purchase an additional 300,000 shares at an exercise price of $2.25 per share.
The total value of the transaction was $1,089,750. The Company granted certain
registration rights to the seller with respect to the 390,000 shares and the
300,000 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) 150,000
shares or (ii) 0.196 times the average monthly trading volume of the Company's
common stock on the Nasdaq National Market over the preceding 12 calendar months
and (b) the right to join the registrable securities in any registration
statements filed by the Company with the Commission. During October 1996, the
Company registered certain securities with the Commission on a Form S-3
Registration Statement which included the aforementioned 390,000 shares. During
November 1997, the Company registered certain securities with the Commission on
a Form S-3 Registration Statement which included the aforementioned 300,000
shares upon exercise of the underlying warrants.
10. STOCK OPTIONS AND WARRANTS
Employee Stock Incentive Plans -- 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 2.8 million 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 1.3 million shares of common stock have
been granted to date under the Stock Incentive Plan to five executive officers
and various other employees of the Company, including Mr. Patterson (options
covering 430,000 shares or approximately 33% of the total options granted). The
outstanding options were variously granted on March 31, 1995, October 27, 1995
and August 1, 1997. Each of the options has a 10-year term. The options granted
on March 31, 1995 are exercisable at a price of $1.8125 per share, the options
granted on October 27, 1995 are exercisable at a per share price of $3.125 and
the options granted on August 1, 1997 are exercisable at $14.8125 per share.
These exercise prices were equal to the fair market value of the Company's
common stock on the respective grant dates. The options granted to the employees
vest either (i) 20% a year, beginning on the grant date and 20% for the next
four anniversaries of the date of grant, or (ii) 11.2% for the first five years,
beginning on the grant date, and 22% on each of the next two anniversaries of
the grant date. A total of 225,800 options granted under the Stock Incentive
Plan have been exercised as of December 31, 1997.
(continued)
F-21
<PAGE> 47
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
In March 1983, the Board of Directors of Tucker approved and implemented an
Incentive Stock Option Plan which was amended in 1988 to allow for granting of
nonqualified stock options and in 1991 was further amended to eliminate stock
appreciation rights. The purpose of the plan was to attract and retain key
employees and directors and to provide such persons with a proprietary interest
in Tucker through the granting and exercise of stock options. The maximum number
of shares of common stock available for issuance under the plan was 507,640
shares. The proceeds from the sale of common stock pursuant to the plan were to
be added to the general funds of Tucker and used for general corporate purposes.
In June 1994, the Board of Directors of Tucker adopted the Tucker Drilling
Company, Inc. 1994 Non-Qualified Stock Option Plan. Officers and directors were
not eligible to receive options from this plan. The maximum number of shares
available for issuance under the plan was 82,880 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 in Note 2, existing stock
options and other employee incentive plans of Tucker became plans to purchase or
receive common stock of the Company upon consummation of the merger of the
Company and Tucker.
Non-Employee Directors' Stock Option Plan -- In June 1995, Patterson
adopted the Non-Employee Directors' Stock Option Plan (the "Outside Directors'
Plan"). The purpose of the Outside Directors' Plan is to encourage and provide
incentive for high level performance by non-employee directors of the Company.
An aggregate of 120,000 shares of Common Stock are reserved for issuance under
the Outside Directors' Plan to directors who are not employees of the Company.
As directed by the Outside Directors' Plan, the exercise price of the
options will be equal to the fair market value of the Company's common stock on
the date of grant. Outside directors are automatically granted options to
purchase 20,000 shares and an additional 4,000 shares for each subsequent year
that they serve up to a maximum of 40,000 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.
The table below sets forth information regarding options granted under the
Outside Directors' Plan. Each of the options are granted with an exercise price
per share equal to fair market value on the grant date.
<TABLE>
<CAPTION>
DATE GRANTED OPTIONS GRANTED EXERCISE PRICE/SHARE
------------ --------------- --------------------
<S> <C> <C>
June 6, 1995................................................ 40,000 $ 2.25
June 6, 1996................................................ 8,000 4.31
July 30, 1996............................................... 20,000 4.38
June 6, 1997................................................ 8,000 10.00
July 30, 1997............................................... 4,000 15.81
------
Total options granted............................. 80,000
======
</TABLE>
(continued)
F-22
<PAGE> 48
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
A summary of the status of the Company's stock options issued under the
Stock Incentive Plan and the Outside Directors' Plan as of December 31, 1995,
1996 and 1997 and the changes during each of the three years then ended are
presented below (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------- --------------------------- ---------------------------
NO. OF NO. OF NO. OF
SHARES OF WEIGHTED SHARES OF WEIGHTED SHARES OF WEIGHTED
UNDERLYING AVERAGE UNDERLYING AVERAGE UNDERLYING AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year............................... -- $ -- 704 $2.52 732 $ 2.58
Granted at the money............... 704 2.52 28 4.02 648 14.76
--- ----- --- ----- ----- ------
Total granted................ 704 2.52 28 4.02 1,380 8.30
--- ----- --- ----- ----- ------
Exercised.......................... -- -- -- -- 250 3.03
Forfeited.......................... -- -- -- -- -- --
Expired............................ -- -- -- -- -- --
--- ----- --- ----- ----- ------
Outstanding at end of year........... 704 $2.52 732 $2.58 1,130 $ 9.47
=== ===== === ===== ===== ======
Exercisable at end of year........... 121 $2.48 284 $2.45 344 $ 6.83
=== ===== === ===== ===== ======
Weighted average fair value of
options granted during the year.... N/A $1.14 N/A $1.85 N/A $12.29
=== ===== === ===== ===== ======
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1995, 1996 and 1997, respectively;
dividend yield of 0.00%; risk-free interest rates are different for each grant
and range from 6.03% to 6.31%; the expected term is 5 years; and a volatility of
38.68% for all 1995 and 1996 grants and 35.97% for all 1997 grants.
Public Relations Services Stock Options -- During November 1994, February
1995 and July 1995, the Company issued options covering a total of 500,000
shares of common stock to two consultants as partial compensation for public
relations services rendered to the Company. All options granted to the
consultants have an exercise price no less than the fair market value of the
stock at date of grant. The respective options were fully exercisable upon grant
date. In November 1994, 130,000 options were granted at $1.88 per share and
50,000 options were granted at $2.13 per share. In February 1995, 80,000 options
were granted at $2.19 per share which had a fair value of $0.56 per option and
in July 1995, 240,000 options were granted at $2.41 per share which had a fair
value of $1.04 per option. At December 31, 1996, 80,000 options with an exercise
price of $2.41 per share have been exercised. The remaining 420,000 options were
exercised during 1997.
The fair values of these options were determined using the following
assumptions: dividend yield of 0.00%; risk-free interest rates of 7.74% and
5.92%, for January 1 and July 1, respectively; expected lives of 5 years; and
volatility of 38.68%.
(continued)
F-23
<PAGE> 49
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
Pro Forma Stock-Based Compensation Disclosure -- Had the compensation cost
for the Company's stock-based compensation plan been determined consistent with
SFAS No. 123, the Company's net income and net income per common share for 1995,
1996 and 1997 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ ------------------ -------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
SFAS No. 123 charge net of
income tax................ $ -- $ 204 $ -- $ 162 $ -- $ 1,329
APB 25 charge............... $ -- $ -- $ -- $ -- $ -- $ --
Net income.................. $3,201 $2,997 $4,271 $4,109 $22,242 $20,913
====== ====== ====== ====== ======= =======
Net income per common share:
Basic..................... $ .18 $ .17 $ .22 $ .21 $ .78 $ .73
====== ====== ====== ====== ======= =======
Diluted................... $ .18 $ .17 $ .21 $ .20 $ .75 $ .71
====== ====== ====== ====== ======= =======
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
Underwriters' Warrants -- In November 1993, the underwriters of the
Company's initial public offering were issued warrants as partial consideration
for their underwriting services for the initial public offering. The warrants
give the underwriters the right to purchase 301,260 shares of the Company's
common stock at a price of $2.17 per share and 301,260 redeemable warrants at
$0.09 per warrant. In November 1995, 301,260 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 $1.88 per
share resulting in the issuance of 142,308 shares of the Company's common stock.
In July 1996 the remaining 301,260 warrants were exercised in which 152,896
shares of the Company's common stock were issued (see Note 9).
Stock Purchase Warrants -- In May 1995, the Company issued 300,000 warrants
exercisable at $2.25 per share as partial consideration for the purchase of
three drilling rigs and related equipment (see Note 9). The warrants were
exercisable upon issuance and would have expired on December 31, 1997. During
November 1997, the Company registered certain securities with the Commission on
a Form S-3 Registration Statement which included the aforementioned 300,000
shares upon exercise of the underlying warrants.
(continued)
F-24
<PAGE> 50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
Tabular Summary -- The following table summarizes information regarding the
Company's stock options and warrants granted under the provisions of the
aforementioned plans as well as stock options and warrants issued pursuant to
certain transactions described in Notes 2 and 9:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Granted
1995............................................... 1,324,000 $ 2.42
1996............................................... 28,000 4.36
1997............................................... 1,448,000 11.02
Exercised
1995............................................... 224,632 $ 1.91
1996............................................... 578,032 2.10
1997............................................... 1,808,720 4.88
Surrendered
1995............................................... 7,104 $ 2.07
1996............................................... 148,364 2.17
1997............................................... 1,184 2.07
Outstanding at Year End
1995............................................... 2,205,156 $ 2.27
1996............................................... 1,506,760 2.39
1997............................................... 1,144,856 9.37
Exercisable at Year End
1995............................................... 1,605,540 $ 2.19
1996............................................... 1,080,360 2.30
1997............................................... 347,800 6.78
</TABLE>
11. LEASES
The Company incurred rent expense, consisting primarily of daily rental
charges for the use of drilling equipment, of $1.0 million, $1.8 million and
$5.0 million, for the periods ended December 31, 1995, 1996 and 1997,
respectively. The Company's obligations under non-cancelable operating lease
agreements are not material to the Company's operations.
(continued)
F-25
<PAGE> 51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Federal:
Current............................................. $ 139 $ 52 $ 9,444
Deferred income tax expense (benefit)............... (1,000) (2,428) 2,420
------- ------- -------
(861) (2,376) 11,864
State:
Current............................................. 74 122 909
Deferred income tax expense......................... -- -- 93
------- ------- -------
Total income tax expense (benefit).................. $ (787) $(2,254) $12,866
======= ======= =======
</TABLE>
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ ----
<S> <C> <C> <C>
Statutory tax rate...................................... 34.0% 34.0% 35.0%
Net operating loss carryforwards........................ (34.0) -- --
Reduction of valuation allowance........................ (41.4) (151.8) --
Statutory depletion in excess of basis.................. -- -- (1.1)
State income taxes...................................... 3.1 6.1 2.9
Alternative minimum taxes............................... 5.8 -- --
Other, net.............................................. -- -- (0.2)
----- ------ ----
Effective tax rate...................................... (32.5)% (111.7)% 36.6%
===== ====== ====
</TABLE>
There is $32,885 of prepaid Federal income taxes in other current assets at
December 31, 1996 and approximately $5.953 million of accrued Federal income
taxes in accrued expenses at December 31, 1997. The Company reduced its accrued
Federal and state income tax payable by approximately $2.9 million due to a tax
benefit received from the exercise of certain stock options. There are $122,144
and $920,600 of accrued state income taxes in accrued expenses at December 31,
1996 and 1997, respectively.
As of January 1, 1994, a deferred tax asset valuation allowance of
approximately $6 million was due primarily to net operating loss ("NOL")
carryforwards which were not expected to be utilized before their respective
expiration dates or which benefits the Company was unable to predict would more
likely than not be realized. During each of the years ended December 31, 1995
and 1996, the Company changed its estimate with respect to its net deferred tax
assets and, accordingly, reduced the related valuation allowance by
approximately $1.7 million and $2.1 million, respectively. To the extent the
valuation allowance was reduced, the related tax benefit was credited to income
tax expense.
(continued)
F-26
<PAGE> 52
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES -- (CONTINUED)
The tax effect of significant temporary differences representing deferred
tax assets and liabilities and changes therein were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, NET JANUARY 1, NET JANUARY 1, NET DECEMBER 31,
1995 CHANGE 1996 CHANGE 1997 CHANGE 1997
---------- ------ ---------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.......... $ 3,560 $ (891) $ 2,669 $ (258) $2,411 $(1,195) $ 1,216
Investment tax credit
carryforwards.......... 469 -- 469 (94) 375 -- 375
AMT credit carryforwards.... 206 76 282 -- 282 -- 282
Depletion carryforwards..... 413 199 612 (218) 394 (394) --
Property and equipment 59 (59) -- -- -- -- --
Other....................... 285 (13) 272 (18) 254 796 1,050
------- ------ ------- ------- ------ ------- -------
4,992 (688) 4,304 (588) 3,716 (793) 2,923
Valuation allowance......... (3,786) 1,691 (2,095) 2,095 -- -- --
------- ------ ------- ------- ------ ------- -------
Deferred tax assets....... 1,206 1,003 2,209 1,507 3,716 (793) 2,923
Deferred tax liabilities:
Property and equipment basis
difference................ (799) (3) (802) (1,527) (2,329) (1,553) (3,882)
------- ------ ------- ------- ------ ------- -------
Net deferred tax asset
(liability)............ $ 407 $1,000 $ 1,407 $ (20) $1,387 $(2,346) $ (959)
======= ====== ======= ======= ====== ======= =======
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $3.5 million at December 31, 1997. If unused, the aforementioned
tax NOL carryforwards will expire in various amounts in years 1998 to 2012.
During the years ended December 31, 1995, 1996 and 1997, the Company utilized
approximately $2.5 million, $2.2 million and $3.6 million, respectively, of NOL
carryforwards.
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). The NOL carryforwards
that can be utilized to offset net income in any year will be equal to
approximately $3.348 million plus any unused benefit from the prior year. The
NOL limitation is determined by the value of Patterson's equity on August 2,
1995, the day prior to the ownership change, times 5.88%, the Federal long-term
exempt rate on that date as published by the U.S. Treasury Department, or $1.808
million, and approximately $1.540 million which is determined by the value of
Tucker's equity on July 29, 1996, the day prior to consummation of the Merger,
times 5.78%, the Federal long-term exempt rate on that date.
During the year ended December 31, 1996, the Company began recording
non-cash Federal deferred income taxes based primarily on the relationship
between the amount of the Company's unused Federal NOL carryforwards and the
temporary differences between the book basis and tax basis in the Company's
assets.
13. EMPLOYEE BENEFITS
Effective January 1, 1992, the Company established a 401(k) profit sharing
plan for all eligible employees. Company contributions are discretionary. In
March 1997 and 1998, the Company contributed $181,256 and $519,559,
respectively, to the plan. The amount of the contributions was included in
accrued expenses at December 31, 1996 and 1997.
(continued)
F-27
<PAGE> 53
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS
The Company completed numerous acquisitions of contract drilling assets
during fiscal years 1996 and 1997. As a result, substantially all of the
Company's consolidated operating revenues, operating profit and identifiable
assets as of and for the year ended December 31, 1997, are specifically
attributable to the activities of the contract drilling segment. As no other
operating segment accounts for more than ten percent of the Company's
consolidated operating revenues, operating profit or identifiable assets,
segment reporting and separate oil and natural gas disclosures as presented
herein and in Notes 15 and 16 are not deemed necessary for the year ended
December 31, 1997.
Management does not anticipate that the quantitative thresholds required
for these disclosures will be met in future years. Information concerning the
Company's business segments for the years ended December 31, 1995 and 1996 is
presented below (in thousands).
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Revenues:
Contract drilling......................................... $ 57,599 $ 73,590
Oil and natural gas....................................... 6,845 10,118
-------- --------
Total revenues.................................... $ 64,444 $ 83,708
======== ========
Income (loss) from operations:
Contract drilling......................................... 3,384 $ 3,869
Oil and natural gas....................................... (51) 1,550
-------- --------
3,333 5,419
-------- --------
General corporate expense(a).............................. -- (2,268)
Interest income........................................... 146 478
Interest expense.......................................... (1,065) (1,612)
-------- --------
Income before income taxes................................ $ 2,414 $ 2,017
======== ========
Identifiable assets:
Contract drilling......................................... $ 52,643 $ 63,506
Oil and natural gas....................................... 10,348 24,407
-------- --------
Total assets...................................... $ 62,991 $ 87,913
======== ========
Depreciation, depletion and amortization:
Contract drilling......................................... $ 5,107 $ 6,837
Oil and natural gas....................................... 2,416 3,123
-------- --------
Total depreciation, depletion and amortization.... $ 7,523 $ 9,960
======== ========
Capital expenditures:
Contract drilling......................................... $ 15,677 $ 23,353
Oil and natural gas....................................... 5,107 4,106
-------- --------
Total capital expenditures........................ $ 20,784 $ 27,459
======== ========
</TABLE>
- ---------------
(a) The general corporate expense for 1996 is comprised entirely of
non-recurring acquisition costs. All other general corporate revenues and
expenses, except for interest income and interest expense, have been
allocated to the business segments of the Company.
(continued)
F-28
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
No customer accounted for more than 10% of the Company's consolidated
revenues for the years ended December 31, 1995, 1996 and 1997.
15. OIL AND NATURAL GAS EXPENDITURES
Gross oil and natural gas expenditures by the Company for the years ended
December 31, 1995 and 1996 are summarized below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Property acquisition costs.................................. $1,187 $ 666
Exploration costs........................................... 3,737 3,684
Development costs........................................... 1,385 2,174
------ ------
$6,309 $6,524
====== ======
</TABLE>
The aggregate amount of capitalized costs of oil and natural gas properties
as of December 31, 1995 and 1996 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Proved properties........................................... $15,387 $ 18,071
Accumulated depreciation, depletion and amortization........ (9,009) (11,412)
------- --------
Net proved properties....................................... $ 6,378 $ 6,659
======= ========
</TABLE>
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND
RELATED DATA (UNAUDITED)
The following table sets forth information with respect to quantities of
net proved developed oil and natural gas reserves and changes in those reserves
for the years ended December 31, 1995 and 1996. The quantities were estimated by
an independent petroleum engineer for the years ended December 31, 1995 and
1996. The Company's proved developed oil and natural gas reserves are located
entirely within the United States.
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
(continued)
F-29
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND
RELATED DATA (UNAUDITED) -- (CONTINUED)
OIL AND NATURAL GAS RESERVE QUANTITIES
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Estimated quantity, January 1, 1995 600 3,769
Revision in previous estimates.............................. (59) 549
Extensions, discoveries and other additions................. 405 2,273
Purchases................................................... 2 40
Sales of reserves-in-place.................................. -- --
Production.................................................. (191) (1,361)
---- ------
Estimated quantity, January 1, 1996......................... 757 5,270
Revision in previous estimates.............................. 39 464
Extensions, discoveries and other additions................. 215 1,972
Purchases................................................... 289 1,687
Sales of reserves-in-place.................................. (3) (87)
Production (235) (1,679)
---- ------
Estimated quantity, January 1, 1997......................... 1,062 7,627
==== ======
</TABLE>
RESULTS OF OPERATIONS FOR OIL AND NATURAL GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Oil and natural gas sales................................... $5,400 $8,300
Gain (loss) on sale of oil and natural gas properties....... 38 (102)
Gain on sale of undeveloped properties...................... 67 --
------ ------
5,505 8,198
------ ------
Costs and expenses:
Production costs.......................................... 1,715 2,129
Exploration expenses...................................... 1,138 1,453
Depreciation, depletion and amortization.................. 2,289 3,003
Impairment of oil and natural gas properties.............. 159 549
Income tax expense.......................................... 69 362
------ ------
5,370 7,496
------ ------
Results of operations for oil and natural gas producing
activities................................................ $ 135 $ 702
====== ======
</TABLE>
(continued)
F-30
<PAGE> 56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND
RELATED DATA (UNAUDITED) -- (CONTINUED)
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Future gross revenues....................................... $22,436 $ 42,930
Future development and production costs..................... (8,623) (17,293)
Future income tax expense(a)................................ (2,158) (6,581)
------- --------
Future net cash flows....................................... 11,655 19,056
Discount at 10% per annum................................... (2,987) (5,756)
------- --------
Standardized measure of discounted future net cash flows.... $ 8,668 $ 13,300
======= ========
</TABLE>
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net
operating loss attributable to oil and gas operations and investment tax
credit carryforwards as of year-end; statutory depletion and tax credits
applicable to future oil and gas-producing activities are also considered
in the income tax computation.
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Standardized measure at beginning of year................... $ 5,566 $ 8,668
Sales and transfers of oil and gas produced, net of
production costs.......................................... (3,891) (6,288)
Net changes in sales price and future production and
development costs......................................... 807 2,015
Extensions, discoveries and improved recovery, less related
costs..................................................... 6,278 9,505
Sales of minerals-in-place.................................. -- --
Revision of previous quantity estimates..................... 667 1,249
Accretion of discount....................................... 574 631
Changes in production rates and other....................... (230) 1,943
Net change in income taxes.................................. (1,103) (4,423)
------- -------
Standardized measure at end of year......................... $ 8,668 $13,300
======= =======
</TABLE>
17. 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.
(continued)
F-31
<PAGE> 57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONCENTRATIONS OF CREDIT RISK -- (CONTINUED)
The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
1996 and 1997, the Company's demand deposits and temporary cash investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under $100,000
and cash on hand.......................................... $ 1,399 $ 1,490
Deposit in FDIC and SIPC-insured institutions over $100,000
and cash on hand.......................................... 6,223 28,792
------- -------
7,622 30,282
Less outstanding checks and other reconciling items......... (4,128) (6,944)
------- -------
Cash and cash equivalents................................... 3,494 23,338
Investment in U.S. Treasury securities...................... 544 566
------- -------
$ 4,038 $23,904
======= =======
</TABLE>
Concentrations of credit risk with respect to trade receivables are
primarily focused on contract drilling receivables. The concentration is
mitigated by the diversification of customers for which the Company provides
drilling services. No significant losses from individual contracts were
experienced during the years ended December 31, 1995, 1996 and 1997. Included in
general and administrative expense for the periods ended December 31, 1995, 1996
and 1997 are provisions for doubtful receivables of $137,757, $126,596 and
$122,069, 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.
18. 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
its proportionate share of the costs of fuel, insurance, taxes and maintenance
of the aircraft. The Company paid approximately $174,455, $267,001 and $171,803
for the lease of the airplane during 1995, 1996 and 1997, respectively.
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 1995, 1996 and 1997. Revenues for 1995, 1996 and 1997 include
approximately $597,700, $919,743 and $1.382 million 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, 1996 and 1997. Sales of oil to
that entity, both royalty and working interest (including the Company) were
approximately $5.9 million, $19.6 million and $12.9 million for 1995, 1996 and
1997, respectively.
Joint Operation of Oil and Gas Properties -- The Company operates certain
oil and natural 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
(continued)
F-32
<PAGE> 58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. RELATED PARTY TRANSACTIONS -- (CONTINUED)
other industry partners. The Company made oil and natural gas production
payments (net of royalty) of $3.9 million, $6.3 million and $10.5 million from
these properties in 1995, 1996 and 1997, respectively, to the aforementioned
persons or entities. These persons or entities reimbursed the Company for joint
operating costs of $5.2 million, $5.3 million and $12.8 million in 1995, 1996
and 1997, respectively.
19. SUBSEQUENT EVENTS
On January 23, 1998, a two-for-one stock split in the form of a 100% stock
dividend payable to stockholders of record on January 9, 1998 was effected. Par
value remained at $0.01 per common share. Earnings per share, weighted average
number of common shares outstanding and all other disclosures regarding the
Company's stockholders' equity and related Company sponsored stock option plans
for all periods presented reflect the effects of such stock splits.
On January 5, 1998, the Company completed the acquisition of 100% of the
outstanding stock of Lone Star Mud, Inc., a privately-owned, non-affiliated
company. The total purchase price of approximately $11.4 million consisted of
$1.43 million in cash and 571,328 shares of the Company's common stock valued at
$17.41 per share.
On February 6, 1998, the Company completed its merger with Robertson
Onshore Drilling Company for the acquisition of 15 contract drilling rigs, a
yard and a shop. The purchase price of $40 million was funded using cash on hand
of $3.25 million and proceeds of $36.75 million provided by the Norwest Line.
F-33
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Plan and Agreement of Merger dated October 14, 1993,
between Patterson Energy, Inc., a Texas corporation, and
Patterson Energy, Inc., a Delaware corporation, together
with related Certificates of Merger.(1)
2.2 -- Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)
2.2.1 -- Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)
2.3 -- Asset Purchase Agreement, dated April 22, 1997, among and
between Patterson Drilling Company and Ziadril, Inc.(4)
2.4 -- Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.4.1 -- Amendment to Asset Purchase Agreement, dated June 4,
1997, among Patterson Energy Inc., Patterson Drilling
Company and Wes-Tex Drilling Company.(5)
2.5 -- Agreement, dated June 4, 1997, among Patterson Energy
Inc., Patterson Drilling Company, Greathouse Foundation
and Myrle Greathouse, Trustee under Agreement dated June
2, 1997.(5)
2.6 -- Asset Purchase Agreement, dated September 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
McGee Drilling Company.(4)
2.7 -- Asset Purchase Agreement dated November 14, 1997 among
Patterson Energy, Inc., Patterson Drilling Company and V
& B Drilling Company.(6)
2.8 -- Asset Purchase Agreement dated November 20, 1997 among
Patterson Drilling Company and Circle R Drilling, Ltd.
1981-A.(6)
2.9 -- Asset Purchase Agreement, dated May 23, 1995, between
Perry E. Esping and Patterson Energy, Inc., together with
related Stock Purchase Warrant and Registration Rights
Agreement.(13)
2.10 -- Agreement and Plan of Merger dated January 20, 1998,
among Patterson Energy, Inc., Patterson Onshore Drilling
Company and Robertson Onshore Drilling Company.(7)
3.1 -- Restated Certificate of Incorporation.(8)
3.1.1 -- Certificate of Amendment to the Certificate of
Incorporation.(9)
3.1.2 -- Certificate of Amendment to the Certificate of
Incorporation.
3.2 -- Bylaws.(1)
4.1 -- Excerpt from Restated Certificate of Incorporation of
Patterson Energy, Inc. regarding authorized Common Stock
and Preferred Stock.(10)
4.2 -- Registration Rights Agreement, dated June 12, 1997, among
Patterson Energy Inc. and Wes-Tex Drilling Company,
Greathouse Foundation and Myrle Greathouse, Trustee under
Agreement dated June 2, 1997.(11)
4.3 -- Stock Purchase Warrant of Patterson Energy, Inc., dated
June 12, 1997.(11)
10.1 -- Credit Agreement dated December 9, 1997 among Patterson
Energy, Inc., Patterson Drilling Company, Patterson
Petroleum, Inc., Patterson Trading Company, Inc. and
Norwest Bank Texas, N.A.(6)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1.1 -- Promissory Note dated December 9, 1997 among Patterson
Energy, Inc. and Norwest Bank Texas, N.A.(6)
10.1.2 -- Security Agreement dated December 9, 1997 between
Patterson Drilling Company and Norwest Bank Texas,
N.A.(6)
10.1.3 -- Corporate Guarantees of Patterson Drilling Company,
Patterson Petroleum, Inc. and Patterson Petroleum Trading
Company, Inc.(6)
10.2 -- Aircraft Lease, dated January 15, 1998,(effective January
1, 1998) between Talbott Aviation, Inc. and Patterson
Energy, Inc.
10.3 -- Participation Agreement, dated October 19, 1994, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(12)
10.3.1 -- Participation Agreement dated October 24, 1995, between
Patterson Petroleum Trading Company, Inc. and BHT
Marketing, Inc.(13)
10.4 -- Crude Oil Purchase Contract, dated October 19, 1994,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(14)
10.4.1 -- Crude Oil Purchase Contract, dated October 24, 1995,
between Patterson Petroleum, Inc. and BHT Marketing,
Inc.(13)
10.5 -- Patterson Energy, Inc. 1993 Stock Incentive Plan, as
amended(15)
10.6 -- Patterson Energy, Inc. Non-Employee Directors' Stock
Option Plan, as amended.(16)
10.7 -- Consulting and Stock Option Agreement, dated as of
November 15, 1994, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(13)
10.8 -- Consulting and Stock Option Agreement, dated as of
February 15, 1995, between Patterson Energy, Inc. and E.
Peter Hoffman, Jr.(13)
10.9 -- Consulting and Stock Option Agreement, dated as of August
2, 1995, between Patterson Energy, Inc. and E. Peter
Hoffman, Jr.(13)
10.10 -- Model Form Operating Agreement.(17)
10.11 -- Form of Drilling Bid Proposal and Footage Drilling
Contract.(17)
10.12 -- Form of Turnkey Drilling Agreement.(17)
11.1 -- Statement re Computation of Per Share Earnings.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Independent Accountants, Coopers & Lybrand
L.L.P.
23.2 -- Consent of Independent Public Accountants, Arthur
Andersen LLP
27.1 -- Financial Data Schedule as of December 31, 1995, 1996 and
1997 and for each of the quarters ended March 31, 1996
and 1997, June 30, 1996 and 1997 and September 30, 1996
and 1997.
</TABLE>
- ---------------
(1) Incorporated herein by reference to Item 27, "Exhibits" to Amendment No. 2
to Registration Statement on Form SB-2 (File No. 33-68058-FW); filed
October 28, 1993.
(2) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated April 22, 1996 and filed on April 30, 1996.
(3) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 8-K dated May 16, 1996 and filed on May 22, 1996.
(4) Incorporated herein by reference to Item 16, "Exhibits" to Amendment No. 1
to Registration Statement on Form S-3 (File No. 333-29035); filed August 5,
1997.
<PAGE> 61
(5) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 3, 1997; filed September 11, 1997.
(6) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits" to Form 8-K dated November 14, 1997 and filed December 24, 1997.
(7) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits," to Form 8-K dated January 23, 1998; filed February 3, 1998.
(8) Incorporated herein by reference to Item 6, "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended September 30, 1996; filed
August 12, 1996.
(9) Incorporated herein by reference to Item 6. "Exhibits and Reports on Form
8-K" to Form 10-Q for the quarterly period ended June 30, 1997; filed
August 14, 1997.
(10) Incorporated by reference to Item 16, "Exhibits" to Registration Statement
on Form S-3 filed with the Securities Exchange Commission on December 18,
1996.
(11) Incorporated herein by reference to Item 7, "Financial Statements and
Exhibits", to Form 8-K dated September 12, 1997; filed September 19, 1997.
(12) Incorporated by reference to Item 27, "Exhibits" to Post Effective
Amendment No. 1 to Registration Statement on Form SB-2(File No.
33-68058-FW).
(13) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to
Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference to Item 5, "Other Items" to Form 8-K dated
December 1, 1995 and filed on January 16, 1996.
(15) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 333-47917); filed March 13, 1998.
(16) Incorporated herein by reference to Item 8, "Exhibits" to Registration
Statement on Form S-8 (File No. 33-39471); filed November 4, 1997.
(17) Incorporated by reference to Item 27, "Exhibits" to Registration Statement
filed with the Securities and Exchange Commission on August 30, 1993.
<PAGE> 1
EXHIBIT 3.1.2
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION OF
PATTERSON ENERGY, INC.
Pursuant to the provisions of Section 242 of the General Corporation
Law of Delaware, the undersigned corporation adopts the following amendment to
its Certificate of Incorporation:
FIRST: The name of the Corporation is PATTERSON ENERGY, INC.
SECOND: The following amendment to the Certificate of Incorporation
was adopted by a vote of the stockholders sufficient for approval effective on
December 30, 1997, in the manner prescribed by the General Corporation Law of
the State of Delaware:
Article FOURTH of the Certificate of Incorporation is amended to read
in its entirety as follows:
FOURTH: The total number of shares of stock that the
Corporation shall have authority to issue is fifty-one million
(51,000,000) shares, of which fifty million (50,000,000) shares shall
be Common Stock, having a par value of $0.01 per share, and one
million (1,000,000) shares shall be Preferred Stock, having a par
value of $0.01 per share. The shares of such classes of stock shall
have the following express terms:
Section 1. PREFERRED STOCK
1.1 Authority of the Board of Directors to Create Series.
The Board of Directors is hereby expressly granted authority, to the
full extent now or hereafter permitted herein and by the General
Corporation Law of the State of Delaware, at any time or from time to
time, by resolution or resolutions, to create one or more series of
Preferred Stock, to fix the authorized number of shares of any series
(which number of shares may vary as between series and be changed from
time to time by like action), and to fix the terms of such series,
including, but not limited to, the following:
(a) the designation of such series, which may be
by distinguishing number, letter, or title;
<PAGE> 2
(b) the rate or rates at which shares of such
series shall be entitled to receive dividends; the periods in
respect of which dividends are payable; the conditions upon,
and times of payment of, such dividends; the relationship and
preference, if any, of such dividends to dividends payable on
any other class or classes or any other series of stock;
whether such dividends shall be cumulative and, if cumulative,
the date or dates from which such dividends shall accumulate;
and the other terms and conditions applicable to dividends
upon shares of such series;
(c) the rights of the holders of the shares of
such series in case the Corporation be liquidated, dissolved
or wound up (which may vary depending upon the time, manner,
or voluntary or involuntary nature or other circumstances of
such liquidation, dissolution, or winding up) and the
relationship and preference, if any, of such rights to rights
of holders of shares of stock of any other class or classes or
any other series of stock;
(d) the right, if any, of the Corporation to
redeem shares of such series at its option, including any
limitation of such right, and the amount or amounts to be
payable in respect of the shares of such series in case of
such redemption (which may vary depending on the time, manner,
or other circumstances of such redemption), and the manner,
effect, and other terms and conditions of any such redemption;
(e) the obligation, if any, of the Corporation to
purchase, redeem, or retire shares of such series and/or to
maintain a fund for such purpose, and the amount or amounts to
be payable from time to time for such purpose or into such
fund, or the number of shares to be purchased, redeemed, or
retired, the per share purchase price or prices, and the other
terms and conditions of any such obligation or obligations;
(f) the voting rights, if any, which, if granted,
may be full, special, or limited, to be given the shares of
such series, including, without limiting the generality of the
foregoing, the right, if any, as a series or in conjunction
with other series or classes, to elect one or more members of
the Board of Directors either generally or at certain times or
under certain circumstances, and
2
<PAGE> 3
restrictions, if any, on particular corporate acts without a
specified vote or consent of holders of such shares (such as,
among others, restrictions on modifying the terms of such
series or of the Preferred Stock, restricting the permissible
terms of other series or the permissible variations between
series of the Preferred Stock, authorizing or issuing
additional shares of the Preferred Stock, creating debt, or
creating any class of stock ranking prior to or on a parity
with the Preferred Stock or any series thereof as to
dividends, or assets remaining for distribution to the
stockholders in the event of the liquidation, dissolution, or
winding up of the Corporation);
(g) the right, if any, to exchange or convert the
shares into shares of any other series of the Preferred Stock
or into shares of any other class of stock of the Corporation
or the securities of any other corporation, and the rate or
basis, time, manner, terms, and conditions of exchange or
conversion or the method by which the same shall be
determined; and
(h) the other special powers, preferences, or
rights, if any, and the qualifications, limitations, or
restrictions thereof, of the shares of such series.
The Board of Directors shall fix the terms of each such series
by resolution or resolutions adopted at any time prior to the issuance
of the shares thereof, and the terms of each such series may, subject
only to restrictions, if any, imposed by this Certificate of
Incorporation or by applicable law, vary from the terms of other
series to the extent determined by the Board of Directors from time to
time and provided in the resolution or resolutions fixing the terms of
the respective series of the Preferred Stock.
1.2 Status of Certain Shares. Shares of any series of the
Preferred Stock, whether provided for herein or by resolution or
resolutions of the Board of Directors, which have been redeemed
(whether through the operation of a sinking fund or otherwise) or
which, if convertible or exchangeable, have been converted into or
exchanged for shares of stock of any other class or classes, or which
have been purchased or otherwise acquired by the Corporation, shall
have the status of authorized and unissued shares of the Preferred
Stock of the same series and may be reissued as a part of the series
of which they were originally a part or may be reclassified and
reissued as part of a new series of the Preferred
3
<PAGE> 4
Stock to be created by resolution or resolutions of the Board of
Directors or as a part of any other series of the Preferred Stock, all
subject to the conditions or restrictions on issuance set forth herein
or in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any series of the Preferred Stock.
Section 2. COMMON STOCK
2.1 Issuance, Consideration, and Terms. Any unissued shares
of the Common Stock may be issued from time to time for such
consideration, having a value of not less than the par value thereof,
as may be fixed from time to time by the Board of Directors. Any
treasury shares may be disposed of for such consideration as may be
determined from time to time by the Board of Directors. The Common
Stock shall be subject to the express terms of the Preferred Stock and
any series thereof. Each share of Common Stock shall be of equal rank
and shall be identical to every other share of Common Stock. Holders
of Common Stock shall have such rights as are provided herein and by
law.
2.2 Voting Rights. Except as expressly required by
law or as provided in or fixed and determined pursuant to
Section 1 of this Article FOURTH, the entire voting power and
all voting rights shall be vested exclusively in the Common
Stock. Each holder of shares of Common Stock shall be
entitled to one (1) vote for each share standing in such
holder's name on the books of the Corporation.
2.3 Dividends. Subject to Section 1 of this Article
FOURTH, the holders of Common Stock shall be entitled to
receive, and shall share equally share for share, when and as
declared by the Board of Directors, out of the assets of the
Corporation which are by law available therefor, dividends or
distributions payable in cash, in property, or in securities
of the Corporation.
THIRD: The Amendment does not provide for the exchange,
reclassification or cancellation of issued shares.
FOURTH: The Amendment does not effect a change in the amount of stated
capital.
Dated: December 30, 1997
ATTEST: PATTERSON ENERGY, INC.
/s/ James C. Brown By: /s/ A. Glenn Patterson
- --------------------------------- ---------------------------------
James C. Brown, Secretary A. Glenn Patterson, President
4
<PAGE> 5
Each of the undersigned, A. Glenn Patterson, the President of the
Corporation, and James C. Brown, the Secretary of the Corporation, hereby
affirms and acknowledges, under penalties of perjury, that the respective
signature of the undersigned on the foregoing instrument is his respective act
and deed or the act and deed of the Corporation, and that the facts stated in
the foregoing instrument are true.
/s/ A. Glenn Patterson
------------------------------------
A. Glenn Patterson, President
/s/ James C. Brown
------------------------------------
James C. Brown, Secretary
5
<PAGE> 1
EXHIBIT 10.2
AIRCRAFT LEASE
By this Aircraft Lease TALBOTT AVIATION, INC., a Texas corporation
("Lessor"), whose address is P.O. Drawer 1416, Snyder, Texas 79550, leases to
PATTERSON ENERGY, INC., a Delaware corporation ("Lessee"), whose address is
P.O. Box 410, Snyder, Texas 79550, the aircraft described below, on the
following terms and conditions:
1. Description of Aircraft. The property leased under this agreement
is a 1981 Beech King-Air 90 airplane, manufacturer's serial No. LA-121 and
Department of Transportation, Federal Aviation Administration No. N182CA.
2. Term of Lease. The term of this Lease is for a period of one (1)
year, commencing as of January 1, 1998 and terminating on December 31, 1998.
3. Rental Payments. Lessee agrees to pay Lessor as rent for the use
of the aircraft a total sum of $9,200.00 per month, payable in advance on the
first day of each month during the term of this Lease, beginning January 1,
1998.
Rental payments shall be made at Lessor's address as set forth above
or at any other place that may be designated by Lessor or its assignees. Any
rental payment not made by Lessee within ten (10) days of its due date shall by
subject to a late charge of five percent (5%) of the amount not paid when due
for each ten days the amount remains unpaid.
4. Delivery of Aircraft. Lessor agrees to deliver the aircraft to
Lessee at Scurry County Airport, Snyder, Texas. At delivery to Lessee on
January 1, 1998, the aircraft shall be in an airworthy condition and registered
in the name of Lessor with the Secretary of Transportation, pursuant to Section
1401, Title 49 of the United States Code, and shall be covered by a Certificate
of Airworthiness issued by the Federal Aviation Administration.
5. Maintenance. During the term of the Lease, Lessee shall at its
own expense maintain the aircraft, including the airframe, engines, propellers,
instruments, equipment, appliances, and accessories in fully operable
condition, and in compliance with all applicable maintenance and safety
requirements of the Federal Aviation Administration and the Federal Aviation
Administration approved 1981 Beech King-Air airplane maintenance manual (the
"Maintenance Manual"). All maintenance and repair work shall be performed by
personnel duly certified to perform such work by the Federal Aviation
Administration. Work shall be in accordance with minimum standards of the
Federal Aviation Administration and in accordance with standards set forth in
the Maintenance Manual.
Dated this 15th day of January, 1998.
LESSOR: LESSEE:
TALBOTT AVIATION, INC. PATTERSON ENERGY, INC.
/S/ CLOYCE A. TALBOTT /S/ A. GLENN PATTERSON
- ---------------------------------- ----------------------------------
CLOYCE A. TALBOTT, PRESIDENT GLENN PATTERSON, PRESIDENT
<PAGE> 1
EXHIBIT 11.1
PATTERSON ENERGY, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
BASIC
Net income ...................................................... $ 3,201 $ 4,271 $ 22,242
Weighted average number of common shares outstanding .......... 17,517 19,167 28,492
========== ========== ==========
Net income per share: Basic .................................... $ 0.18 $ 0.22 $ 0.78
========== ========== ==========
DILUTED
Net income ...................................................... $ 3,201 $ 4,271 $ 22,242
Shares:
Weighted average number of common shares outstanding .......... 17,517 19,167 28,492
Dilutive effect of outstanding options and redeemable
warrants (as determined by the application of the
treasury stock method) ..................................... 565 919 1,013
---------- ---------- ----------
Weighted average number of common shares outstanding,
as adjusted ................................................ 18,082 20,086 29,505
========== ========== ==========
Net income per share: Diluted .................................. $ 0.18 $ 0.21 $ 0.75
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
OF
PATTERSON ENERGY, INC.
<TABLE>
<CAPTION>
STATE OF NAMES UNDER WHICH
NAME INCORPORATION SUBSIDIARIES DO BUSINESS
- ---- ------------- ------------------------
<S> <C> <C>
Patterson Petroleum, Inc. Texas Patterson Petroleum, Inc.
Patterson Petroleum Trading Company, Texas Patterson Petroleum Trading Company,
Inc. Inc.
Patterson Drilling Programs, Inc. Texas Patterson Drilling Programs, Inc.
Patterson Drilling Company Delaware Patterson Drilling Company
Lone Star Mud, Inc. Texas Lone Star Mud, Inc.
Patterson Onshore Drilling Company Texas Patterson Onshore Drilling Company
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Patterson Energy, Inc. on Forms S-8 (File No.'s 333-47917, 33-97972, 33-39471
and 33-35399) and on Forms S-3, as amended, (File No.'s 333-43739 and
333-39537) of our report dated February 27, 1998, on our audits of the
consolidated financial statements of Patterson Energy, Inc. as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997, which
report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Dallas, Texas
March 30, 1998
<PAGE> 1
EXHIBITS 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the previously filed Registration
Statements of Patterson Energy, Inc., on Forms S-8 (File No.'s 333-47917,
33-97972, 33-39471 and 33-35399) and on Forms S-3 (File No.'s 333-43739 and
333-39537, as amended).
/s/ Arthur Andersen LLP
San Antonio, Texas
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,344
<SECURITIES> 524
<RECEIVABLES> 13,332
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,734
<PP&E> 88,216
<DEPRECIATION> 53,417
<TOTAL-ASSETS> 62,991
<CURRENT-LIABILITIES> 12,051
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 37,467
<TOTAL-LIABILITY-AND-EQUITY> 62,991
<SALES> 0
<TOTAL-REVENUES> 64,444
<CGS> 0
<TOTAL-COSTS> 61,919
<OTHER-EXPENSES> (954)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,065
<INCOME-PRETAX> 2,414
<INCOME-TAX> (787)
<INCOME-CONTINUING> 3,201
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,201
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 3,433 4,251 9,450 3,494
<SECURITIES> 0 0 524 544
<RECEIVABLES> 9,308 13,160 13,800 24,742
<ALLOWANCES> 0 0 0 0
<INVENTORY> 470 462 490 0
<CURRENT-ASSETS> 16,764 21,382 28,177 35,481
<PP&E> 56,111 58,045 94,081 109,859
<DEPRECIATION> 29,213 30,057 57,529 58,551
<TOTAL-ASSETS> 45,765 51,279 68,498 87,913
<CURRENT-LIABILITIES> 11,023 16,222 16,923 17,889
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 128 128 192 198
<OTHER-SE> 22,021 22,384 39,045 43,284
<TOTAL-LIABILITY-AND-EQUITY> 45,765 51,279 68,498 87,913
<SALES> 0 0 0 0
<TOTAL-REVENUES> 16,246 18,547 20,263 83,708
<CGS> 0 0 0 0
<TOTAL-COSTS> 16,002 17,915 19,182 78,954
<OTHER-EXPENSES> (232) 15 1,479 1,125
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 329 315 340 1,612
<INCOME-PRETAX> 147 302 (738) 2,017
<INCOME-TAX> (2,340) 47 (126) (2,254)
<INCOME-CONTINUING> 2,487 255 (612) 4,271
<DISCONTINUED> 1,640 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,487 255 (612) 4,271
<EPS-PRIMARY> 0.13 0.01 (0.03) 0.22
<EPS-DILUTED> 0.13 0.01 (0.03) 0.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 34,415 11,358 17,255 23,338
<SECURITIES> 543 551 559 566
<RECEIVABLES> 24,775 32,210 42,053 45,505
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 67,432 51,161 67,641 77,014
<PP&E> 117,480 147,407 155,829 173,800
<DEPRECIATION> 61,747 65,744 69,663 73,395
<TOTAL-ASSETS> 124,297 153,480 174,915 203,200
<CURRENT-LIABILITIES> 17,193 25,584 34,534 30,530
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 284 294 296 310
<OTHER-SE> 105,600 120,329 128,705 146,622
<TOTAL-LIABILITY-AND-EQUITY> 124,297 153,480 174,915 203,200
<SALES> 0 0 0 0
<TOTAL-REVENUES> 30,641 40,692 58,158 190,777
<CGS> 0 0 0 0
<TOTAL-COSTS> 28,001 36,646 46,671 157,456
<OTHER-EXPENSES> (438) (660) (1,224) (2,832)
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 483 26 186 1,045
<INCOME-PRETAX> 2,595 6,680 12,525 35,108
<INCOME-TAX> 955 2,402 4,646 12,866
<INCOME-CONTINUING> 1,640 4,278 7,879 22,242
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,640 4,278 7,879 22,242
<EPS-PRIMARY> 0.06 0.08 0.27 0.78
<EPS-DILUTED> 0.06 0.08 0.25 0.75
</TABLE>
