<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] 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
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PATTERSON ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2504748
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
P.O. BOX 1416, 4510 LAMESA HIGHWAY,
SNYDER, TEXAS
79550
(Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (915) 573-1104
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Securities Registered Pursuant to 12(b) of the Act: None
Securities Registered Pursuant to 12(g) of the Act:
(TITLE OF CLASS)
Common Stock, $.01 Par Value
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. [ ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 22, 1999 was $142,705,758, based
upon the average bid and asked prices of $4.66 and $4.69, respectively, on the
Nasdaq National Market.
As of March 22, 1999, the registrant had outstanding 32,471,132 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 1999 Annual Meeting of Stockholders.
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<PAGE> 2
PART I
The "Company" or "Patterson" is used in this report to refer to Patterson
Energy, Inc. and its consolidated subsidiaries. The Company may from time to
time make written or oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and its reports to stockholders. Items 1 and 2 contain forward-looking
statements and are made pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements include, without
limitation, statements relating to the drilling and completion of wells, well
operations, utilization rates of drilling rigs, reserve estimates (including
estimates for future net revenues associated with such reserves and the present
value of such future net reserves), business strategies and other plans and
objectives of the Company's management for future operations and activities and
other such matters. The words "believes," "budgeted," "plans," "intends,"
"strategy," or "anticipates" and similar expressions identify forward-looking
statements. The Company does not undertake to update, revise or correct any of
the forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the Company's disclosures under
the heading: "Cautionary Statement for Purposes of the 'Safe Harbor' Provisions
of the Private Securities Litigation Reform Act of 1995" beginning on page 13.
------------------------------
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 119 drilling rigs, 114 of which are currently operable.
The Company is also engaged in the development, exploration, acquisition and
production of oil and natural gas and, to a lesser extent, provides contract
drilling fluid services to other oil and natural gas operators.
CONTRACT DRILLING OPERATIONS. The Company has established a reputation for
reliable, 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, 1998, the
Company drilled 1,028 wells for 251 non-affiliated customers maintaining an
average utilization rate of 54%.
Over the past five years, the Company's operations have expanded
significantly through a series of acquisitions. Since 1993, the Company has
increased its contract drilling fleet by 106 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 1998,
the Company's consolidated operating revenues increased from $25.0 million to
$187.0 million, and earnings before interest expense, income taxes,
depreciation, depletion and amortization (EBITDA) increased from $4.3 million to
$36.1 million.
OIL AND NATURAL GAS OPERATIONS. The Company's oil and natural gas
activities are designed to complement its land drilling operations and diversify
the Company's overall business strategy. These activities are primarily focused
in mature producing regions in the Austin Chalk Trend, the Permian Basin and
South Texas. Oil and natural gas operations comprised approximately 4% of the
Company's consolidated operating revenues for the year ended December 31, 1998.
At December 31, 1998, the Company's proved developed reserves were approximately
1.5 million BOE and had a present value (discounted at 10% before income taxes)
of estimated future net revenues of approximately $6.8 million. The industry's
significantly reduced
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commodity prices, primarily the price of crude oil, have had a negative impact
on the valuation of the Company's oil and natural gas reserves. For the year end
December 31, 1998, the Company incurred a $3.8 million impairment charge to its
oil and natural gas properties.
The Company's business strategy for its oil and natural gas operations is
to increase its oil and natural gas reserves primarily through developmental and
exploratory drilling in producing areas. Although Patterson from time to time
will participate through a working interest in exploratory drilling, the focus
of the Company's drilling activities for the foreseeable future will be
exploration and development drilling in the Austin Chalk Trend, the Permian
Basin of West Texas and Southeastern New Mexico and in South Texas.
DRILLING FLUID OPERATIONS. In addition, the Company also provides contract
drilling fluid services to numerous operators in the oil and natural gas
industry. Operating revenues derived from these activities constitute
approximately 7% of the Company's consolidated operating revenues. Patterson
believes that these contract services integrate well with its other core
operating activities. The drilling fluid operations were added by the Company
during the current fiscal year with its acquisition of Lone Star Mud, Inc.
during January 1998 and Tejas Drilling Fluids, Inc. in September 1998.
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, Corpus
Christi, Texas, and twelve yard facilities variously located in its areas of
operations.
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 had one of the most competitive ratios of EBITDA to revenues in
the U.S. land drilling industry during 1998. 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
On January 5, 1998, the Company acquired 100% of the outstanding stock of
Lone Star Mud, Inc. ("Lone Star"), a privately-owned, non-affiliated company
based in Midland, Texas. The purchase price of approximately $13.0 million
consisted of $1.4 million in cash, 571,328 shares of the Company's common stock
valued at $17.41 per share, the assumption of $1.6 million of debt and
approximately $3,300 of other direct costs incurred relative to the transaction.
Pursuant to certain terms of the Company's existing loan agreement
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with Norwest Bank Texas, N.A. ("Norwest"), the outstanding balance of the above
mentioned assumed debt was paid in full.
On February 6, 1998, the Company completed the merger of Robertson Onshore
Drilling Company ("Robertson") a privately-owned, non-affiliated, contract
drilling company based in Dallas, Texas, with and into Patterson Onshore
Drilling Company, a wholly-owned subsidiary of Patterson Drilling Company. The
purchase price of approximately $42.2 million was funded using cash on hand of
approximately $3.25 million, proceeds of $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. The
assets acquired consisted of 15 operable drilling rigs and a shop and yard
located in Liberty City, Texas.
On September 17, 1998, the Company acquired 100% of the outstanding stock
of Tejas Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated
company based in Corpus Christi, Texas for $3.5 million cash and approximately
$74,000 of other direct costs incurred relative to the transaction.
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from a non-affiliated entity based in South
Texas. The Company's consideration for the acquired assets included 800,000
unregistered shares of the Company's common stock valued at $4.00 per share and
an additional cash payment to be determined one year from the acquisition date.
The contingent cash payment will be based on the sales price of the Company's
common stock in January 2000. The payment may be as high as $880,000 or as low
as zero.
INDUSTRY SEGMENTS
The Company's revenues, operating profits and identifiable operating assets
are primarily attributable to three industry segments: (i) contract drilling,
(ii) oil and natural gas exploration, development, acquisition and production
and (iii) drilling fluids. The contract drilling segment operated at a profit
during each of the years in the three-year period ended December 31, 1998. The
oil and natural gas segment operated at a profit for the years ended December
31, 1996 and 1997 and at a loss for the year ended December 31, 1998. The
drilling fluids segment generated a profit for the year ended December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 of Notes to Consolidated Financial Statements included
as a part of Items 7 and 8, respectively, of this Report for financial
information pertaining to these industry segments.
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 119
drilling rigs, 114 of which are currently operable. Currently, 99 of the
operable drilling rigs are based in Texas (60 in west Texas, 22 in south Texas,
12 in east Texas and five in north Texas), nine are based in southeast New
Mexico, five in Mississippi and one in Utah. 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
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importance to prospective customers. The Company has and will continue to strive
to maintain its drilling fleet in good working condition. In addition to normal
repair and maintenance expenses, the Company spends significant funds each year
on an ongoing program of modifying and upgrading its drilling rigs. The Company
also strives to employ experienced and dedicated drilling supervisors for its
various drilling rigs in the field. The Company intends to continue its ongoing
rig maintenance program and to continue to retain high quality, experienced
drilling supervisors in order to build upon its reputation in the market place.
In addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
DRILLING CONTRACTS. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other matters. The contracts obligate
the Company to pay certain operating expenses, including wages of drilling
personnel and maintenance expenses and to furnish incidental drilling rig
supplies and equipment. The contracts are subject to termination by the customer
on short notice, usually upon payment of a fee. The Company generally
indemnifies its customers against claims by the Company's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of the Company. These customers generally indemnify
the Company against claims arising from other surface and subsurface pollution,
except claims arising from the Company's gross negligence.
The contracts provide for compensation to the Company on a daywork, footage
or turnkey basis, or a combination thereof, with rates bid by the Company which
are dependent upon the anticipated complexity of drilling the well, the on-site
drilling conditions, the type of equipment to be used, the Company's estimate of
the risks involved and the estimated duration of the work to be performed, among
other considerations. All of the horizontal wells drilled by the Company have
been done either on a turnkey or footage basis to the point where the vertical
drilling ends and horizontal drilling begins, and on a daywork basis beyond that
point.
Under daywork contracts, the Company provides the drilling rig, including
the required personnel, to the operator who supervises the drilling of the
contracted well. Compensation to the Company is based on a negotiated rate per
day that the drilling rig is utilized. Daywork contracts generally specify the
type of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, the Company generally does not incur any costs
due to "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.
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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 1996 1997 1998
---------------- ---- ---- ----
<S> <C> <C> <C>
Daywork..................................................... 52% 62% 64%
Footage..................................................... 40 35 24
Turnkey..................................................... 8 3 12
</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.
The Company's ability to drill wells for which it has contracts may be
delayed by inclement weather. Sustained periods of inclement weather may have a
material adverse effect on the Company's revenues and cash flows.
CONTRACT DRILLING ACTIVITY. The following table sets forth certain
information regarding the Company's contract drilling activity for each of the
years in the three year period ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Number of wells drilled................................... 464 1,115 1,028
Average rigs available for service........................ 42 73 106
Average rig utilization rate(1)........................... 76% 89% 54%
</TABLE>
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(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, 1998, the Company drilled wells
for 251 nonaffiliated customers. This compares with 193 nonaffiliated customers
for the year ended December 31, 1997. No single customer accounted for 10% or
more of the Company's consolidated operating revenues for the fiscal year ended
December 31, 1998. The Company does not believe that the loss of any one
customer would have a material adverse effect on the Company's operations.
The Company's customers in the past 12 months have included, among others,
Abraxas Production, Apache Corporation, ARCO Permian, Burlington Resources Oil &
Gas Company, Chevron U.S.A., Cobra Oil and Gas, Costilla Petroleum, Louis
Dreyfuss Natural Gas Company, Enron Oil & Gas Company, Mitchell Energy
Corporation, Oryx Energy, Santa Fe Energy and Union Pacific Resources, Co.
As of December 31, 1998 the Company was drilling a total of 17 wells, none
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....................................... 37(1) --
10,001 to 15,000...................................... 64 7
15,001 to 25,000...................................... 7(2) 4
--- --
Totals...................................... 108 11
=== ==
</TABLE>
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(1) Includes 4 inoperable rigs.
(2) Includes 1 inoperable rig.
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The Company owns 101 trucks and 137 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
GENERAL. The Company has been engaged in the development, exploration,
acquisition and production of oil and natural gas since 1982. The Company's oil
and natural gas activities 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.
The Company's strategy for its oil and natural gas operations is to
increase its reserve base primarily through development drilling, as well as
selected acquisitions of leasehold acreage and producing properties. At December
31, 1998, the Company was the operator of 130 wells, of which it was the
drilling contractor for 122 wells.
OIL AND NATURAL GAS RESERVES. The Company engaged M. Brian Wallace, P.E.
Dallas, Texas, an independent petroleum engineer, to estimate the Company's
proved developed reserves, projected future production and estimated future net
revenues from production of proved developed reserves on its properties as of
December 31, 1996, 1997 and 1998. Mr. Wallace's estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. In determining the estimates of the
reserve quantities that are economically recoverable, Mr. Wallace used oil and
natural gas prices and estimated average development and production costs
provided by the Company.
The following table sets forth information as of the end of each of the
years in the three year period ended December 31, 1998 derived from the reserve
reports of Mr. Wallace. The present values (discounted at 10% before income
taxes) of estimated future net revenues shown in the table are not intended to
represent the current market value of the estimated oil and natural gas reserves
owned by the Company. For further information concerning the present value of
estimated future net revenue from these proved developed reserves, see Note 16
of Notes to Consolidated Financial Statements included as a part of Item 8 of
this Report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls).......................................... 1,062 945 946
Gas (Mcf)........................................... 7,627 3,788 3,490
Total (BOE)......................................... 2,333 1,576 1,528
Estimated future net revenue before income taxes.... $25,637 $15,012 $9,232
Present value of estimated future net revenues
before income taxes, discounted at 10%............ $17,893 $11,422 $6,770
</TABLE>
The reserve data set forth above represents only estimates. The estimates
are based on various assumptions and, therefore, are inherently imprecise.
Actual future production, revenues, taxes, production costs and development
costs may vary substantially from those assumed in the estimates. Any
significant variance could materially affect the estimates set forth in this
Form 10-K. In addition, the reserve data may be subject to upward or downward
revisions depending upon, among other factors, production history and prevailing
oil and natural gas prices. Oil and natural gas prices have fluctuated widely in
recent years. There is no assurance that prices will be higher or lower than
prices used in estimating the Company's reserves.
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PRODUCTION. The Company's wells in the Austin Chalk Trend and South Texas
primarily produce natural gas and in the Permian Basin primarily produce oil.
The following table sets forth the Company's net oil and natural gas production,
average sales price and average production (lifting) costs associated with such
production during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Average net daily production:
Oil (Bbls).......................................... 641 1,159 835
Gas (Mcf)........................................... 4,586 4,024 2,742
Total (BOE)......................................... 1,406 1,830 1,292
Average sales prices:
Oil (per Bbl)....................................... $20.99 $17.86 $12.16
Gas (per Mcf)....................................... 2.01 2.19 1.93
Average production (lifting) costs (per BOE)........ $ 3.91 $ 3.41 $ 4.08
</TABLE>
PRODUCTIVE WELLS. The following table sets forth information regarding the
number of productive wells in which the Company held a working interest as of
December 31, 1998. One or more completions in the same well bore are counted as
one well.
<TABLE>
<CAPTION>
PRODUCTIVE
WELLS
--------------
GROSS NET
----- ---
<S> <C> <C>
Oil......................................................... 185 56.56
Gas......................................................... 56 4.73
--- -----
Total.................................................. 241 61.29
=== =====
</TABLE>
DEVELOPED AND UNDEVELOPED ACREAGE. The following table sets forth the
developed and undeveloped acreage in which the Company owned a working or
leasehold interest as of December 31, 1998:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- -----------------
LOCATION GROSS NET GROSS NET
-------- ----- --- ----- ---
<S> <C> <C> <C> <C>
Austin Chalk Trend and South Texas.......................... 34,118 6,260 89,330 22,459
Permian Basin............................................... 24,275 3,150 37,390 7,994
------ ----- ------- ------
Total.................................................. 58,393 9,410 126,720 30,453
====== ===== ======= ======
</TABLE>
Many of the leases summarized in the table above as undeveloped acreage
will expire at the end of their respective primary terms unless production has
been obtained from the acreage subject to the lease prior to that date, in which
event the lease will remain in effect until the cessation of production. The
following table sets forth the gross and net acres subject to leases summarized
in the table of undeveloped acreage that will expire.
<TABLE>
<CAPTION>
LEASE ACRES EXPIRING
--------------------
GROSS NET
----- ---
<S> <C> <C>
PERIOD ENDING:
December 31, 1999....................................... 35,397 6,767
December 31, 2000....................................... 40,485 8,901
December 31, 2001 and later............................. 50,838 14,785
------- ------
Total.............................................. 126,720 30,453
======= ======
</TABLE>
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DRILLING ACTIVITIES. The following table set forth the results of the
Company's participation in the drilling of development and exploratory wells
during each of the years ended December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
DEVELOPMENT WELLS EXPLORATORY WELLS
------------------------------- ------------------------------
PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES
-------------- ------------- ------------- -------------
YEAR ENDED DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET
----------------------- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996...................................... 29 4.35 16 3.87 1 .16 6 1.00
1997...................................... 24 5.44 8 1.53 7 1.13 15 3.06
1998...................................... 23 4.45 6 1.74 3 .55 13 2.16
-- ----- -- ---- -- ---- -- ----
Total................................ 76 14.24 30 7.14 11 1.84 34 6.22
== ===== == ==== == ==== == ====
</TABLE>
MARKETING OF CRUDE OIL AND NATURAL GAS. Crude oil is sold based upon 30-day
automatically renewable contracts with oil purchasers. Prices vary as world oil
prices fluctuate. Due to competitive conditions, the Company does not believe
that the loss of any one of its major crude oil purchasers would have a material
adverse effect on its business. The Company markets oil produced from Company
operated wells through a wholly-owned subsidiary. A company owned in part by the
son of Cloyce A. Talbott, the Company's Chairman and Chief Executive Officer, is
a first purchaser of substantially all of the oil produced from Company-operated
leases. See Note 18 of Notes to Consolidated Financial Statements included as a
part of Item 8 of this Report.
Most of the Company's natural gas is sold through third-party natural gas
brokers at spot market prices and is transported to market by interstate
pipelines. Contracts with these brokers are currently for less than five years
and allow for prices to adjust to the marketplace. The Company believes that
because of the competitive nature of the industry today, the loss of any one of
its natural gas purchasers would not have a material adverse effect on its
business. While the Company has not experienced any inability to market its
natural gas, if transportation space in the pipelines is restricted or is
unavailable, the Company's cash flow could be adversely affected.
No customer for oil and natural gas accounted for more than 10% of the
Company's consolidated revenues for the year ended December 31, 1998.
TITLE TO OIL AND NATURAL GAS PROPERTIES. Title to the Company's oil and
natural gas properties is subject to royalty, overriding royalty, carried
working, and other similar interests and cost sharing arrangements customary in
the oil and natural gas industry (including farmout agreements, operating
agreements and joint venture arrangements), liens for current taxes not yet due,
and to other minor defects and encumbrances. The Company believes that such
burdens do not materially detract from the value of such properties or from the
Company's interest therein or materially interfere with the operation of the
Company's business.
As is customary in the oil and natural gas industry in the case of
undeveloped properties, an in-house title review is made prior to or at the time
of acquisition. More comprehensive title investigations, including in most cases
receipt of a title opinion of legal counsel, are generally made before
commencement of drilling operations on undeveloped properties and also are
generally made before consummation of an acquisition of developed properties.
COMPETITION
CONTRACT DRILLING OPERATIONS. 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
9
<PAGE> 10
turn influenced primarily by the financial condition of such companies, by
general economic conditions, by prices of oil and natural gas and, from time to
time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of the Company, some of which have substantially greater resources and longer
operating histories than the Company. Also, in recent years, many drilling
companies have consolidated or merged with other companies. Although this
consolidation has decreased the total number of competitors, management of the
Company believes that competition for drilling contracts will continue to be
intense for the foreseeable future.
OIL AND NATURAL GAS OPERATIONS. There is substantial competition for the
acquisition of oil and natural gas leases suitable for exploration and for the
hiring of experienced personnel. The Company's competitors in oil and natural
gas exploration, development and production include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies,
drilling and production purchase programs and individual producers and
operators. The ability of the Company to increase its holdings of oil and
natural gas reserves in the future is directly dependent upon the Company's
ability to select, acquire and develop suitable prospects in competition with
these companies. Many competitors have financial resources, staffs, facilities
and other resources significantly greater than those of the Company.
GOVERNMENT REGULATION AND ENVIRONMENTAL
The domestic drilling of oil and natural gas wells is subject to numerous
state and federal laws, rules and regulations. State statutory provisions
relating to oil and natural gas generally include requirements as to well
spacing, waste prevention, production limitations, disposal of produced waters,
pollution prevention and clean-up, obtaining drilling permits and similar
matters. Within the state of Texas, where substantially all of the Company's
operations are currently conducted, these regulations are principally enforced
by the Texas Railroad Commission. To date, the Company has not been required to
expend significant resources in order to satisfy applicable environmental laws
and regulations. The Company does not anticipate any material capital
expenditures for environmental control facilities or extraordinary expenditures
associated with compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material and the Company could incur liability for
noncompliance. The Company has not been fined or incurred liability for
noncompliance, pollution or other environmental damage in connection with its
operations and is not currently aware of any environmental 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
10
<PAGE> 11
CERCLA and/or RCRA, the Company could be required to remove and remediate
previously disposed of materials (including materials disposed of or released by
prior owners or operators) from properties (including ground water contaminated
with hydrocarbons) and to perform removal or remedial actions to prevent future
contamination.
The Federal Water Pollution Control Act ("FWPCA") and the Oil Pollution Act
of 1990 ("OPA") and implementing regulations govern the prevention of
discharges, including oil and produced water spills, and liability for damages
into waters. The OPA is more comprehensive and stringent than previous oil
pollution liability and prevention laws and imposes strict liability for a
comprehensive and expansive list of damages from an oil spill into waters from
facilities. Liability may be imposed for oil removal costs and a variety of
public and private damages. Penalties may also be imposed for violation of
federal safety, construction and operating regulations, and for failure to
report a spill or to cooperate fully in a clean-up. The OPA also expands the
authority and capability of the federal government to direct and manage oil
spill clean-up and operations, plus requires operators to prepare oil spill
response plans in cases where it can reasonably be expected that substantial
harm will be done to the environment by discharges on or into navigable waters.
The Company has spill protection control countermeasure (SPCC) plans in place
for its oil and natural gas properties in each of the areas in which it
operates. Failure to comply with ongoing requirements or inadequate cooperation
during a spill event may subject a responsible party to civil or criminal
actions. Although the liability for owners and operators is the same under the
FWPCA, the damages recoverable under the OPA are potentially much greater and
can include natural resource damages.
The operations of the Company are also subject to federal, state and local
regulations for the control of air emissions. The federal Clean Air Act ("CAA"),
as amended, and various state and local laws impose certain air quality
requirements on the Company. Amendments to the CAA revised the definition of
"major source" such that emissions from both wellhead and associated equipment
involved in oil and gas production may be added to determine if a source is a
"major source." As a consequence, more facilities may become major sources and
thus would be required to obtain operating permits. This permitting process may
require capital expenditures in order to comply with permit limits.
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 $2.0 million
per occurrence with an aggregate of $2.0 million and excess liability and
umbrella coverage's of up to $50.0 million per occurrence with a $50.0 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
11
<PAGE> 12
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 1,202 full-time persons (83 office
personnel and 1,119 field personnel) at December 31, 1998. 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 are represented by a union.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to various legal proceedings arising in the normal
course of its business. Management of the Company does not believe that the
outcome of these proceedings will have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 13
------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 for any forward-looking statement made by, or on behalf of,
the Company. The factors identified in this cautionary statement are important
factors (but not necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company. Where any such forward-looking
statement includes a statement of the assumptions or bases underlying such
forward-looking statement, the Company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management, expresses an expectation or belief as to the future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking into
account the foregoing, the following are identified as important risk factors
that could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the Company:
VOLATILITY OF OIL AND NATURAL GAS PRICES. The Company's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas. 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 low since then of $8.60 per barrel in December 1998.
These low level oil prices have materially 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 would 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. 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 and fell to a low
since then of 29% during December 1998 due to low oil prices.
SUBSTANTIAL BANK DEBT -- IMPACT OF DEPRESSED OIL AND NATURAL GAS PRICES ON
ABILITY TO MAKE LOAN PAYMENTS AND TO SATISFY LOAN COVENANTS. The Company has a
bank term loan with a remaining principal balance of $55.7 million at December
31, 1998. All of the Company's contract drilling rigs and all of its oil and
natural gas properties are pledged as collateral on the loan and the remainder
of its assets are subject to a negative pledge. The loan is payable in monthly
principal installments of $714,286 until January 1, 2001, when the loan matures
and the then remaining principal balance and accrued interest becomes due and
payable. The loan agreement contains a number of covenants including financial
covenants, the failure of which to satisfy could at the bank's election cause
acceleration of the maturity date of the loan and require immediate
13
<PAGE> 14
repayment. At December 31, 1998, the Company was in violation of one of the loan
covenants which required positive net income. The bank waived the breach of this
covenant and agreed to replace the covenant with an earnings before interest
expense, income taxes, depreciation, depletion and amortization to interest
expense covenant. Failure of the Company to meet this amended covenant or any of
the other covenants could at the bank's election cause the maturity date of the
loan to be accelerated and become immediately due and payable. Failure of the
Company to pay the loan principal and interest could result in foreclosure on
the drilling rigs and oil and natural gas properties. The Company believes it
has sufficient working capital to pay monthly principal and interest payments
under the loan for at least the next 12 months without improvement in commodity
prices. The ability to meet the various loan covenants without improvement in
commodity prices could be more difficult.
FLUCTUATIONS IN SHORTAGES 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 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 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
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<PAGE> 15
competitors in each of the Company's lines of business have substantially
greater financial and other resources than the Company.
OPERATING HAZARDS AND UNINSURED RISKS. Contract drilling and oil and
natural gas activities are subject to a number of risks and hazards which could
cause serious injury or death to persons, suspension of drilling operations and
serious damage to equipment or property of others and, in addition to
environmental damage, could cause substantial damage to producing formations and
surrounding areas. Damages to the environment could result from the Company's
operations, particularly through oil spills, gas leaks, discharges of toxic
gases or extensive uncontrolled fires. In addition, the Company could become
subject to liability for reservoir 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, 1997 and 1998, the percentage of the Company's contract
drilling revenues attributable to turnkey contracts was 3.0% and 12.0%,
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>
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
1998:
First quarter............................................... $20.00 $8.88
Second quarter.............................................. 15.63 9.25
Third quarter............................................... 10.06 4.06
Fourth quarter.............................................. 7.00 3.44
</TABLE>
As of March 22, 1999, there were approximately 408 holders of record
(approximately 18,000 beneficial holders) 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 subparagraph sets forth information concerning equity
securities sold by the Company during 1998 but not registered under the
Securities Act of 1993, as amended (the "Act"):
During January 1998, the Company issued a total of 571,328 shares of its
Common Stock valued at $17.41 per share as partial consideration for the
acquisition of 100% of the outstanding stock of Lone Star Mud, Inc. 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. The Company believes that the issuance of the
shares was exempt from the registration requirements of Section 5 of the Act by
virtue of Rule 506 under Regulation D of the Act.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1994, 1995, 1996, 1997 and 1998 and for each of the five years then ended were
derived from the consolidated financial statements of the Company which have
been audited by PricewaterhouseCoopers LLP, 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,
-----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling..................................... $54,823 $57,599 $73,590 $178,332 $165,997
Oil and natural gas.......................... 4,707 6,845 10,118 12,445 7,170
Drilling fluids.............................. -- -- -- -- 13,397
------- ------- ------- -------- --------
Total..................................... 59,530 64,444 83,708 190,777 186,564
------- ------- ------- -------- --------
Operating costs and expenses:
Drilling..................................... 43,036 46,505 59,564 128,416 128,838
Oil and natural gas.......................... 2,654 2,669 3,465 4,402 3,676
Drilling fluids.............................. -- -- -- -- 10,205
Impairment of oil and natural gas
properties................................ -- 159 549 355 3,816
Depreciation, depletion and amortization..... 4,912 7,523 9,960 17,497 28,091
General and administrative................... 4,793 5,063 5,416 6,786 9,313
------- ------- ------- -------- --------
Total..................................... 55,395 61,919 78,954 157,456 183,939
------- ------- ------- -------- --------
Operating income............................... 4,135 2,525 4,754 33,321 2,625
------- ------- ------- -------- --------
Other income (expense)......................... 679 (111) (2,737) 1,787 (2,857)
------- ------- ------- -------- --------
Income (loss) before income taxes.............. 4,814 2,414 2,017 35,108 (232)
Income tax expense (benefit)................... (193) (787) (2,254) 12,866 93
------- ------- ------- -------- --------
Net income (loss).............................. $ 5,007 $ 3,201 $ 4,271 $ 22,242 $ (325)
======= ======= ======= ======== ========
Net income (loss) per common share:
Basic........................................ $ 0.31 $ 0.18 $ 0.22 $ 0.78 $ (0.01)
======= ======= ======= ======== ========
Diluted...................................... $ 0.31 $ 0.18 $ 0.21 $ 0.75 $ (0.01)
======= ======= ======= ======== ========
Weighted average number of common shares
outstanding:
Basic........................................ 16,120 17,517 19,167 28,492 31,645
======= ======= ======= ======== ========
Diluted...................................... 16,120 18,082 20,086 29,505 31,645
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Total assets................................... $49,509 $62,991 $87,913 $203,200 $236,605
Notes payable.................................. 6,886 13,816 25,849 23,250 55,714
Stockholders' equity........................... 30,310 37,656 43,482 146,932 156,852
</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, 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
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<PAGE> 18
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 any of the forward-looking information.
Readers are cautioned that such forward-looking statements should be read in
conjunction with the Company's disclosures under the heading: "Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" beginning on page 13.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of approximately
$31.0 million and cash and cash equivalents of approximately $9.0 million as
compared to working capital of approximately $46.5 million and cash and cash
equivalents of approximately $23.3 million as of December 31, 1997. The decrease
in the Company's working capital at December 31, 1998 was largely attributable
to cash expended by the Company related to acquisitions completed during fiscal
year 1998. Approximately $8.7 million of the aggregate $58.8 million purchase
price for the related acquisitions was funded using cash on hand at the
respective dates of acquisition. In addition, the Company assumed approximately
$3.4 million of debt, which was paid in full using cash on hand immediately
following the consummation of such acquisitions and made an $8.0 million payment
to the Internal Revenue Service for the Company's estimated Federal tax
liability. For the year ended December 31, 1998, the Company generated net cash
from operations of approximately $30.0 million, received proceeds of
approximately $299,000 from the exercise of stock options, sold property and
equipment for proceeds of approximately $1.4 million, received approximately
$566,000 from the sale of investment securities and borrowed $40.2 million under
a then existing credit facility. These funds were used primarily to acquire
drilling rigs, related equipment and associated intangible assets of
approximately $45.5 million, to provide certain necessary refurbishment of
approximately $26.4 million to the Company's operable drilling fleet, to reduce
certain notes payable by approximately $7.7 million and to fund leasehold
acquisition, exploration and development of approximately $7.7 million.
On January 5, 1998, the Company completed the acquisition of Lone Star Mud,
Inc. ("Lone Star"), a privately-owned, non-affiliated company based in Midland,
Texas for a purchase price of approximately $13.0 million consisting of $1.4
million in cash, 571,328 shares of the Company's common stock valued at $17.41
per share, which was the market price on the acquisition date, the assumption of
$1.6 million of debt and approximately $3,300 of direct costs incurred related
to the acquisition. 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.
On February 6, 1998, the Company completed its merger with Robertson
Onshore Drilling Company ("Robertson"), a privately-owned, non-affiliated
contract drilling company based in Dallas, Texas. The purchase price of $42.2
million consisted of $3.25 million in cash, $36.75 million provided by the
Company's line of credit, the assumption of $1.8 million of debt and
approximately $444,000 of direct costs incurred related to the acquisition. As a
result of the merger, the Company acquired 15 operable drilling rigs, increasing
the Company's rig fleet to 114 drilling rigs, and a shop and yard located in
Liberty City, Texas.
On September 17, 1998, the Company completed the acquisition of Tejas
Drilling Fluids, Inc. ("Tejas"), a privately-owned, non-affiliated company based
in Corpus Christi, Texas for a purchase price of approximately $3.5 million cash
and approximately $74,000 of direct costs incurred related to the acquisition.
Tejas is a provider of drilling fluids to the oil and natural gas industry with
its primary focus of operations in the south Texas region.
At May 31, 1998, the Company's existing $70.0 million line of credit with
Norwest Bank Texas, N.A. ("Norwest") converted to a term note with a maturity
date of January 1, 2001 with a seven-year, level-principal amortization. The
note bears interest at the 30-day LIBOR rate plus 2.375%. At the time of
conversion, the Company had drawn $60.0 million under the available credit
facility. The Company is currently making monthly principal and interest
payments of approximately $1.1 million as required by the underlying agreement
until its maturity at January 1, 2001.
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<PAGE> 19
At December 31, 1998, the Company was in violation of the positive net
income covenant provision of such credit agreement. The Company obtained a
waiver of such violation from Norwest as of December 31, 1998. In addition, the
credit agreement was further amended to replace the positive net income covenant
with an earnings before interest expense, income taxes, depreciation, depletion
and amortization (EBITDA) to quarterly interest expense provision. The Company
must maintain on a quarterly basis an EBITDA to interest expense of at least
2.25 to 1.0. Although there can be no assurances, management does not anticipate
a future violation of such covenant.
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, 1998 AND 1997
For the year ended December 31, 1998, contract drilling revenues were
approximately $166.0 million as compared to $178.3 million for the same period
in 1997, a decrease of approximately 7%. Average rig utilization was 54% on an
average of 106 rigs available for service for the year ended December 31, 1998
as compared to 89% on an average of 73 rigs available for service for the twelve
months ended December 31, 1997. Direct drilling costs were $128.8 million or 78%
of drilling revenues for the year ended December 31, 1998, while direct drilling
costs were $128.4 million or 72% of related drilling revenues for 1997. General
and administrative expense for the contract drilling operations was
approximately $6.1 million for the year ended December 31, 1998 as compared to
approximately $5.4 million in 1997. The increase in general and administrative
expense was largely attributable to additional expense associated with the
administrative offices of Lone Star Mud Company and Robertson Onshore Drilling
Company acquired by the Company during January and February 1998, respectively.
The administrative responsibilities of the Robertson Onshore operations were
terminated during July 1998 and absorbed by the Company's personnel in Snyder,
Texas. Depreciation and amortization expense for the contract drilling segment
increased from $12.5 million for the year ended December 31, 1997 to
approximately $22.4 million for the same twelve-month period in 1998. The
increase in depreciation and amortization expense was largely attributable to
the increased number of drilling rigs added by acquisitions completed during
fiscal years 1997 and 1998. For the twelve months ended December 31, 1998,
operating income from the Company's contract drilling operations was
approximately $9.3 million as compared to approximately $32.7 million in 1997.
The decreased profitability was largely attributable to the 35% decrease in the
Company's rig utilization rates , a change in drilling contracts which required
the Company to bear certain costs in associated with drilling wells that in 1997
was paid by the Company's customers, and, to a lesser extent, moderate decrease
during 1998 by the Company in its daily drilling rates. These three factors are
reflective of the detrimental impact the industry's weakened commodity prices
had on the Company's operations.
Oil and natural gas sales revenues were approximately $5.6 million for the
year ended December 31, 1998, as compared to approximately $10.8 million in
1997. The volume of oil and natural gas sold by the Company decreased by
approximately 29% in 1998, as compared to fiscal year 1997. The average price
per Bbl of crude oil received by the Company was $12.16 in 1998, as compared to
$17.86 in 1997, and the average price per Mcf of natural gas was $1.93 in 1998,
as compared to $2.19 in 1997. Lease operating and production costs were $4.08
per BOE in 1998, as compared to $3.41 per BOE in 1997. General and
administrative expense for the oil and natural gas segment was approximately
$1.3 million and $1.4 million for the years ended December 31, 1998 and 1997,
respectively. Exploration costs increased moderately by approximately 3% to
$669,000 for the year ended December 31, 1998. Depreciation and depletion
expense was approximately $4.8 million in 1998, as compared to approximately
$5.0 million in 1997. During 1998, primarily as a result of the industry's
significantly reduced commodity prices, the Company impaired certain of its oil
and natural gas
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<PAGE> 20
properties by $3.8 million. The Company incurred impairment expense of
approximately $355,000 in 1997. Other revenues generated by the oil and natural
gas segment, consisting primarily of fees generated from lease operating
activities, were approximately $1.5 million and $1.6 million for the years ended
December 31, 1998 and 1997, respectively. For the year ended December 31, 1998,
the oil and natural gas segment generated a loss from operations of
approximately $6.2 million as compared to income of approximately $2.4 million
for the year ended December 31, 1997. The decrease in the segment's operating
results was primarily attributable to the decrease in the underlying commodity
prices, particularly the 32% decrease in the price received for crude oil, as
discussed above.
Although the contract drilling and oil and natural gas segments represent
the Company's core operations, the Company derived operating revenues of
approximately $13.4 million from its drilling fluid services. For the year ended
December 31, 1998, the Company incurred approximately $13.0 million of operating
costs associated with its drilling fluid activities, including depreciation and
amortization expense of approximately $895,000 and general and administrative
expense of approximately $1.9 million. The Company generated approximately
$360,000 of operating income from its contract drilling fluid services for the
year ended December 31, 1998.
For the year ended December 31, 1998, the Company incurred interest expense
of approximately $4.5 million as compared to $1.0 million in 1997. This increase
was due to the additional $36.75 million borrowed during February 1998 in the
Company's acquisition of Robertson. In 1998, the Company recognized a net gain
on the sale of property and equipment of $636,000 as compared to approximately
$1.5 million in 1997. The decrease in 1998 was largely attributable to the sale
of the Company's interest in an oil and natural gas property of approximately
$813,000 during fiscal year 1997.
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 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.
Oil and natural gas sales revenues were approximately $10.8 million for the
year ended December 31, 1997, as compared to approximately $8.3 million in 1996.
The volume of oil and natural gas sold by the Company increased by approximately
30% in 1997, as compared to fiscal year 1996. The average price per Bbl of crude
oil received by the Company was $17.86 in 1997, as compared to $20.99 in 1996,
and the average price per Mcf of natural gas was $2.19 in 1997, as compared to
$2.01 in 1996. Lease operating production costs were $3.41 per BOE in 1997, as
compared to $3.91 per BOE in 1996. General and administrative expense for the
oil and natural gas segment was approximately $1.4 million for each of the years
ended December 31, 1997 and 1996. Exploration costs were $647,000 for the year
ended December 31, 1997, as compared to approximately $466,000 in 1996.
Depreciation and depletion expense was approximately $5.0 million in 1997, as
compared to approximately $3.1 million in 1996. The Company incurred impairment
expense of approximately $355,000 and $549,000 for the years ended December 31,
1997 and 1996, respectively. Other revenues generated by the oil and natural gas
segment, consisting primarily of fees generated from lease
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<PAGE> 21
operating activities, were approximately $1.6 million and $1.8 million for the
years ended December 31, 1997 and 1996, respectively. For the year ended
December 31, 1997, the oil and natural gas segment generated income from
operations of approximately $2.4 million as compared to income of approximately
$1.6 million for the year ended December 31, 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. 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.
INCOME TAXES
At December 31, 1998, the Company had tax net operating loss ("NOL")
carryforwards of approximately $4.2 million. These NOL carryforwards expire at
various dates from 1999 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. 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 $3.3 million.
The NOL limitation is determined by the value of the Company's equity on August
2, 1995, the day prior to the ownership change, times 5.88%, the Federal long-
term exempt rate on that date as published by the U.S. Treasury Department, or
$1.8 million, and approximately $1.5 million which is determined by the value of
Tucker Drilling Company, Inc.'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. 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 tax expense as these benefits are utilized. The Company incurred
deferred income tax expense of approximately $6.5 million and $2.5 million for
the years ended December 31, 1998 and 1997, respectively.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and natural gas, both
with respect to its contract drilling and its oil and natural gas segments.
Historically, oil and natural gas prices and markets have been extremely
volatile. Prices are affected by market supply and demand factors as well as
actions of state and local agencies, the United States and foreign governments
and international cartels. All of these are beyond the control of the Company.
Any significant or extended decline in oil and/or natural gas prices will have a
material adverse effect on the Company's financial condition and results of
operations. The sharp decline in crude oil prices beginning in the fourth
quarter of 1997 has materially impacted the Company's operations. Should oil
prices remain at current
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levels or continue to decline or natural gas prices decline significantly from
current prices, the Company's operations would be further adversely affected.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENTLY-ISSUED ACCOUNTING STANDARDS
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. SFAS No. 130 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 requires that an
enterprise (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Company's adoption of SFAS No. 130 did not result in any significant changes to
its related reporting disclosures.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
SFAS No. 131 did not result in any significant changes to its related reporting
disclosures.
The FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") in February 1998. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement recognition of those plans. This statement is effective for fiscal
years beginning after December 15, 1998. The Company's adoption of SFAS No. 132
in September 1998 did not result in any changes to the Company.
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
in June 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The provisions of
SFAS No. 133 are not expected to have a material impact to the Company.
YEAR 2000 COMPLIANCE PROGRAM
During fiscal year 1997, the Company began implementation of its program
for alleviating potential business interruptions that could be caused by the
year 2000. The Company's program identified two principal areas of concern:
supporting information technology systems ("IT systems") and the Company's
related vulnerability to external providers of services and materials.
The Company currently maintains three separate infrastructures to
facilitate the processing of daily transactions and financial reporting. Each of
the lines of business engaged in by the Company function separately from the
other and therefore operates on individual computer platforms. The Company has
completed its conversion of each of the computer platforms resulting in the
replacement and modification of certain hardware and software applications that
previously were determined not to be compliant with year 2000 issues.
The ability of the Company to conduct its business efficiently and
productively requires that providers of services and materials to the Company,
as well as, major customers to the Company (collectively referred to herein as
"external agents") be year 2000 compliant. The Company has implemented a process
whereby
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external agents are identified and prioritized by level of exposure. Management
of the Company is in the process of assessing the readiness and effectiveness of
its external agents for the year 2000. Surveys, solicitations and other forms of
inquiry are being used to make this determination. Management intends to
interpret the responses and information gathered and determine on an individual
basis whether the Company is vulnerable to that external agent. This process
will continue through January 2000 as a means to provide a continuous update as
to the external agents' status and success.
The Company does not expect the total cost associated with the Company's
efforts to become year 2000 compliant to be material to the Company's financial
position. The total amount expended on the project through December 31, 1998 was
approximately $1.75 million. The Company expects to significantly reduce its
level of uncertainty about year 2000 issues and, in particular, about the year
2000 compliance and readiness of its external agents. Accordingly, the Company
does not deem it necessary to formally adopt a contingency plan.
The failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Company believes that, with
the implementation of new business systems and completion of its program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The foregoing disclosure constitutes "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk associated with the floating rate
portion of the interest charged on its $55.7 million term loan with Norwest Bank
Texas, N.A. The term loan, which matures on January 1, 2001, bears interest at
LIBOR plus 2.375%. The Company's exposure to interest rate risk due to changes
in LIBOR is not expected to be material and at December 31, 1998, the fair value
of the obligation approximates its related carrying value because the obligation
bears interest at the current market rate.
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.
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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 1999 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.
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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>
<S> <C>
2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)
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.(3)
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 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.8 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.9 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).
2.10 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.
3.1 Restated Certificate of Incorporation.(8)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation.(9)
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)
</TABLE>
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<TABLE>
<S> <C>
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)
10.1.4 Amendment to Credit Agreement dated March 4, 1999 among Patterson Energy, Inc., Patterson Drilling
Company, Patterson Petroleum, Inc., Patterson Trading Company, Inc. and Norwest Bank Texas, N.A.
10.2 Aircraft Lease, dated December 20, 1998, (effective January 1, 1999) 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 Model Form Operating Agreement.(17)
10.8 Form of Drilling Bid Proposal and Footage Drilling Contract.(17)
10.9 Form of Turnkey Drilling Agreement.(17)
21.1 Subsidiaries of the registrant.(18)
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule as of December 31, 1998 and for the year then ended.
</TABLE>
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(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.
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<PAGE> 27
(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 herein 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 herein 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.
(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1997.
(19) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
January 5, 1998.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal quarter ended December 31, 1998.
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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 31, 1999 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
James C. Brown Treasurer
(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>
<PAGE> 29
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants -- PricewaterhouseCoopers
LLP....................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for each of the
years ended December 31, 1996, 1997 and 1998........... F-4
Consolidated Statements of Stockholders' Equity for each
of the years ended December 31, 1996, 1997 and 1998.... F-5
Consolidated Statements of Cash Flows for each of the
years ended December 31, 1996, 1997 and 1998........... F-6
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Patterson Energy, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Patterson
Energy, Inc. and Subsidiaries as of December 31, 1997 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
March 1, 1999
F-2
<PAGE> 31
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,338 $ 8,986
Marketable securities..................................... 566 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $378,110
and $417,519 at December 31, 1997 and 1998,
respectively........................................... 44,732 28,616
Oil and natural gas sales................................. 773 426
Costs of uncompleted drilling contracts in excess of
related billings....................................... -- 100
Accrued federal income taxes receivable................... -- 8,400
Inventory................................................. -- 1,283
Deferred income taxes..................................... 2,309 1,568
Undeveloped oil and natural gas properties held for
resale................................................. 4,781 3,214
Other current assets...................................... 515 890
-------- --------
Total current assets.............................. 77,014 53,483
Property and equipment, at cost, net........................ 100,405 136,677
Intangible assets, net...................................... 24,644 45,875
Other assets................................................ 1,137 570
-------- --------
Total assets...................................... $203,200 $236,605
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable........................ $ 1,467 $ 8,571
Accounts payable:
Trade.................................................. 12,126 9,748
Revenue distribution................................... 3,352 1,390
Other.................................................. 1,569 73
Accrued expenses.......................................... 5,142 3,170
Accrued state and federal income taxes payable............ 6,874 --
-------- --------
Total current liabilities............................ 30,530 22,952
-------- --------
Deferred income taxes, net.................................. 3,268 9,566
Deferred liabilities........................................ 687 92
Note payable, less current maturities....................... 21,783 47,143
-------- --------
25,738 56,801
-------- --------
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 30,967,084 and 31,671,132 issued and outstanding
at December 31, 1997 and 1998, respectively............ 310 317
Additional paid-in capital................................ 102,306 112,544
Retained earnings......................................... 44,316 43,991
-------- --------
Total stockholders' equity........................... 146,932 156,852
-------- --------
Total liabilities and stockholders' equity........... $203,200 $236,605
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 32
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Drilling.................................................. $73,590 $178,332 $165,997
Drilling fluids........................................... -- -- 13,397
Oil and natural gas sales................................. 8,299 10,773 5,641
Well operation fees....................................... 1,499 1,632 1,442
Other..................................................... 320 40 87
------- -------- --------
83,708 190,777 186,564
------- -------- --------
Operating costs and expenses:
Direct drilling costs..................................... 59,564 128,416 128,838
Drilling fluids........................................... -- -- 10,205
Lease operating and production............................ 2,012 2,274 1,924
Impairment of oil and natural gas properties.............. 549 355 3,816
Exploration costs......................................... 466 647 669
Dry holes and abandonments................................ 987 1,481 1,083
Depreciation, depletion and amortization.................. 9,960 17,497 28,091
General and administrative................................ 5,416 6,786 9,313
------- -------- --------
78,954 157,456 183,939
------- -------- --------
Operating income............................................ 4,754 33,321 2,625
------- -------- --------
Other income (expense):
Net gain on sale of assets................................ 546 1,499 636
Interest income........................................... 478 1,056 767
Interest expense.......................................... (1,612) (1,045) (4,471)
Non-recurring acquisition costs........................... (2,268) -- --
Other..................................................... 119 277 211
------- -------- --------
(2,737) 1,787 (2,857)
------- -------- --------
Income (loss) before income taxes........................... 2,017 35,108 (232)
------- -------- --------
Income tax expense (benefit):
Current................................................... 174 10,353 (6,358)
Deferred.................................................. (2,428) 2,513 6,451
------- -------- --------
(2,254) 12,866 93
------- -------- --------
Net income (loss)........................................... $ 4,271 $ 22,242 $ (325)
======= ======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.22 $ 0.78 $ (0.01)
======= ======== ========
Diluted................................................... $ 0.21 $ 0.75 $ (0.01)
======= ======== ========
Weighted average number of common shares outstanding:
Basic..................................................... 19,167 28,492 31,645
======= ======== ========
Diluted................................................... 20,086 29,505 31,645
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 33
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, 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
Issuance of common stock..................... 571 5 9,941 -- 9,946
Exercise of stock options.................... 133 2 297 -- 299
Net loss..................................... -- -- (325) (325)
------ ---- -------- ------- --------
December 31, 1998.............................. 31,671 $317 $112,544 $43,991 $156,852
====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 34
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 4,271 $ 22,242 $ (325)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Abandonment of oil and natural gas properties............. 121 -- 694
Depreciation, depletion and amortization.................. 9,960 17,497 28,091
Impairment of oil and natural gas properties.............. 549 355 3,816
Net gain on sale of assets................................ (546) (1,499) (636)
Tax benefit related to exercise of stock options.......... -- 2,912 --
Deferred income tax expense (benefit)..................... (2,428) 2,513 6,451
Increase (decrease) in deferred compensation
liabilities............................................ 349 (27) (595)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable..... (10,558) (20,989) 16,116
(Increase) decrease in oil and natural gas sales
receivable........................................ (512) 226 347
Increase in inventory held for resale................ -- -- (1,283)
Increase in accrued Federal income taxes
receivable........................................ -- -- (8,400)
(Increase) decrease in undeveloped oil and natural
gas properties held for resale.................... (2,548) (111) 873
(Increase) decrease in other current assets.......... (99) 32 (475)
Increase (decrease) in trade accounts payable........ 4,301 (3) (2,378)
Increase (decrease) in revenue distribution
payable........................................... 828 920 (1,962)
Increase (decrease) in accrued state and federal
income taxes payable.............................. (13) 6,752 (6,874)
Increase (decrease) in accrued expenses.............. 649 3,018 (1,972)
Increase (decrease) in other current payables........ 331 604 (1,496)
-------- -------- --------
Net cash provided by operating activities......... 4,655 34,442 29,992
-------- -------- --------
Cash flows from investing activities:
Net sales (purchases) of investment securities............ 1,927 (22) 566
Acquisitions.............................................. (17,078) (49,400) (45,453)
Purchases of property and equipment....................... (6,895) (34,861) (34,148)
Sales of property and equipment........................... 1,229 4,164 1,361
Change in other assets.................................... (99) (13) 567
-------- -------- --------
Net cash used in investing activities............. (20,916) (80,132) (77,107)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 17,469 23,250 40,150
Payments on notes payable................................. (5,837) (25,849) (7,686)
Issuance of common stock and redeemable warrants.......... -- 59,400 --
Proceeds from exercise of stock options................... 914 8,733 299
-------- -------- --------
Net cash provided by financing activities......... 12,546 65,534 32,763
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (3,715) 19,844 (14,352)
Cash and cash equivalents at beginning of year.............. 7,209 3,494 23,338
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 3,494 $ 23,338 $ 8,986
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................... $ 1,657 $ 1,045 $ 4,471
Income taxes........................................... 174 691 8,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 35
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
Noncash investing and financing activities:
During 1998, the Company acquired Lone Star Mud, Inc., Robertson Onshore
Drilling Company and Tejas Drilling Fluids, Inc. for an aggregate purchase price
of approximately $58.8 million of which, approximately $45.5 million was paid in
cash as follows (see Note 2):
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Purchase price.............................................. $58,799
Less non-cash items:
Common stock issued....................................... (9,946)
Debt assumed.............................................. (3,400)
-------
Total cash paid................................... $45,453
=======
</TABLE>
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 $1.4 million
(see Notes 2 and 9).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 36
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 Onshore
Drilling Company, Lone Star Mud, Inc., 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, the development, exploration, acquisition and production
of oil and natural gas and provides contract drilling fluid services to the oil
and natural gas industry. 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 crude oil
and natural gas prices. However, except for that period and other occasional
upturns, the market for onshore contract drilling and other related 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 these services
occurred in 1986 because of the worldwide collapse in crude oil prices. 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. 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 and other related services or future conditions in the oil and
natural gas 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 significant reduction in the price of crude oil. Should crude oil
or natural gas prices remain at these levels or continue to 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 footage and day work 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.
Inventory -- Inventory consists primarily of chemical products to be used
in conjunction with the Company's contract drilling fluid activities. The
inventory is stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
F-8
<PAGE> 37
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Undeveloped oil and natural gas properties held for resale -- Undeveloped
oil and natural gas properties held for resale represent leasehold interests in
unproven oil and natural gas properties which the Company expects to sell. Also
included are leasehold costs programmed for development under arrangements which
will provide for reimbursement of such costs to the Company. Such properties are
carried at the lower of cost or net realizable value. The Company recognizes
gains or losses upon disposition or impairment of the properties.
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 $7.0 million, $11.7 million and $20.2 million for the
years ended December 31, 1996, 1997 and 1998, 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 $3.0
million, $4.8 million and $4.6 million for the years ended December 31, 1996,
1997 and 1998, respectively.
Impairment of long-lived assets -- In accordance with Statement of
Financial Accounting Standards 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, certain identifiable intangibles and goodwill 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 $549,000, $355,000 and $3.8 million
of impairment to such properties at December 31, 1996, 1997 and 1998,
respectively. Impairment to the Company's oil and natural gas properties was
primarily attributable to a significant decline in the market price of crude
oil.
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 natural 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 natural gas property or an entire proved oil and
natural 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 primarily 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
F-9
<PAGE> 38
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 period of
expected benefit of 15 years. Covenants not to compete are amortized over their
contractual lives. Amortization expense charged to operations at December 31,
1997 and 1998 was approximately $942,452 and $3.3 million, respectively.
Earnings per share -- The Company provides a dual presentation of its
earnings per share; Basic Earnings per Share ("Basic EPS") and Diluted Earnings
per Share ("Diluted EPS") in its Consolidated Statements of Operations. 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, 1996 and 1997, the dilutive
securities, consisting of certain stock options and warrants as described in
Notes 9 and 10, were approximately 919,000 and 1.0 million, respectively.
Dilutive securities of 1.5 million were excluded from the 1998 calculation of
Diluted EPS as a result of the Company's net loss for the year.
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 Note 9).
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 Statement of Financial
Accounting Standards 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 -- During 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and
presentation of comprehensive income and its components (revenues, expenses,
F-10
<PAGE> 39
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
gains and losses) in a full set of general-purpose financial statements. SFAS
No. 130 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 requires that an enterprise (i) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company's adoption of SFAS No. 130 did not
result in any changes to its related reporting disclosures.
During the quarter ended March 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The Company's adoption of
SFAS No. 131 did not result in any significant changes to its related reporting
disclosures.
The FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
("SFAS No. 132") in February 1998. SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement recognition of those plans. This statement is effective for fiscal
years beginning after December 15, 1998. The Company's adoption of SFAS No. 132
in September 1998 did not result in any changes to the Company.
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133")
in June 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The provisions of
SFAS No. 133 are not expected to have a material impact to the Company.
Reclassifications -- Certain reclassifications have been made to the 1996
and 1997 consolidated financial statements in order for them to conform with the
1998 presentation. The reclassifications had no effect on net income or
stockholders' equity for these years.
2. MERGER AND ACQUISITIONS
1998 MERGER AND ACQUISITIONS
Lone Star Mud, Inc. -- On January 5, 1998, the Company acquired 100% of the
outstanding stock of Lone Star Mud, Inc. ("Lone Star"), a privately-owned,
non-affiliated company based in Midland, Texas. The purchase price of
approximately $13.0 million consisted of $1.4 million in cash, 571,328 shares of
the Company's common stock valued at $17.41 per share, the assumption of $1.6
million of debt and approximately $3,300 of other direct costs incurred relative
to the transaction. Pursuant to certain terms of the Company's existing loan
agreement with Norwest Bank Texas, N.A. ("Norwest"), the outstanding balance of
the above mentioned debt was paid in full. The fair market values of the assets
acquired were estimated and the purchase price, as of the date of the
acquisition, was allocated as follows (in thousands):
<TABLE>
<S> <C>
Net assets acquired......................................... $ 3,069
Goodwill.................................................... 9,911
-------
Total purchase price...................................... $12,980
=======
</TABLE>
F-11
<PAGE> 40
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
Robertson Onshore Drilling Company -- On February 6, 1998, the Company
completed the merger of Robertson Onshore Drilling Company ("Robertson") a
privately-owned, non-affiliated, contract drilling company based in Dallas,
Texas, with and into Patterson Onshore Drilling Company, a wholly-owned
subsidiary of Patterson Drilling Company. The purchase price of approximately
$42.2 million was funded using cash on hand of approximately $3.25 million,
proceeds of $36.75 million provided by the Company's line of credit, the
assumption of $1.8 million of debt and approximately $444,000 of direct costs
incurred related to the acquisition. The assets acquired consisted of 15
operable drilling rigs and a shop and yard located in Liberty City, Texas. The
purchase price, as of the date of the acquisition, was allocated based on
estimated fair values as follows (in thousands):
<TABLE>
<S> <C>
Net assets acquired......................................... $31,565
Goodwill.................................................... 10,680
-------
Total purchase price...................................... $42,245
=======
</TABLE>
Tejas Drilling Fluids, Inc. -- On September 17, 1998, the Company acquired
100% of the outstanding stock of Tejas Drilling Fluids, Inc. ("Tejas"), a
privately-owned, non-affiliated company based in Corpus Christi, Texas for $3.5
million cash and approximately $74,000 of other direct costs incurred relative
to the transaction. The fair market values of the assets acquired were estimated
and the purchase price, as of the date of acquisition, was allocated as follows
(in thousands):
<TABLE>
<S> <C>
Net assets acquired......................................... $ 263
Goodwill.................................................... 2,061
Covenants not to compete.................................... 1,250
------
Total purchase price...................................... $3,574
======
</TABLE>
1997 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 $25.0 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 $19.0 million of
cash on hand and $6.0 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 (in thousands):
<TABLE>
<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
F-12
<PAGE> 41
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
$7.0 million was funded using cash on hand and $17.3 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 years 1997 and 1998
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.
1996 MERGER AND ACQUISITIONS
Tucker Drilling Company, Inc. -- On April 22, 1996, as amended on May 16,
1996, the Company executed the Agreement and Plan of Merger among Patterson
Energy, Inc., Patterson Drilling Company ("Patterson Drilling") and Tucker
Drilling Company, Inc. ("Tucker") (the "Merger Agreement") providing for the
merger of Patterson Drilling with and into Tucker. The merger was consummated on
July 30, 1996 after a required approval of the stockholders of both Patterson
and Tucker, with Tucker as the surviving corporation, wholly-owned by Patterson
and operating under the assumed name of Patterson Drilling Company.
Pursuant to the terms of the Merger Agreement, each share of Tucker common
stock outstanding on July 30, 1996 was converted into 0.74 of a share ("Exchange
Ratio") of Patterson common stock, par value $0.01 per share, and all options to
purchase shares of Tucker common stock outstanding on that date became options
to purchase Patterson common stock, as adjusted by the Exchange Ratio, upon the
terms of the governing stock option plans.
F-13
<PAGE> 42
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
A total of 6.3 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 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.
Certain adjustments were made in 1996 to conform the previous accounting
policies and fiscal year end of Tucker with those of the Company. Consequently,
the operations of Tucker for the three months ended March 31, 1996 (Tuckers'
fiscal year end) are reflected in the consolidated financial statements of the
Company for the year ended December 31, 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 $14.7 million. The acquisition was
funded by a cash payment of $4.3 million and proceeds of $10.4 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 $1.7 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 as of December 31, 1996 presents the consolidated
results of operations as if Sledge had been acquired as of January 1, 1996,
after giving effect to certain adjustments, including the elimination of certain
revenues and other income and expenses attributed to the assets not acquired
from Sledge, and increased interest expense on the acquisition debt and related
income tax effects (in thousands, except per share data).
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenues.................................................... $90,806
Net income.................................................. 4,078
Net income per basic share.................................. 0.21
Net income per diluted share................................ 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,
F-14
<PAGE> 43
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
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 $4.2 million consisting of $2.4 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 $1.4 million (see Notes
7 and 9).
3. CASH
Included in cash as of December 31, 1997 and 1998 was approximately $3.3
million and $1.4 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, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Drilling rigs and related equipment...................... $144,104 $199,331
Producing oil and natural gas properties................. 24,024 27,856
Other equipment.......................................... 917 2,135
Buildings................................................ 3,771 3,953
Land..................................................... 984 1,534
-------- --------
173,800 234,809
Less accumulated depreciation and depletion.............. (73,395) (98,132)
-------- --------
$100,405 $136,677
======== ========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1997 and 1998
(in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Goodwill.................................................... $23,708 $46,482
Covenants not to compete.................................... 1,673 2,673
Other....................................................... 205 979
------- -------
25,586 50,134
Less accumulated amortization............................... (942) (4,259)
------- -------
$24,644 $45,875
======= =======
</TABLE>
F-15
<PAGE> 44
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1997 and 1998
(in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Salaries, wages and related payroll taxes................... $2,302 $1,276
Workers' compensation liability............................. 1,615 1,157
Sales tax................................................... 548 472
Employee benefit plan contributions......................... 568 --
Other....................................................... 109 265
------ ------
$5,142 $3,170
====== ======
</TABLE>
7. NOTE PAYABLE
Note payable consisted of the following at December 31, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Line of credit agreement with Norwest Bank Texas, N.A.
providing for an advancing, non-revolving credit facility of
$70.0 million, monthly payments of interest only at the
London Interbank Offered Rate (LIBOR) plus 2.375% (7.921% at
December 31, 1998) through May 1998 at which time the
outstanding principal balance converted to a term loan with
a maturity date of January 1, 2001 and a seven-year level
principal amortization. The obligation is collateralized by
certain accounts receivable, drilling rigs and other related
drilling equipment.......................................... $23,250 $55,714
Less current maturities................................... (1,467) (8,571)
------- -------
$21,783 $47,143
======= =======
</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 $30.0
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 maturity date and a seven-year level principal 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 Bank Texas, Wichita Falls,
N.A. ("Norwest") renegotiated the terms of its existing credit agreement
replacing it with a new agreement (the "Norwest Line") providing for an
advancing, non-revolving credit facility of $60.0 million. During February 1998,
the existing credit facility was increased to $70.0 million. The Norwest Line
was payable interest only at LIBOR plus 2.375% through May 31, 1998, at which
time the outstanding principal balance of $60.0 million converted to a term loan
with a January 1, 2001 maturity date and a seven-year level principal
amortization. Using proceeds from the Norwest Line, the Company paid a $75,000
origination fee and all amounts then
F-16
<PAGE> 45
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTE PAYABLE -- (CONTINUED)
outstanding under its previous Norwest credit facility, including principal of
$23.25 million and accrued interest of approximately $94,000. During February
1998, the Company borrowed $36.75 million under the Norwest Line to fund its
acquisition of Robertson Onshore Drilling Company as described in Note 2.
Five-year maturities of note payable -- Scheduled maturities of the Norwest
Line for the periods subsequent to December 31, 1998, are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $ 8,571
2000........................................................ 8,571
2001........................................................ 38,572
-------
Total.................................................. $55,714
=======
</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 1.10 to 1.0;
- Maintenance on a quarterly basis of a ratio of current assets to
current liabilities of at least 1.4 to 1.0;
- Maintenance on a quarterly basis of positive net income;
- 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 the express written consent of Norwest. At December 31, 1998, the
Company was in violation of the positive net income covenant provision. The
Company has obtained an unconditional waiver of such violation from Norwest as
of December 31, 1998. In addition, the Norwest Line was further amended to
replace the positive net income covenant with an earnings before interest
expense, income taxes, depreciation, depletion and amortization (EBITDA) to
quarterly interest expense provision. The Company must maintain on a quarterly
basis an EBITDA to interest expense of at least 2.25 to 1.0. In addition, the
Company must provide a pledge of its oil and natural gas properties to Norwest.
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.
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 letters of credit in the aggregate amount of
$340,289 with a bank for the benefit of an insurance company as collateral for
retrospective premiums and retained losses which could become payable under the
terms of the Company's insurance contract. These letters of credit
F-17
<PAGE> 46
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTE PAYABLE -- (CONTINUED)
expire in November 1999, but provide for an indefinite number of annual
extensions of the expiration date and are fully collateralized by the Company's
cash. No amounts have been drawn under the letters 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.
The Company, through a grantor trust of which it is beneficiary, owns life
insurance policies on the participants and an annuity from which the premiums on
the life insurance policies were paid. During 1998, the life insurance policies
were cancelled and the respective cash values were distributed to the Plan
participants.
Contingencies -- The Company's contract services 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 $2.0 million per occurrence with $2.0 million of
aggregate coverage and excess liability and umbrella coverages up to $50.0
million per occurrence with a $50.0 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.
9. STOCKHOLDERS' EQUITY
During January 1998, the Company acquired the outstanding stock of Lone
Star. The purchase price consisted of $1.4 million in cash, 571,328 shares of
the Company's common stock valued at $17.41 per share, the assumption of $1.6
million of debt and approximately $3,300 of other direct costs (see Note 2).
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.
F-18
<PAGE> 47
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY -- (CONTINUED)
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 1.1 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 7.1 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 $1.4 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 6.3 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.
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 1.6 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 455,000 shares or approximately 25% of the total options granted). The
outstanding options were variously granted since 1995. Each of the options has a
10-year term and the exercise
F-19
<PAGE> 48
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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 354,520 options granted under the Stock Incentive Plan have been
exercised, 29,216 have been forfeited and 11,984 have expired as of December 31,
1998.
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 the 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.
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. At December 31, 1998, 8,288 options granted under the above
mentioned plans were outstanding to purchase common stock of the Company, 1,184
options have been forfeited and 1,184 options have expired as of December 31,
1998.
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.
F-20
<PAGE> 49
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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> <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
June 6, 1998...................... 8,000 .................... 11.06
July 30, 1998..................... 4,000 .................... 7.38
------
Total options granted........ 92,000
======
</TABLE>
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, 1996,
1997 and 1998 and the changes during each of the three years then ended are
presented below (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- --------------------------- ---------------------------
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.......................... 760 $2.64 $ 788 $ 2.70 1,145 $ 9.39
Granted at the money.......... 28 4.36 648 14.76 515 9.79
---- ----- ------ ------ ------ ------
Total granted.............. 788 2.70 1,436 8.14 1,660 9.51
---- ----- ------ ------ ------ ------
Exercised..................... -- -- 291 2.88 133 2.31
Forfeited..................... -- -- -- -- 30 12.47
Expired....................... -- -- -- -- 13 11.62
---- ----- ------ ------ ------ ------
Outstanding at end of year...... 788 $2.70 $1,145 $ 9.39 1,484 $10.08
==== ===== ====== ====== ====== ======
Exercisable at end of year...... 374 $2.81 $ 361 $ 6.70 574 $ 8.96
==== ===== ====== ====== ====== ======
Weighted average fair value of
options granted during the
year.......................... N/A $1.93 N/A $ 6.15 N/A $ 4.99
==== ===== ====== ====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTED LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICES
- ------------------------ ----------- --------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.81 to $5.00 378,768 6.71 $ 2.89 245,136 $ 3.05
$5.01 to $15.81 1,104,800 8.85 $12.56 328,800 $13.36
--------- ---- ------ ------- ------
1,483,568 8.30 $10.08 573,936 $ 8.96
========= ==== ====== ======= ======
</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, 1997 and
F-21
<PAGE> 50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
1998 respectively; dividend yield of 0.00%; risk-free interest rates are
different for each grant and range from 5.61% to 6.60%; the expected term is 5
years; and a volatility of 38.68% for all 1995 and 1996 grants, 35.97% for all
1997 grants and 51.08% for all 1998 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%.
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 (loss) and net income (loss) per common
share for 1996, 1997 and 1998 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------- -------------------
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... $ -- $ 162 $ -- $ 1,329 $ -- $ 1,817
APB 25 charge........................... $ -- $ -- $ -- $ -- $ -- $ --
Net income (loss)....................... $4,271 $4,109 $22,242 $20,913 $ (325) $(2,142)
====== ====== ======= ======= ====== =======
Net income (loss) per common share:
Basic................................. $ 0.22 $ 0.21 $ 0.78 $ 0.73 $(0.01) $ (0.07)
====== ====== ======= ======= ====== =======
Diluted............................... $ 0.21 $ 0.20 $ 0.75 $ 0.71 $(0.01) $ (0.07)
====== ====== ======= ======= ====== =======
</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
gave 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
F-22
<PAGE> 51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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.
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
GRANTED SHARES EXERCISE PRICE
------- ------ --------------
<S> <C> <C>
1996................................................. 28,000 $ 4.36
1997................................................. 1,448,000 11.02
1998................................................. 515,000 9.79
EXERCISED
1996................................................. 578,032 $ 2.10
1997................................................. 1,808,720 4.88
1998................................................. 132,720 2.31
SURRENDERED
1996................................................. 148,364 $ 2.17
1997................................................. 1,184 2.07
1998................................................. 43,568 12.10
OUTSTANDING AT YEAR END
1996................................................. 1,506,760 $ 2.39
1997................................................. 1,144,856 9.37
1998................................................. 1,483,568 10.08
EXERCISABLE AT YEAR END
1996................................................. 1,080,360 $ 2.30
1997................................................. 347,800 6.78
1998................................................. 573,936 8.96
</TABLE>
11. LEASES
The Company incurred rent expense, consisting primarily of daily rental
charges for the use of drilling equipment, of $1.8 million, $5.0 million and
$4.3 million, for the periods ended December 31, 1996, 1997 and 1998,
respectively. The Company's obligations under non-cancelable operating lease
agreements are not material to the Company's operations.
F-23
<PAGE> 52
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, 1996, 1997
and 1998 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current.......................................... $ 52 $ 9,444 $(6,358)
Deferred......................................... (2,428) 2,420 6,451
------- ------- -------
(2,376) 11,864 93
State income tax expense:
Current.......................................... 122 909 --
Deferred......................................... -- 93 --
------- ------- -------
Total income tax expense (benefit)................. $(2,254) $12,866 $ 93
======= ======= =======
</TABLE>
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................ 34.0% 35.0% 34.0%
Reduction of valuation allowance.................. (151.8) -- --
Nondeductible amortization........................ -- -- (102.75)
Statutory depletion in excess of basis............ -- (1.1) 44.29
State income taxes................................ 6.1 2.9 --
Non-deductible expenses........................... -- -- (12.83)
Other, net........................................ -- (0.2) (2.8)
------ ---- -------
Effective tax rate................................ (111.7)% 36.6% (40.09)%
====== ==== =======
</TABLE>
There is approximately $8.4 million of Federal income taxes receivable in
current assets at December 31, 1998 and approximately $6.0 million of Federal
income taxes payable was accrued at December 31, 1997. The Company reduced its
accrued Federal and state income tax payable in 1997 by approximately $2.9
million due to a tax benefit received from the exercise of certain stock
options. There was $920,600 of accrued state income taxes accrued at December
31, 1997.
As of January 1, 1994, a deferred tax asset valuation allowance of
approximately $6.0 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.
F-24
<PAGE> 53
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 DECEMBER 31, NET DECEMBER 31, NET DECEMBER 31,
1996 CHANGE 1996 CHANGE 1997 CHANGE 1998
---------- ------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.............. $ 2,669 $ (258) $2,411 $(1,195) $ 1,216 $ 218 $ 1,434
Investment tax credit
carryforwards.............. 469 (94) 375 -- 375 -- 375
AMT credit carryforwards....... 282 -- 282 -- 282 -- 282
Depletion carryforwards........ 612 (218) 394 (394) --
Property and equipment......... -- -- -- -- -- -- --
Other.......................... 272 (18) 254 796 1,050 78 1,128
------- ------- ------ ------- ------- ------- --------
4,304 (588) 3,716 (793) 2,923 296 3,219
Valuation allowance............ (2,095) 2,095 -- -- -- -- --
------- ------- ------ ------- ------- ------- --------
Deferred tax assets............ 2,209 1,507 3,716 (793) 2,923 296 3,219
Deferred tax liabilities:
Property and equipment basis
difference................. (802) (1,527) (2,329) (1,553) (3,882) (7,335) (11,217)
------- ------- ------ ------- ------- ------- --------
Net deferred tax asset
(liability)........... $ 1,407 $ (20) $1,387 $(2,346) $ (959) $(7,039) $ (7,998)
======= ======= ====== ======= ======= ======= ========
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $4.2 million at December 31, 1998. If unused, the aforementioned
tax NOL carryforwards will expire in various amounts in years 1999 to 2012.
During the years ended December 31, 1996 and 1997, the Company utilized
approximately $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 $3.3 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 $1.8 million,
and approximately $1.5 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 1998, the Company contributed $519,559 to the plan. The amount of the
contribution was included in accrued expenses at December 31, 1997. No matching
contribution was accrued or paid by the Company for the 1998 fiscal year.
14. BUSINESS SEGMENTS
The Company conducts its business through three distinct operating
activities: contract drilling of oil and natural gas wells, oil and natural gas
exploration, development, acquisition and production and, to a lesser degree,
providing drilling fluid services to operators in the oil and natural gas
industry. Although the drilling
F-25
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
fluid operations do not meet the quantitative thresholds to warrant disclosure
as a business segment, management of the Company considers its drilling fluid
operations an integral part of its business.
Contract Drilling Services. The Company markets its contract drilling
services to major oil companies and independent oil and natural gas producers.
The Company owns 119 drilling rigs, 114 of which are currently operable.
Currently, 99 of the operable drilling rigs are based in Texas (60 in west
Texas, 22 in south Texas, 12 in east Texas and five in north Texas), nine are
based in southeast New Mexico, five in Mississippi and one in Utah. The drilling
rigs have rated maximum depth capabilities ranging from 7,000 feet to 25,000
feet.
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 are designed to
complement its land drilling operations and diversify the Company's overall
business strategy. These activities are primarily focused in mature producing
regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 4% of the Company's consolidated
operating revenues for the year ended December 31, 1998. The Company's business
strategy for its oil and natural gas operations is to increase its oil and
natural gas reserves primarily through developmental and exploratory drilling in
producing areas. At December 31, 1998, the Company's proved developed reserves
were approximately 1.5 million BOE and had a present value (discounted at 10%
before income taxes) of estimated future net revenues of approximately $6.8
million. The industry's significantly reduced commodity prices, primarily the
price of crude oil, have had a negative impact on the valuation of the Company's
oil and natural gas reserves. For each of the years ended December 31, 1996,
1997 and 1998, the Company incurred $549,000, $355,000 and $3.8 million,
respectively, of impairment charge to its oil and natural gas properties.
Drilling Fluid Services. The Company provides contract drilling fluid
services to numerous operators in the oil and natural gas industry. Operating
revenues derived from these activities constitute approximately 7% of the
Company's consolidated operating revenues. Patterson believes that these
contract services integrate well with its other core operating activities. The
drilling fluid operations were added by the Company during the current fiscal
year with its acquisitions of Lone Star Mud, Inc. during January 1998 and Tejas
Drilling Fluids, Inc. in September 1998 and have operations throughout Texas,
New Mexico, Oklahoma and Colorado.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Contract drilling......................................... $73,590 $178,332 $165,997
Oil and natural gas....................................... 10,118 12,445 7,170
Drilling fluids........................................... -- -- 13,397
------- -------- --------
Total revenues.............................................. $83,708 $190,777 $186,564
======= ======== ========
Income (loss) from operations:
Contract drilling......................................... $ 3,869 $ 32,745 $ 9,329
Oil and natural gas....................................... 1,550 2,352 (6,217)
Drilling fluids........................................... -- -- 360
------- -------- --------
5,419 35,097 3,472
General corporate expense(a).............................. (2,268) -- --
Interest income........................................... 478 1,056 767
Interest expense.......................................... (1,612) (1,045) (4,471)
------- -------- --------
Income (loss) before income taxes......................... $ 2,017 $ 35,108 $ (232)
======= ======== ========
</TABLE>
F-26
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Identifiable assets:
Contract drilling......................................... $63,506 $162,726 $185,237
Oil and natural gas....................................... 24,407 23,777 15,411
Drilling fluids........................................... -- -- 20,063
Corporate(b).............................................. -- 16,697 15,894
------- -------- --------
Total assets................................................ $87,913 $203,200 $236,605
======= ======== ========
Depreciation, depletion and amortization:
Contract drilling......................................... $ 6,837 $ 12,541 $ 22,416
Oil and natural gas....................................... 3,123 4,956 4,780
Drilling fluids........................................... -- -- 895
------- -------- --------
Total depreciation, depletion and amortization.............. $ 9,960 $ 17,497 $ 28,091
======= ======== ========
Capital expenditures:
Contract drilling......................................... $19,867 $ 74,495 $ 67,471
Oil and natural gas....................................... 4,106 9,766 7,734
Drilling fluids........................................... -- -- 4,396
------- -------- --------
Total capital expenditures.................................. $23,973 $ 84,261 $ 79,601
======= ======== ========
</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.
(b) Corporate assets primarily include cash on hand managed by the parent
corporation and certain deferred Federal income tax assets.
15. OIL AND NATURAL GAS EXPENDITURES
Gross oil and natural gas expenditures by the Company for the years ended
December 31, 1996, 1997 and 1998 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs........................... $ 666 $ 2,577 $1,585
Exploration costs.................................... 3,684 7,680 6,510
Development costs.................................... 2,174 2,412 1,126
------ ------- ------
$6,524 $12,669 $9,221
====== ======= ======
</TABLE>
The aggregate amount of capitalized costs of oil and natural gas properties
as of December 31, 1997 and 1998 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
---- ----
<S> <C> <C>
Proved properties........................................ $ 24,024 $ 27,856
Accumulated depreciation, depletion and amortization..... (15,696) (21,809)
-------- --------
Net proved properties.................................... $ 8,328 $ 6,047
======== ========
</TABLE>
F-27
<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)
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, 1996, 1997 and 1998. The quantities were
estimated by an independent petroleum engineer. The Company's proved developed
oil and natural gas reserves are located entirely within the United States.
ESTIMATES OF RESERVES AND PRODUCTION PERFORMANCE ARE SUBJECTIVE AND MAY
CHANGE MATERIALLY AS ACTUAL PRODUCTION INFORMATION BECOMES AVAILABLE.
OIL AND NATURAL GAS RESERVE QUANTITIES
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
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
Revision in previous estimates............................ 193 (973)
Extensions, discoveries and other additions............... 411 294
Purchases................................................. -- --
Sales of reserves-in-place................................ (336) (2,003)
Production................................................ (385) (1,157)
----- ------
Estimated quantity, January 1, 1998....................... 945 3,788
Revision in previous estimates............................ 140 (596)
Extensions, discoveries and other additions............... 146 1,100
Purchases................................................. -- --
Sales of reserves-in-place................................ (1) (7)
Production................................................ (284) (795)
----- ------
Estimated quantity, January 1, 1999....................... 946 3,490
===== ======
</TABLE>
F-28
<PAGE> 57
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED
DATA (UNAUDITED) -- (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND NATURAL GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and natural gas sales................................... $8,299 $10,773 $ 5,641
Gain (loss) on sale of oil and natural gas properties....... (101) 803 68
------ ------- -------
8,198 11,576 5,709
------ ------- -------
Costs and expenses:
Production costs.......................................... 2,012 2,274 1,924
Exploration expenses...................................... 1,453 2,128 1,752
Depreciation, depletion and amortization.................. 3,123 4,956 4,780
Impairment of oil and natural gas properties.............. 549 355 3,816
Income tax expense (benefit).............................. 362 633 (2,231)
------ ------- -------
7,499 10,346 10,041
------ ------- -------
Results of operations for oil and natural gas producing
activities................................................ $ 699 $ 1,230 $(4,332)
====== ======= =======
</TABLE>
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future gross revenues............................ $42,930 $23,933 $16,451
Future development and production costs.......... (17,293) (8,921) (7,219)
Future income tax expense(a)..................... (6,581) (3,679) (1,929)
------- ------- -------
Future net cash flows............................ 19,056 11,333 7,303
Discount at 10% per annum........................ (5,756) (2,710) (1,953)
------- ------- -------
Standardized measure of discounted future net
cash flows.................................... $13,300 $ 8,623 $ 5,350
======= ======= =======
</TABLE>
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net operating
loss attributable to oil and gas operations and investment tax credit
carryforwards as of year-end; statutory depletion and tax credits applicable
to future oil and gas-producing activities are also considered in the income
tax computation.
F-29
<PAGE> 58
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED
DATA (UNAUDITED) -- (CONTINUED)
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT 10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure at beginning of year................... $ 8,668 $ 13,300 $ 8,623
Sales and transfers of oil and gas produced, net of
production costs.......................................... (6,288) (5,195) (2,773)
Net changes in sales price and future production and
development costs......................................... 2,015 1,347 (5,056)
Extensions, discoveries and improved recovery, less related
costs..................................................... 9,505 5,061 3,018
Sales of minerals-in-place.................................. -- (4,775) (9)
Revision of previous quantity estimates..................... 1,249 (1,024) (804)
Accretion of discount....................................... 631 1,922 1,193
Changes in production rates and other....................... 1,943 231 (224)
Net change in income taxes.................................. (4,423) (2,244) 1,382
------- -------- --------
Standardized measure at end of year....................... $13,300 $ 8,623 $ 5,350
======= ======== ========
</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.
The Company believes that it places its demand deposits and temporary cash
investments with high credit quality financial institutions. At December 31,
1997 and 1998, the Company's demand deposits and temporary cash investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under $100,000
and cash on hand.......................................... $ 1,490 $ 1,755
Deposit in FDIC and SIPC-insured institutions over $100,000
and cash on hand.......................................... 28,792 11,097
------- -------
30,282 12,852
Less outstanding checks and other reconciling items......... (6,944) (3,866)
------- -------
Cash and cash equivalents................................... 23,338 8,986
Investment in U.S. Treasury securities...................... 566 --
------- -------
$23,904 $ 8,986
======= =======
</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, 1996, 1997 and 1998. Included in
general and administrative expense for the periods ended December 31, 1996, 1997
and 1998 are provisions for doubtful receivables of $126,596, $122,069 and
$90,000, 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.
F-30
<PAGE> 59
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $267,001, $171,803 and $211,495
for the lease of the airplane during 1996, 1997 and 1998, 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 1996 and 1997. Revenues for 1996 and 1997 were approximately
$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 1996, 1997 and 1998. Sales of oil to
that entity, both royalty and working interest (including the Company) were
approximately $19.6 million, $12.9 million and $8.1 million for 1996, 1997 and
1998, respectively.
Joint Operation of Oil and Natural 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 other industry partners. The Company made oil and natural gas
production payments (net of royalty) of $6.3 million, $10.5 million and $6.9
million from these properties in 1996, 1997 and 1998, respectively, to the
aforementioned persons or entities. These persons or entities reimbursed the
Company for joint operating costs of $5.3 million, $12.8 million and $7.4
million in 1996, 1997 and 1998, respectively.
19. SUBSEQUENT EVENT
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from Padre Industries, Inc., a privately-held,
non-affiliated entity based in Corpus Christi, Texas. The purchase price of
approximately $4.0 million consisted of 800,000 unregistered shares of the
Company's common stock valued at $4.00 per share and a contingent payment based
on a guarantee that the Company's common stock will be trading at $5.00 per
share one year from the acquisition date. The contingent cash payment will be
calculated by multiplying the 800,000 shares by the difference of the closing
sales price of the Company's common stock one year from the closing date and
$5.00. The maximum cash payment will be $800,000 [($5.00 -- $4.00) x 800,000]
plus $80,000 of interest. The cash payment and interest thereon will be ratably
reduced if the price of the Company's common stock, one year from the
acquisition date exceeds $5.00. No cash payment will be required if the
Company's common stock is at least $5.50 per share one year from the acquisition
date.
F-31
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)
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.(3)
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 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.8 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.9 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).
2.10 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.
3.1 Restated Certificate of Incorporation.(8)
3.1.1 Certificate of Amendment to the Certificate of
Incorporation.(9)
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)
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)
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.1.4 Amendment to Credit Agreement dated March 4, 1999 among
Patterson Energy, Inc., Patterson Drilling Company,
Patterson Petroleum, Inc., Patterson Trading Company, Inc.
and Norwest Bank Texas, N.A.
10.2 Aircraft Lease, dated December 20, 1998, (effective January
1, 1999) 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 Model Form Operating Agreement.(17)
10.8 Form of Drilling Bid Proposal and Footage Drilling
Contract.(17)
10.9 Form of Turnkey Drilling Agreement.(17)
21.1 Subsidiaries of the registrant.(18)
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.
27.1 Financial Data Schedule as of December 31, 1998 and for the
year then ended.
</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 herein 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.
<PAGE> 62
(12) Incorporated herein 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.
(18) Incorporated by reference to Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K dated December 31, 1997.
(19) Incorporated herein by reference to Item 16, "Exhibits" to Registration
Statement on Form S-3 filed with the Securities Exchange Commission on
January 5, 1998.
<PAGE> 1
EXHIBIT 2.9
STOCK PURCHASE AGREEMENT
AMONG
LONE STAR MUD, INC.
AND
MARK CAMPBELL
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
POST CLOSING ACTION AND COVENANTS
<S> <C>
SECTION 1.1 The Stock Purchase...............................................................................1
SECTION 1.2 Stock Purchase Consideration.....................................................................1
SECTION 1.3 No Further Ownership Rights in TFI Common Stock..................................................1
SECTION 1.4 Closing..........................................................................................1
SECTION 1.5 Calculation of Working Capital...................................................................1
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF LONE STAR
SECTION 2.1 Organization, Standing and Power.................................................................2
SECTION 2.2 Authority; Non-Contravention.....................................................................2
SECTION 2.3 Investment Representation........................................................................3
SECTION 2.4 Brokers..........................................................................................3
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LONE STAR
SECTION 3.1 Organization, Standing and Power.................................................................3
SECTION 3.2 Capital Structure of TFI.........................................................................3
SECTION 3.3 Ownership of TFI Common Stock....................................................................3
SECTION 3.4 Authority; Non-Contravention.....................................................................3
SECTION 3.5 Financial Statements.............................................................................4
SECTION 3.6 Absence of Material Adverse Change...............................................................4
SECTION 3.7 Taxes............................................................................................4
SECTION 3.8 Real and Personal Property; Title Thereto........................................................5
SECTION 3.9 Accounts Receivable..............................................................................5
SECTION 3.10 Liabilities......................................................................................5
SECTION 3.11 Insurance........................................................................................5
SECTION 3.12 Contracts and Other Agreements...................................................................5
SECTION 3.13 Records..........................................................................................5
SECTION 3.14 Transactions with Affiliates.....................................................................5
SECTION 3.15 Employee Benefit Plans; Employment Agreements....................................................5
SECTION 3.16 Labor Matters....................................................................................6
SECTION 3.17 Environmental Matters............................................................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3.18 Litigation........................................................................................7
SECTION 3.19 Governmental Licenses and Permits; Compliance with Law............................................7
SECTION 3.20 Brokers...........................................................................................8
SECTION 3.21 Bank Accounts.....................................................................................8
SECTION 3.22 Distributions to Stockholders of TFI..............................................................8
SECTION 3.23 Workers'Compensation Claims.......................................................................8
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.1 Fees and Expenses.................................................................................8
SECTION 4.2 Reasonable Best Efforts...........................................................................8
SECTION 4.3 M Campbell Indemnification........................................................................8
SECTION 4.4 Lone Star Indemnification.........................................................................8
SECTION 4.5 Limitation on Indemnification Obligations.........................................................9
SECTION 4.6 Employee Benefits.................................................................................9
ARTICLE V
CONDITIONS PRECEDENT TO THE STOCK PURCHASE
SECTION 5.1 Conditions to Each Party's Obligation to Effect the Stock Purchase................................9
SECTION 5.2 Conditions to Obligation of Shareholder to Effect the Stock Purchase..............................9
SECTION 5.3 Conditions to Obligations of Lone Star to Effect the Stock Purchase..............................11
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.1 Notices..........................................................................................12
SECTION 6.2 Interpretation...................................................................................13
SECTION 6.3 Counterparts.....................................................................................13
SECTION 6.4 Entire Agreement; No Third-Party Beneficiaries...................................................13
SECTION 6.5 Governing Law....................................................................................14
SECTION 6.6 Assignment.......................................................................................14
SECTION 6.7 Severability.....................................................................................14
SECTION 6.8 Enforcement of This Agreement....................................................................14
</TABLE>
EXHIBIT A Non-Competition Agreement - Mark Campbell
EXHIBIT B Employment Agreement - Mark Campbell
EXHIBIT C Form of Non-Competition Agreement - Key Employees
ii
<PAGE> 4
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of September ___, 1998 (this
"Agreement"), among LONE STAR MUD, INC., a Texas corporation ("Lone Star")
wholly-owned by Patterson Energy, Inc., a Delaware corporation ("PEC"), and Mark
Campbell (referred to herein as "M Campbell" or "Shareholder").
WITNESSETH:
WHEREAS, M Campbell owns (beneficially and of record) all of the
outstanding common stock, par value $1.00 per share ("TFI Common Stock") of
TEJAS FLUIDS, INC., a Texas corporation ("TFI"); and
WHEREAS, Lone Star desires to purchase, and Shareholder desires to
sell, all of the outstanding TFI Common Stock (the "Stock Purchase") for the
consideration set forth and provided for herein; and
WHEREAS, Lone Star, on the one hand, and Shareholder, on the
other, desire to make certain representations, warranties and agreements in
connection with the Stock Purchase.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
THE STOCK PURCHASE
SECTION 1.1 The Stock Purchase. Upon the terms and subject to the
conditions of this Agreement, at the Closing (as defined below) provided herein,
Lone Star shall purchase from Shareholder, and Shareholder shall sell to Lone
Star, all of the outstanding shares of TFI Common Stock.
SECTION 1.2 Stock Purchase Consideration. Lone Star agrees to pay
a total of $3.5 million in cash, subject to possible post-closing adjustment, if
any, pursuant to Section 1.6 (the "Stock Purchase Consideration"), to
Shareholder as consideration for the Stock Purchase.
SECTION 1.3 No Further Ownership Rights in TFI Common Stock. The
Stock Purchase Consideration, when paid at Closing in accordance with the terms
hereof, shall be deemed to have been paid in full satisfaction of all ownership
rights pertaining to the outstanding shares of TFI Common Stock.
SECTION 1.4 Closing. The closing of the transaction contemplated
by this Agreement (the "Closing") shall take place at the offices of Lone Star
in Midland, Texas at 10:00 a.m. local time, on the date of this Agreement or at
such other time and place as Lone Star and Shareholder shall agree.
SECTION 1.5 Calculation of Working Capital. Within 60 days after
the Closing, Lone Star will prepare and present to Shareholder a calculation of
the Net Working Capital (defined below) of TFI as of the Closing (the "Working
Capital Calculation"). The parties agree that the Working Capital Calculation
shall be prepared so that it presents fairly the Net Working Capital of TFI as
of the Closing using practices and procedures consistent with the preparation of
the TFI Financial Statements (defined below). Shareholder and an independent
certified public accountant selected and retained by Shareholder (the
"Shareholder's Auditor") shall have the right to review and copy, promptly upon
request, the work papers of Lone Star and/or its accountants utilized in
preparing the Working Capital Calculation for purposes of verifying the accuracy
thereof. The Working Capital Calculation shall be binding upon the parties
unless shareholder gives written notice of disagreement with any of the values
or amounts contained therein to Lone Star within 15 business days after receipt
of the working Capital Calculation and the work papers, specifying in reasonable
detail the nature and extent of such disagreement. If Lone Star and Shareholder
are unable to resolve any such disagreement within such period, the disagreement
shall be referred for
1
<PAGE> 5
final determination to an independent accounting firm of national reputation
mutually selected by Shareholder and Lone Star (the "Selected Firm"), and the
resolution of that disagreement (the "Disagreement") shall be final and binding
upon the parties for purposes of this Agreement. The working Capital Calculation
as finally agreed to or determined by the Selected Firm is referred to herein as
the "Final Working Capital Calculation." The fees and disbursements incurred in
the preparation of the Working capital Calculation, other than the expense of
Shareholder's Auditor and of the Selected Firm, shall be paid by Lone Star.
Shareholder shall pay the fees and disbursements of Shareholder's auditor, while
the fees and disbursements of the Selected firm, if any, shall be paid by the
non-prevailing party in the Disagreement. For purposes of this Agreement, "Net
Working capital" means, as of the Closing, the amount by which (a) the current
assets of TFI (exclusive of the $300,000 to be used to fund annuities for, and
to pay bonuses to, certain TFI employees) on the close of business on the last
business day immediately preceding the Closing (the "Determination Date") exceed
9b) the current liabilities of TFI on the Determination Date, with the current
assets and current liabilities to be as determined in accordance with accrual
tax basis accounting consistently applied.
SECTION 1.6 Post Closing Stock Purchase Adjustment. If the Net
Working Capital of TFI as of the Determination Date as set forth in the Final
Working capital Calculation is less than $500,000, then within five business
days after the determination of the Final Working Capital Calculation,
Shareholder shall reimburse to Lone Star the amount of such shortfall in cash in
immediately available funds by wire transfer to a bank account designated in
writing by Lone Star prior to the due date thereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF LONE STAR
Lone Star represents and warrants to Shareholder as follows:
SECTION 2.1 Organization, Standing and Power. Lone Star (i) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas and has the requisite corporate power and authority
to carry on its business as now being conducted, and (ii) is in good standing in
each jurisdiction where the character of its business owned or held under lease
or the nature of its activities makes such qualification necessary, except where
the failure to be so qualified would not individually or in the aggregate, have
a Material Adverse Effect on Lone Star. "Material Adverse Change" or "Material
Adverse Effect" means, when used with respect to Lone Star or TFI, any change or
effect that is or, so far as can reasonably be determined, is likely to be
materially adverse to the assets, properties, condition (financial or
otherwise), business or results of operations of Lone Star or TFI, as the case
may be.
SECTION 2.2 Authority; Non-Contravention. Lone Star has all
requisite power and authority to enter into this Agreement and to consummate the
Stock Purchase. The execution and delivery by Lone Star of this Agreement and
the consummation by Lone Star of the Stock Purchase have been duly authorized by
all necessary corporate action on the part of Lone Star. This Agreement has been
duly executed and delivered by Lone Star and (assuming the valid authorization,
execution and delivery of this Agreement by Shareholder) constitutes a valid and
binding obligation of Lone Star enforceable against Lone Star in accordance with
its terms, except to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer or other similar
laws of general applicability relating to or affecting the enforcement of
creditors' rights and by the effect of general principles of equity (regardless
of whether enforceability is considered in a proceeding in equity or at law).
The execution and delivery of this Agreement do not or will not, as the case may
be, and the consummation of the transactions contemplated hereby and compliance
with the provisions hereof will not, conflict with, or result in any violation
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any obligation
or to the loss of a material benefit under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Lone Star under, any provision of (i) the Articles of Incorporation or
Bylaws of Lone Star, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to Lone Star, or (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Lone Star or any of
its properties or assets, other than, in the case of clauses (ii) or (iii), any
such conflicts, violations, defaults, losses, liens, security interests, charges
or encumbrances that, individually or in the aggregate,
2
<PAGE> 6
would not have a Material Adverse Effect on Lone Star, materially impair the
ability of Lone Star to perform its obligations hereunder or prevent
consummation of the transaction contemplated hereby. No filing or registration
with, or authorization, consent or approval of, any domestic (federal and
state), foreign or supranational court, commission, governmental body,
regulatory agency, authority or tribunal (a "Governmental Entity") is required
by or with respect to Lone Star in connection with the exercise and delivery of
this Agreement by Lone Star or is necessary for the consummation by Lone Star of
the Stock Purchase or any other transaction contemplated by this Agreement.
SECTION 2.3 Investment Representation. Lone Star is acquiring the
TFI Common Stock for investment solely for its own account and not with a view
to, or for resale in connection with, any distribution thereof and acknowledges
that Shareholder is relying upon the bona fide nature of the investment intent
of Lone Star as set forth herein. Lone Star further acknowledges that the TFI
Common Stock has not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and has not been qualified under applicable
state securities laws and that any subsequent disposition thereof must be
registered under the Securities Act and qualified under applicable state
securities laws or be exempt from such registration and qualification. Lone Star
is aware that no trading market exists for the TFI Common Stock. Lone Star has
the ability to bear the economic risk of investment in the TFI Common Stock,
including a complete loss of the investment.
SECTION 2.4 Brokers. No broker, investment banker or other person
is entitled to any broker's, finder's or similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Lone Star.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF M CAMPBELL
M Campbell represents and warrants to Lone Star as follows:
SECTION 3.1 Organization, Standing and Power. TFI (i) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas and has the requisite corporate power and authority
to carry on its business as now being conducted, (ii) is duly qualified to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified would
not individually, or in the aggregate, have a Material Adverse Effect on TFI.
TFI has no subsidiaries.
SECTION 3.2 Capital Structure of TFI. The authorized capital stock
of TFI consists of 100,000 shares of common stock with a par value of $1.00 per
share, of which 1,000 shares are issued and outstanding. All of the TFI Common
Stock are validly issued, fully paid and nonassessable and have not been issued
in violation of any preemptive rights. There are no options, warrants, rights,
commitments, agreements, arrangements or undertakings of any kind to which TFI
is a party or by which it is bound obligating TFI to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of
TFI.
SECTION 3.3 Ownership of TFI Common Stock. All of the issued and
outstanding shares of capital stock of TFI are owned of record and beneficially
by M Campbell, free and clear of any restrictions on transfer (other than
restrictions under the Securities Act and state securities laws), taxes, Liens
(as defined below in this Section), options, warrants, purchase rights,
contracts, commitments, equities, claims and demands. M Campbell is not party to
(i) any option, warrant, purchase right, or other contract or commitment that
could require him to sell, transfer, or otherwise dispose of any TFI Common
Stock (other than pursuant to this Agreement) or (ii) any voting trust, proxy,
or other agreement or understanding with respect to the TFI Common Stock. For
purposes of this Agreement "Liens" means liens, mortgages, pledges, security
interests and encumbrances.
SECTION 3.4 Authority; Non-Contravention. Shareholder has all
requisite power and authority to enter into this Agreement and to consummate the
Stock Purchase. This Agreement has been duly executed and delivered by
Shareholder and (assuming the valid authorization, execution and delivery of
this Agreement by Lone Star ) constitutes a valid and binding obligation of
Shareholder enforceable against him in
3
<PAGE> 7
accordance with its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws of general applicability relating to or affecting the enforcement
of creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding or at law).
The execution and delivery of this Agreement do not, and the consummation of the
Stock Purchase and compliance with the provisions hereof will not, conflict
with, or result in any violation of, or default (with or without notice of lapse
of time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to the loss of a material benefit under, or
result in the creation of any Lien upon any of the properties or assets of TFI
under, any provision of (i) the Articles of Incorporation or Bylaws of TFI (true
and complete copies of which as of the date hereof have been delivered to Lone
Star), (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to Shareholder or TFI, or (iii) any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to Shareholder or TFI or any of
the respective properties or assets of Shareholder or TFI, other than, in the
case of clauses (ii) or (iii), any such conflicts, violations, defaults, rights,
Liens or losses that, individually or in the aggregate, would not have a
Material Adverse Effect on TFI, materially impair the ability of Shareholder to
perform his obligations hereunder or prevent the consummation of the Stock
Purchase. No filing or registration with, or authorization, consent or approval
of, any Governmental Entity is required by or with respect to Shareholder or TFI
in connection with the execution and delivery of this Agreement by Shareholder
or is necessary for the consummation by Shareholder of the Stock Purchase or any
other transaction contemplated by this Agreement.
SECTION 3.5 Financial Statements. Included in Section 3.5 of the
disclosure schedules attached to this Agreement (the "M Campbell Disclosure
Schedule") are the following unaudited financial statements (collectively, the
"TFI Financial Statements") of TFI; (i) balance sheet as of September 15, 1998;
and (ii) statement of income for the six and one-half month period ended
September 15, 1998.
Except as may be set forth in Section 3.5 of the M Campbell
Disclosure Schedule, the TFI Financial Statements (a) are complete and correct
in all material respects, (b) have been prepared in conformity with accrual tax
basis accounting consistently applied, and (c) present fairly the financial
condition of TFI at the date presented and the results of operations of TFI for
the period then ended. There does not, and there will not be at Closing, exist
any fact, event, condition or claim known to Shareholder which would cause a
Material Adverse Change in the TFI Financial Statements as presented other than
as set forth therein.
SECTION 3.6 Absence of Material Adverse Change. Except as
otherwise set forth in Section 3.6 of the M Campbell Disclosure Schedule, there
has not been any Material Adverse Change with respect to TFI since September 15,
1998.
SECTION 3.7 Taxes. Except as otherwise set forth in Section 3.7 of
the M Campbell Disclosure Schedule: (i) all Tax Returns required to be filed by
TFI have been filed or extensions have been validly obtained; (ii) Tax Returns
referred to in clause (i) are true and correct in all material respects and have
been completed in all material respects in accordance with applicable law; (iii)
all Taxes shown to be due on the Tax Returns referred to in clause (i) have been
timely paid or extensions have been duly obtained or such taxes have been
adequately provided for on TFI's balance sheet or are being timely and properly
contested; (iv) TFI has not waived any statute of limitations in respect of
Taxes of TFI; (v) neither M Campbell nor TFI has received notice that the
Internal Revenue Service or any other taxing authority has asserted against TFI
any deficiency in Taxes or claims for additional Taxes in connection with any
tax period; (vi) all deficiencies asserted or assessments made as a result of
any examination of the Tax Returns referred to in clause (i) by a taxing
authority have been paid in full or adequately provided for on TFI's balance
sheet or are being timely and properly contested; and (vii) TFI has made
available to Lone Star correct and complete copies of all federal and state
income Tax Returns, examination reports, and statements of deficiencies assessed
against or agreed to by TFI for the prior six years. For purposes of this
Agreement, (a) "Tax" (and, with correlative meaning, "Taxes" and "Taxable")
means any federal, state, local or foreign income, gross receipts, property,
sales, use, license, excise, franchise, employment, payroll, withholding,
alternative or added minimum, ad valorem, transfer, severance or excise tax, or
any other tax, custom, duty, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest or penalty, imposed by any
governmental authority, and (b) "Tax Return" means any return, report or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
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SECTION 3.8 Real and Personal Property; Title Thereto. Set forth
in Section 3.8 of the M Campbell Disclosure Schedule is a complete and accurate
schedule of (a) all real and personal property owned by TFI having an individual
fair market value in excess of $5,000, and (b) any real or personal property
held by TFI under lease. Except as set forth in Section 3.8 of the M Campbell
Disclosure Schedule, TFI has good and, with respect to real property,
indefeasible title to all of such real property and personal property, subject
to no Liens except for (i) Liens for taxes not yet delinquent or the validity of
which is being contested in good faith, and (ii) any Liens arising by operation
of law securing obligations not yet overdue. Any real or personal property held
by TFI under lease is held under valid and enforceable leases which will
continue in full force and effect immediately after the Closing Date; TFI is not
in default with respect to any such lease.
SECTION 3.9 Accounts Receivable. Set forth in Section 3.9 of the M
Campbell Disclosure Schedule is a complete and accurate schedule of the accounts
receivable of TFI as of September 15, 1998, as reflected in the balance sheet as
of that date included in the TFI Financial Statements, together with an accurate
aging of those accounts. To the knowledge of Shareholder, the accounts described
in Section 3.9 have been collected in full or are valid obligations owing to
TFI. Except as set forth in Section 3.9 of the M Campbell Disclosure Schedule,
Shareholder has no knowledge of any notice from any account debtor on such
accounts indicating such account debtor will not pay such accounts (to the
extent not yet collected).
SECTION 3.10 Liabilities. There are no liabilities of TFI of any
kind, whether contingent or fixed, other than (i) liabilities disclosed or
provided for in the balance sheet of TFI as of September 15, 1998, included in
the Lone Star Financial Statements or disclosed in Section 3.10 of the M
Campbell Disclosure Schedule, or (ii) liabilities incurred in the ordinary
course of business since September 15, 1998, none of which, either individually
or in the aggregate, may be reasonably expected to be materially adverse to the
business, assets, condition (financial or otherwise) or results of operations of
TFI.
SECTION 3.11 Insurance. Set forth in Section 3.11 of the M
Campbell Disclosure Schedule is a complete list of all policies of fire and
extended coverage, liability, worker compensation and other forms of similar
insurance or indemnity bonds held by TFI for which all premiums have been paid.
There are no claims pending under any of such policies. To the knowledge of TFI,
TFI is not in default in any material respect with respect to any provisions of
any such policy or indemnity bond and has not failed to give any notice or
present any claim thereunder in due and timely fashion, which failure would
materially adversely affect the condition (financial or otherwise), results of
operations, assets, liabilities or business of TFI.
SECTION 3.12 Contracts and Other Agreements. Except as disclosed
on Section 3.12 of the M Campbell Disclosure Schedule, TFI is not a party to or
bound by any written or oral (i) employment, agency, consulting or similar
contract which cannot be terminated upon 30 days' notice without liability to
TFI, as the case may be, (ii) lease, whether as lessor or lessee, with respect
to any real or personal property, (iii) contract or commitment involving more
than $5,000 a year, other than contracts with TFI's drilling fluids customers in
the ordinary course of business; (iv) credit agreements; (v) guarantee,
suretyship, indemnification or contribution agreement, or (vi) other contracts
not made in the ordinary course of business.
SECTION 3.13 Records. The minute books of TFI contain true and
complete records in all material respects of all actions taken at any meetings
of TFI's shareholders or Board of Directors and of all written consents executed
in lieu of holding of any such meeting.
SECTION 3.14 Transactions with Affiliates. Except as otherwise set
forth in 3.14 of the M Campbell Disclosure Schedule, no Affiliate (as
hereinafter defined) has any direct or indirect interest in or owns directly or
indirectly any asset or right used in the conduct of the business of TFI or is
party to any contract, lease, agreement, arrangement or commitment used in such
business.
"Affiliate" as used in this Section 3.14 means a person which
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, TFI. For purposes of this
definition, the officers, directors and stockholders of TFI shall be deemed
Affiliates.
SECTION 3.15 Employee Benefit Plans; Employment Agreements. With
respect to all the employee benefit plans, programs and arrangements of TFI
maintained for the benefit of any current or former
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employee, officer or director of TFI (collectively, the "TFI Plans"), except as
would not, individually or in the aggregate, have a Material Adverse Effect on
TFI: (i) none of the TFI Plans is a multi-employer plan within the meaning of
ERISA; (ii) none of the TFI Plans promises or provides retiree medical or life
insurance benefits to any person, except as otherwise required by law; (iii)
each TFI Plan intended to be qualified under Section 401(k) of the Code has
received a favorable determination letter from the Internal Revenue Service that
it is so qualified and nothing has occurred since the date of such letter that
could reasonably be expected to affect the qualified status of such TFI Plan;
(iv) each TFI Plan has been operated in all material respects in accordance with
its terms and the requirements of applicable law; and (v) TFI has not incurred
any direct or indirect liability under, arising out of or by operation of Title
IV of ERISA in connection with the termination of, or withdrawal from, any TFI
Plan or other retirement plan or arrangement, and no fact or event exists that
could reasonably be expected to give rise to any such liability. The aggregate
accumulated benefit obligations of any TFI Plan subject to Title IV of ERISA do
not exceed the fair market value of the assets of such TFI Plan. Except as set
forth in Section 3.15 of the M Campbell Disclosure Schedule, TFI has no TFI
Plans or any employment or severance agreements with any of its employees.
SECTION 3.16 Labor Matters. (i) TFI is not a party to any
collective bargaining agreement or other material contract or agreement with any
labor organization or other representative of employees nor is any such contract
being negotiated; (ii) there is no material unfair labor practice charge or
complaint pending nor, to the knowledge of M Campbell, threatened, with regard
to employees of TFI; (iii) there is no labor strike, material slowdown, material
work stoppage or other material labor controversy in effect, or, to the
knowledge of M Campbell, threatened against TFI; (iv) there are no campaigns
being conducted by and/or to the employees of TFI to authorize representation by
a labor organization; (v) TFI is not party to, or is not otherwise bound by, any
consent decree with any governmental authority relating to employees or
employment practices of TFI; (vi) TFI has not incurred any liability under, and
has complied in all respects with, the Worker Adjustment Retraining Notification
Act, and no fact or event exists that could give rise to liability under such
Act; (vii) except as disclosed in Section 3.16 of the M Campbell Disclosure
Schedule, TFI is in compliance with all applicable agreements, contracts and
policies relating to employment, employment practices, wages, hours and terms
and conditions of employment of the employees and all applicable laws respecting
employment practice, except where the failure to be in compliance with each such
agreement, contract and policy would not, either singly or in the aggregate,
have a Material Adverse Effect on TFI; and (vii) no charges with respect to, or
relating to TFI are pending before the Equal Employment Opportunity Commission,
or any corresponding state agency.
SECTION 3.17 Environmental Matters.
(a) Except to the extent that the inaccuracy of any of the
following, individually or in the aggregate, would not have a Material Adverse
Effect on TFI, to the knowledge of M Campbell:
(i) TFI holds, and is in compliance with and has been in
compliance with for the last three years, all Environmental
Permits, and is otherwise in substantial compliance and has been
in substantial compliance for the last three years with, all
applicable Environmental Laws and there is no condition that is
reasonably likely to prevent or materially interfere prior to the
Closing with compliance by TFI with Environmental Laws;
(ii) no modification, revocation, reissuance, alteration,
transfer or amendment of any Environmental Permit, or any review
by, or approval of, any third party of any Environmental Permit is
required in connection with the execution or delivery of this
Agreement or the consummation by Shareholder of the transactions
contemplated hereby or the operation of the business of TFI on the
date of the Closing;
(iii) TFI has not received any Environmental Claim, nor has
any Environmental Claim been threatened against TFI;
(iv) TFI has not entered into, agreed to or is not subject
to any outstanding judgment, decree, order or consent arrangement
with any governmental authority under any Environmental Laws,
including, without limitation, those relating to compliance with
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any Environmental Laws or to the investigation, cleanup,
remediation or removal of Hazardous Materials;
(v) there are no circumstances that are reasonably likely to
give rise to liability under any agreements with any person
pursuant to which TFI would be required to defend, indemnify, hold
harmless, or otherwise be responsible for any violation by or
other liability or expense of such person, or alleged violation by
or other liability or expense of such person, arising out of any
Environmental Law; and
(vi) there are no existing conditions that are reasonably
likely to give rise to liability of TFI under any Environmental
Laws.
(b) For purposes of this Agreement, the terms below shall have
the following meanings:
"Environmental Claim" means any written complaint, notice,
claim, demand, action, suit or judicial, administrative or
arbitral proceeding by any person to TFI or any of its
subsidiaries asserting liability or potential liability
(including, without limitation, liability or potential liability
for investigatory costs, cleanup costs, governmental response
costs, natural resource damages, property damage, personal injury,
fines or penalties) arising out of, relating to, based on or
resulting from (i) the presence, discharge, emission, release or
threatened release of any Hazardous Materials at any location,
(ii) circumstances forming the basis of any violation or alleged
violation of any Environmental Laws or Environmental Permits, or
(iii) otherwise relating to obligations or liabilities of TFI
under any Environmental Law.
"Environmental Permits" means all permits, licenses,
registrations, exemptions and other governmental authorizations
required under Environmental Laws for TFI to conduct its
operations as presently conducted.
"Environmental Laws" means all applicable foreign, federal,
state and local statutes, rules, regulations, ordinances, orders,
decrees and common law relating in any manner to pollution or
protection of the environment, to the extent and in the form that
such exist at the date hereof.
"Hazardous Materials" means all hazardous or toxic
substances, wastes, materials or chemicals, petroleum (including
crude oil or any fraction thereof) and petroleum products,
asbestos and asbestos-containing materials, pollutants,
contaminants and all other materials and substances, including but
not limited to radioactive materials, regulated pursuant to any
Environmental Laws.
SECTION 3.18 Litigation. Except as set forth in Section 3.18 of
the M Campbell Disclosure Schedule, there is no suit, action, investigation or
proceeding pending or, to the knowledge of Shareholder, threatened against TFI
at law or in equity before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or before any arbitrator of any kind, that would have a
Material Adverse Effect on either TFI or, with respect to such matters that are
pending or threatened as of the date hereof, materially impair the ability of
Shareholder to perform his obligations hereunder or to consummate the Stock
Purchase, and there is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, board, bureau, agency,
instrumentality or arbitrator to which Shareholder is subject that would have a
Material Adverse Effect on TFI or, with respect to such items that are
outstanding and applicable as of the date hereof, materially impair the ability
of Shareholder to perform his obligations hereunder or to consummate the Stock
Purchase.
SECTION 3.19 Governmental Licenses and Permits; Compliance with
Law. TFI has not received notice of any revocation or modification of any
federal, state, local or foreign governmental license, certification, tariff,
permit, authorization or approval, the revocation or modification of which would
have a Material
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Adverse Effect on TFI. To the knowledge of Shareholder, the conduct of the
business of TFI complies with all statutes, laws, regulations, ordinances,
rules, judgments, orders, decrees or arbitration awards applicable thereto,
except for violations or failures to comply, if any, that, individually or in
the aggregate, would not have a Material Adverse Effect on TFI.
SECTION 3.20 Brokers. No broker, investment banker or other person
is entitled to any broker's, finder's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Shareholder or TFI.
SECTION 3.21 Bank Accounts. A complete list of each bank account
maintained by TFI, including safe deposit boxes maintained by TFI, the account
balances and the names of the persons authorized to draw down upon or have
access thereto is set forth in Section 3.21 of the M Campbell Disclosure
Schedule.
SECTION 3.22 Distributions to Stockholders of TFI. Except as set
forth in Section 3.23 of the M Campbell Disclosure Schedule, TFI, since December
31, 1997, has not declared, set aside or paid any dividends on, or made any
other actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise made any payments to any of the stockholders of TFI
other than salaries in the ordinary course of business and bonuses accrued on
the December 31, 1997 balance sheet of TFI.
SECTION 3.23 Workers' Compensation Claims. Except as set forth in
Section 3.23 of the M Campbell Disclosure Schedule, there are no workers'
compensation claims pending or, to the knowledge of Shareholder, threatened
against TFI.
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.1 Fees and Expenses. All costs and expenses incurred by
Lone Star in connection with this Agreement and the transactions contemplated
hereby shall be paid by Lone Star; such costs and expenses incurred by TFI up to
a maximum of $15,000 shall be paid by Lone Star and the balance, if any, shall
be paid by Shareholder.
SECTION 4.2 Reasonable Best Efforts. Upon the terms and subject
to the conditions set forth in this Agreement, each of the parties agrees to use
all reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Stock Purchase and
the other transactions contemplated by this Agreement and the prompt
satisfaction of the conditions hereto.
SECTION 4.3 M Campbell Indemnification. On and after the date of
Closing, Shareholder shall jointly and severally indemnify and hold Lone Star
harmless against and in respect of all actions, suits, demands, judgments, costs
and expenses (including reasonable attorneys' fees of Lone Star), arising out of
any breach of any representation, warranty, covenant or agreement on the part of
Shareholder contained in this Agreement. The indemnification provided for in
this Section 4.3 shall terminate and be of no further force and effect two years
from the date of Closing, except as to any representation or warranty as to
which a written notice of claim for indemnification has been given to M Campbell
prior to the expiration of such two-year period.
SECTION 4.4 Lone Star Indemnification.. On and after the date of
Closing, Lone Star shall indemnify and hold Shareholder harmless against and in
respect of all actions, suits, demands, judgments, costs and expenses (including
reasonable attorneys fees of Shareholder) arising out of any breach of any
representation, warranty, covenant or agreement on the part of Lone Star
contained in this Agreement and any and all liabilities arising out of or
related to the business or the operations of TFI, Lone Star or any successor
thereof to the extent the liabilities arise out of, or are based upon, facts or
events occurring after the Closing. The indemnification provided for in this
Section 4.4 shall terminate and be of no further force and effect two years from
the date of Closing, except
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as to any representation or warranty as to which a written notice of claim for
indemnification has been given to Lone Star prior to expiration of such two-year
period.
SECTION 4.5 Limitation on Indemnification Obligations. The parties
shall have no liability for indemnification under this Article IV unless the
total of the alleged costs, expenses or damages with respect to any individual
matter exceeds $5,000 or the costs, expenses or damages arising out of multiple
claims of less than $5,000 exceed $20,000 in the aggregate (the "Basket
Amount"). The indemnification obligations of the parties pursuant to this
Article IV shall (a) in no event exceed the amount of the Stock Purchase
Consideration (the "Maximum Indemnification Limitation"), and (b) except as set
forth in Section 6.8 below, be the sole and exclusive remedy of the parties with
respect to this Agreement. Notwithstanding the foregoing, neither the Basket
Amount nor the Maximum Indemnification Limitation shall be applicable in respect
of any actions, suits, demands, judgments, costs and expenses (including
reasonable attorney's fees), arising out of, or based upon, a fraudulent
representation by M Campbell or Lone Star in this Agreement or any claims for
indemnification relating to unpaid or undisclosed Tax liabilities of TFI.
SECTION 4.6 Employee Benefits. At Closing, all employee benefit
plans and programs of TFI shall terminate, and, subject to all applicable laws,
all vested rights and benefits of such benefit plans and programs shall be
distributed to the eligible recipients in accordance with the terms of such
plans.
ARTICLE V
CONDITIONS PRECEDENT TO THE STOCK PURCHASE
SECTION 5.1 Conditions to Each Party's Obligation to Effect the
Stock Purchase. The respective obligations of each party to effect the Stock
Purchase shall be subject to the fulfillment or waiver (where permissible) at or
prior to the date of Closing of each of the following conditions:
(a) No Order. No Governmental Entity or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of prohibiting the Stock Purchase or any of the other transactions
contemplated hereby; provided that, in the case of any such decree, injunction
or other order, each of the parties shall have used reasonable best efforts to
prevent the entry of any such injunction or other order and to appeal as
promptly as practicable any decree, injunction or other order that may be
entered.
(b) Non-Competition Agreement. A Non-Competition Agreement in the
form attached hereto as Exhibit A shall have been executed and delivered by PEC,
Lone Star, and M Campbell.
(c) Employment Agreement. An Employment Agreement in the form
attached hereto as Exhibit B shall have been executed and delivered by Lone Star
and M Campbell.
(d) Bonus Payment. Prior to Closing, TFI shall have paid bonuses
totaling $150,000 to Cindi Campbell, Steve Disharon and Steve Akins.
(e) Annuity. Prior to Closing, TFI shall have made provision for
an incentive compensation plan in the amount of $150,000 for the benefit of
Cindi Campbell, Steve Disharon and Steve Akins.
SECTION 5.2 Conditions to Obligation of Shareholder to Effect the
Stock Purchase. The obligation of Shareholder to effect the Stock Purchase shall
be subject to the fulfillment at or prior to the Closing of the following
additional conditions; provided that Shareholder may waive any of such
conditions in his sole discretion:
(a) Performance of Obligations; Representations and Warranties.
Lone Star shall have performed in all material respects each of its agreements
contained in this Agreement required to be performed on or
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prior to the Closing, each of the representations and warranties of Lone Star
contained in this Agreement shall be true and correct on and as of the date of
Closing as if made on and as of such date.
(b) Officers' Certificate. Lone Star shall have furnished to
Shareholder a certificate, dated the Closing, signed by an appropriate officer
of Lone Star, certifying to the effect that, to his knowledge and belief, the
conditions set forth in Section 5.1 and Section 5.2(a) have been satisfied in
full.
(c) Incentive Stock Options. PEC shall have granted incentive
stock options under the Patterson Energy, Inc. 1993 Stock Incentive Plan to the
following persons in the following amounts: Steve Akins - option to purchase
3,000 shares of common stock, $.01 share ("PEC Common Stock"); Cindi Campbell -
option to acquire 1,000 shares of PEC Common Stock; Mark Campbell - option to
acquire 4,000 shares of PEC Common Stock, and Steve Disharon - option to acquire
2,000 shares of PEC Common Stock, and Lone Star shall have included Steve Akins,
Cindi Campbell and Steve Disharon as participants in the Lone Star deferred
compensation plan.
(d) Opinion of Baker & Hostetler, LLP. Shareholder shall have
received an opinion of counsel from Baker & Hostetler, L.L.P., counsel to Lone
Star, dated as of the Closing, substantially to the effect that:
(i) The incorporation, existence and good standing of Lone
Star are as stated in this Agreement.
(ii) Lone Star has full power and authority to execute,
deliver and perform this Agreement, and this Agreement has been
duly authorized, executed and delivered by Lone Star, and
(assuming the due and valid authorization, execution and delivery
by Shareholder) constitutes the legal, valid and binding agreement
of Lone Star enforceable against Lone Star in accordance with its
terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws of general applicability relating
to or affecting the enforcement of creditors' rights and by the
effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(iii) The execution and performance by Lone Star of this
Agreement will not violate the Articles of Incorporation or Bylaws
of Lone Star and, to the knowledge of such counsel, will not
violate, result in a breach of, or constitute a default under, any
material lease, mortgage, contract, agreement, instrument, law,
rule, regulation, judgment, or order or decree known to such
counsel to which Lone Star is a party or to which it or any of its
properties or assets may be bound.
(iv) The Non-Competition Agreement and Employment Agreement
dated the date of Closing among Lone Star and M Campbell
constitute the legal, valid and binding agreement of Lone Star
enforceable against Lone Star in accordance with its terms, except
to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer, or
other similar laws of general applicability relating to or
affecting the enforcement of creditors' rights and by the effect
of general principles of equity whether enforceability is
considered in a proceeding in equity or at law.
(v) To the knowledge of such counsel, no consent approval,
authorization or order of any court or governmental agency or body
which has not been obtained is required on behalf of Lone Star for
consummation of the transactions contemplated by this Agreement.
(vi) To the knowledge of such counsel, there are no actions,
suits or proceedings, pending or threatened, against or affecting
Lone Star by any Governmental Entity which seeks to restrain,
prohibit or invalidate the transactions contemplated by the
Agreement.
In rendering such opinion, counsel for Lone Star may rely as to
matters of fact upon the representations of officers of Lone Star contained in
any certificate delivered to such counsel and certificates of
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public officials. Such opinion shall be limited to the laws of the United States
of America and the State of Texas.
(e) Delivery of Stock Purchase Consideration. Lone Star shall have
made delivery of the Stock Purchase Consideration.
SECTION 5.3 Conditions to Obligations of Lone Star to Effect the
Stock Purchase. The obligations of Lone Star to effect the Stock Purchase shall
be subject to the fulfillment at or prior to the Closing of the following
additional conditions, provided that Lone Star may waive any such conditions in
its sole discretion:
(a) Performance of Obligations; Representations and Warranties.
Shareholder shall have performed in all material respects each of his agreements
contained in this Agreement required to be performed on or prior to the Closing
and each of the respective representations and warranties of Shareholder
contained in this Agreement shall be true and correct on and as of the Closing
as if made on and as of such date.
(b) Officers' Certificate. Shareholder shall have furnished to
Lone Star a certificate, dated as of the Closing, certifying to the effect that,
to the knowledge and belief of Shareholder, the conditions set forth in Section
5.1 and Section 5.3(a) have been satisfied.
(c) Opinion of Davis, Hutchinson & Wilkerson, L.L.P. Lone Star
shall have received an opinion of counsel from Davis, Hutchinson & Wilkerson,
L.L.P., counsel to Shareholder and TFI, dated as of the Closing, substantially
to the effect that:
(i) The incorporation, existence, good standing, and
capitalization of TFI are as stated in this Agreement; the
authorized shares of TFI Common Stock are as stated in this
Agreement; all outstanding shares of TFI Common Stock are duly and
validly authorized and issued, fully paid and non-assessable.
(ii) Shareholder has full power and authority to execute,
deliver and perform this Agreement, and this Agreement has been
duly authorized, executed and delivered by Shareholder, and
(assuming the due and valid authorization, execution and delivery
by Lone Star) constitutes the legal, valid and binding agreement
of Shareholder enforceable against Shareholder in accordance with
its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other similar laws of general applicability relating
to or affecting the enforcement of creditors' rights and by the
effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law).
(iii) The execution and performance by Shareholder of this
Agreement will not violate the Articles of Incorporation or Bylaws
of TFI and, to the knowledge of such counsel, will not violate,
result in a breach of, or constitute a default under, any material
lease, mortgage, contract, agreement, instrument, law, rule,
regulation, judgment, order or decree known to such counsel to
which either Shareholder or TFI is a party or to which him or it
or any of his or its properties or assets may be bound.
(iv) The Non-Competition Agreement and Employment Agreement
dated the date of Closing among Lone Star and M Campbell
constitute the legal, valid and binding agreement of M Campbell
enforceable against M Campbell in accordance with its terms,
except to the extent enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer, or
other similar laws of general applicability relating to or
affecting the enforcement of creditors' rights and by the effect
of general principles of equity whether enforceability is
considered in a proceeding in equity or at law.
(v) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body
which has not been obtained is
11
<PAGE> 15
required on behalf of either of M Campbell or TFI for consummation
of the transactions contemplated by this Agreement.
(vi) To the knowledge of such counsel, there are no actions,
suits or proceedings, pending or threatened, against or affecting
either of M Campbell or TFI by any Governmental Entity which seeks
to restrain, prohibit or invalidate the transactions contemplated
by the Agreement.
In rendering such opinion, counsel for M Campbell and TFI may rely
as to matters of fact upon the representations of officers of TFI and M Campbell
contained in any certificate delivered to such counsel and certificates of
public officials. Such opinion shall be limited to the laws of the United States
of America and the State of Texas.
(d) Officer and Director Resignation Letters. Lone Star shall have
received a resignation letter dated the date of the Closing from each of the
directors and officers of TFI.
(e) TFI Stock Certificates. Lone Star shall have received all of
the certificates evidencing the TFI Common Stock duly endorsed to Lone Star.
(f) Evidence of Insurability. M Campbell shall have provided Lone
Star with proof that he is insurable with life insurance underwritten by
Massachusetts Mutual Life Insurance Company in the face amount of at least $2
million.
(g) Non-Competition Agreements. A Non-Competition Agreement in the
form attached hereto as Exhibit C shall have been executed and delivered by each
of the following persons: Steve Akins, Cindi Campbell and Steve Disharon.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.1 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
sent by overnight courier or telecopied (with a confirmatory copy sent by
overnight courier) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) to Lone Star, to:
Lone Star Mud, Inc.
415 West Wall Street, Suite 530
Midland, Texas 79701
Facsimile: (915) 684-7473
Attention: Spencer D. Armour III
President
12
<PAGE> 16
with copies to:
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Box 1416
Snyder, Texas 79550
Facsimile: (915) 537-0281
Attention: Cloyce A. Talbott
Chairman and Chief
Executive Officer
Thomas H. Maxfield, Esq.
Baker & Hostetler LLP
303 East 17th Avenue, Suite 1100
Denver, Colorado 80203-1264
Facsimile: (303) 861-2307
(b) if to M Campbell, to:
Mark Campbell
6262 Weber, Suite 112
Corpus Christi, Texas 78413
Facsimile: (512) 851-8155
with copies to:
Marshall R. Wilkerson
Davis, Hutchinson & Wilkerson, L.L.P.
Frost Bank Plaza
802 N. Carancahua, Suite 1270
Corpus Christi, Texas 78470-0400
Facsimile: (512) 882-1191
SECTION 6.2 Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this Agreement
unless otherwise indicated, and the words "hereof," "herein" and "hereunder" and
similar terms refer to this Agreement as a whole and not to any particular
provision of this Agreement, unless the context otherwise requires. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" is used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
SECTION 6.3 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 6.4 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, including the documents and instruments referred to herein, (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties any rights or remedies hereunder; provided, however, that legal
counsel for the parties hereto may rely upon the representations and warranties
contained herein and in the certificates delivered pursuant to Sections 5.2(c)
and 5.3(c).
13
<PAGE> 17
SECTION 6.5 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 6.6 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties without the prior written consent of the other parties. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of, and be enforceable by, the parties and their respective successors and
assigns.
SECTION 6.7 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 6.8 Enforcement of This Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
IN WITNESS WHEREOF, Lone Star and M Campbell have executed this
Agreement as of the date first written above.
LONE STAR:
LONE STAR MUD, INC.
By: /s/ SPENCER D. ARMOUR III
-----------------------------------------
Spencer D. Armour III
President
M CAMPBELL:
/s/ MARK CAMPBELL
-----------------------------------------
Mark Campbell
14
<PAGE> 18
EXHIBIT A
PATTERSON ENERGY, INC.,
LONE STAR MUD, INC.
AND
MARK CAMPBELL
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT is made and entered into this
day of September, 1998 (this "Agreement"), between and among PATTERSON ENERGY,
INC., a Delaware corporation ("PEC"), Lone Star MUD, INC., a Texas corporation
("Lone Star") wholly-owned by PEC, and MARK CAMPBELL, an individual residing in
Corpus Christi, Texas ("M Campbell").
RECITALS:
A. Simultaneously with the execution of this Agreement, (i) Lone
Star and M Campbell have consummated the transactions contemplated by that
certain Stock Purchase Agreement dated of even date herewith (the "Stock
Purchase Agreement"), among Lone Star and M Campbell providing for, among other
things, the acquisition by Lone Star from M Campbell of all of the outstanding
capital stock of Tejas Fluids, Inc. ("TFI"), a Texas corporation wholly owned by
M Campbell (the "Stock Purchase"); and (ii) Lone Star and M Campbell have
entered into an employment agreement (the "M Campbell Employment Agreement").
B. M Campbell is or was an officer, a director and a stockholder
of TFI.
C. The execution and delivery of this Agreement is a condition
to the consummation of the Stock Purchase contemplated by the Stock Purchase
Agreement, and the parties are entering into this Agreement in order to fulfill
such condition.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Period of Agreement. The period of this Agreement shall
commence on the date hereof and remain in effect through the first to occur of
(a) termination of the M Campbell Employment Agreement (i) by Lone Star without
"Cause" as that term is defined in Section 10(a) of the M Campbell Employment
Agreement or (ii) by M Campbell as a result of a material breach of the M
Campbell Employment Agreement by Lone Star pursuant to Section 10(b) thereof, or
(b) December 31, 2005, unless M Campbell is still in the employ of Lone Star on
that date, in which event this Agreement shall terminate on the second
anniversary of the termination of the employment of M Campbell with Lone Star
(the "Non-Compete Period").
2. Covenant Not to Compete.
(a) M Campbell covenants and agrees that during the
Non-Compete Period, M Campbell shall not, without the prior
written consent of PEC and Lone Star, directly or indirectly, and
whether as a principal or as an agent, officer, director,
employee, consultant, or otherwise, alone or in association with
any other person, carry on, be engaged, concerned, or take part
in, render services to, or own, share in the earnings of, or
invest in the stock, bonds, or other securities of, any person
which is engaged in the drilling fluids business (the "Competitive
Business") within the states of Texas, Louisiana, New Mexico and
Oklahoma or in any other states in which Lone Star
A-1
<PAGE> 19
is conducting the Competitive Business at the time of termination
of the M Campbell Employment Agreement; provided, however, that M
Campbell may (i) invest in stock, bonds, or other securities of
any Competitive Business (but without otherwise participating in
the Competitive Business) if: (A) such stock, bonds, or other
securities are listed on any national securities exchange or are
registered under Section 12(g) of the Securities Exchange Act of
1934, as amended; (B) the investment does not exceed, in the case
of any class of capital stock of any one issuer, two percent (2%)
of the issued and outstanding shares, or, in the case of bonds or
other securities of any one issuer, two percent (2%) of the
aggregate principal amount thereof issued and outstanding; and (C)
such investment would not prevent, directly or indirectly, the
transaction of business by PEC or Lone Star or any affiliate of
PEC or Lone Star with any state, district, territory, or
possession of the United States or any governmental subdivision,
agency, or instrumentality thereof by virtue of any statute, law,
regulation or administrative practice. The period of time during
which M Campbell is prohibited from engaging in certain activities
by this Section shall be extended by the length of time during
which M Campbell is in breach of the terms of this section.
(b) It is understood by and between the parties hereto that
the foregoing covenant by M Campbell not to enter into competition
with PEC or Lone Star as set forth in Section 2(a) hereof is an
essential element of this Agreement, the Stock Purchase Agreement
and the M Campbell Employment Agreement and that, but for the
agreement of M Campbell to comply with such covenant, Lone Star
would not have agreed to enter into this Agreement, the Stock
Purchase Agreement and the M Campbell Employment Agreement. PEC
and Lone Star on the one hand and M Campbell on the other hand
have independently consulted with their respective counsel and
have been advised in all respects concerning the reasonableness
and propriety of such covenant, with specific regard to the nature
of the business conducted by PEC and Lone Star and their
respective affiliates. M Campbell agrees that such covenant is
reasonable in scope, geographic area, and duration.
3. Restrictions on Soliciting Business of PEC and Lone Star. M
Campbell further covenants and agrees that during the Non-Compete Period, M
Campbell will not, either for himself or for any other person or entity,
directly or indirectly, engage in any of the following activities in a
Competitive Business without the express prior written consent of PEC and Lone
Star:
(a) Solicit or hire any of the employees of PEC or Lone Star
or solicit or take away any of PEC's or Lone Star's customers,
lessors, or suppliers or attempt any of the foregoing;
(b) Acquire or attempt to acquire rights providing any
product or service in a Competitive Business within the territory
described in Section 2 hereof; or
(c) Engage in any act which would interfere with or harm any
business relationship PEC or Lone Star has with any customer,
lessor, employee, principal or supplier.
4. Specific Performance. Without intending to limit the remedies
available to PEC or Lone Star, M Campbell acknowledges that PEC or Lone Star
will have no adequate remedies at law if M Campbell violates the terms of
Section 2 or 3, hereof. In such event, M Campbell agrees that PEC or Lone Star
shall have the right, in addition to any other rights it may have, to obtain in
any court of competent jurisdiction specific performance of such Sections of
this Agreement or injunctive relief to restrain any breach or threatened breach
thereof. Nothing herein shall be construed as prohibiting PEC or Lone Star from
pursuing any other remedies available to PEC or Lone Star (whether at law or in
equity) for such breach or threatened breach, including, without limitation, the
recovery of monetary damages from M Campbell.
A-2
<PAGE> 20
The provisions of this Section 4 shall survive the expiration,
termination or cancellation of this Agreement.
5. Attorneys Fees and Costs. If an action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys fees, costs and necessary
expenses in addition to any other relief to which that party may be entitled.
This provision is applicable to this entire Agreement.
6. Representations and Warranties of PEC, Lone Star and M
Campbell.
(a) Representations and Warranties of PEC and Lone Star. PEC
and Lone Star hereby jointly and severally represent and warrant
to M Campbell that: (i) they have all requisite power to enter
into and perform their obligations under this Agreement; (ii) this
Agreement has been duly and validly authorized by all necessary
corporate action on the part of PEC and Lone Star; (iii) the
execution of this Agreement by PEC and Lone Star and performance
of their obligations hereunder do not require the consent or
approval of any other party; and (iv) this Agreement is a valid
and binding obligation of PEC and Lone Star.
(b) Representations and Warranties of M Campbell. M Campbell
hereby represents and warrants to PEC and Lone Star that: (i) M
Campbell has the capacity and power to enter into and perform the
obligations of M Campbell under this Agreement; (ii) M Campbell
has duly and validly executed this Agreement; (iii) the execution
of this Agreement and performance of obligations of M Campbell
hereunder do not require the consent or approval of any other
party; and (iv) this Agreement constitutes a valid and binding
obligation of M Campbell.
7. General Provisions.
(a) Compliance with Laws. The parties agree that they will
comply with all applicable laws and regulations of government
bodies or agencies in their respective performance of their
obligations under this Agreement.
(b) Governing Law and Construction. This Agreement will be
governed by and construed in accordance with the laws of the State
of Texas without reference to its conflict-of-laws principles.
This Agreement's final form resulted from review and negotiations
among the parties and their attorneys, and no part of this
Agreement should be construed against any party on the basis of
authorship.
(c) Forum for Dispute Resolution. If any dispute arises among
the parties concerning the interpretation or performance of any
portion of this Agreement which the parties are unable to resolve
themselves, and any party brings an action against any other party
seeking a declaratory order, specific performance, damages, or any
other legal or equitable relief based on this Agreement, the
parties agree that the forum for any such action shall be an
appropriate federal or state court in Texas having jurisdiction,
agree that venue will be proper in such courts, and waive any
objections based on inconvenience of the forum, and further agree
that the prevailing party in any such action, as determined by the
court, shall be awarded its reasonable attorneys' fees and costs
in addition to any relief or judgment the court awards.
(d) Entire Agreement; Amendment. This Agreement constitutes
the entire agreement between the parties with respect to the
subject matter contained herein and supersedes any previous oral
or written communications, representations, understandings or
agreements with respect thereto. The terms of this Agreement may
be modified only in a writing, signed by authorized
representatives of both parties.
A-3
<PAGE> 21
(e) Assignability. The rights and duties of any party under
this Agreement shall not be assignable by such party except that
this Agreement and all right and obligations hereunder may be
assigned by Lone Star or PEC to, and assumed by, any corporation
or other business entity which succeeds to all or substantially
all of the assets and business of Lone Star or PEC, as the case
may be, through merger, consolidation, acquisition of assets or
other corporate reorganization.
(f) Waiver. A waiver of a breach or default under this
Agreement will not constitute a waiver of any other breach or
default. Failure or delay by either party to enforce compliance
with any term or condition of this Agreement will not constitute a
waiver of such term or condition.
(g) Severability. If any provision of this Agreement is
declared to be invalid, the parties agree that such invalidity
will not affect the validity of the remaining provisions of this
Agreement, and further agree, to the extent possible, to
substitute for the invalid provision a valid provision that
approximates the intent and economic effect of the invalid
provision as closely as possible.
(h) Headings. The titles of the Sections and subsections of
this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
(i) Notice. Any notice, request, consent, demand or other
communication required to be given under this Agreement will be in
writing and will be given personally, by facsimile or by mailing
the same, first-class, postage prepaid to the appropriate address
and facsimile number set forth below or to such other person or at
such other address as may hereafter be designated by like notice.
Notices by mail will be considered delivered and become effective
three days after the mailing thereof. All notices by facsimile
will be considered delivered and become effective immediately upon
the confirmed (by answer back or other tangible printed
verification or successful receipt) sending thereof.
To PEC:
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1410
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
To Lone Star:
Lone Star Mud, Inc.
415 West Wall Street, Suite 530
Midland, Texas 79701
Facsimile: (915) 684-7446
Attention: Spencer D. Armour III
President
A-4
<PAGE> 22
To M Campbell:
Mark Campbell
6262 Weber, Suite 112
Corpus Christi, Texas 78413
Facsimile: (512) 851-8155
(j) Counterparts. This Agreement may be executed in
counterparts and by the parties hereto in separate counterparts,
each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(k) Effective Time. This Agreement shall become effective
simultaneously with the Closing (as defined in the Stock Purchase
Agreement) of the Stock Purchase.
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be executed by their respective representatives as of the day and year first
above written.
"PEC"
PATTERSON ENERGY, INC.
By:
-------------------------------------------------
James C. Brown
Vice President and Chief Financial Officer
"LONE STAR"
LONE STAR MUD, INC.
By:
-------------------------------------------------
Spencer D. Armour III
President
"M CAMPBELL"
-------------------------------------------------
Mark Campbell
A-5
<PAGE> 23
EXHIBIT B
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of September __, 1998, by and between LONE STAR MUD, INC., a Texas
corporation (hereinafter referred to as "Employer") wholly owned by Patterson
Energy, Inc., a Delaware corporation ("PEC"), and MARK CAMPBELL of Corpus
Christi, Texas (hereinafter referred to as "Employee").
W I T N E S S E T H:
WHEREAS, Employee was employed by TEJAS FLUIDS, INC. ("TFI"), a
Texas corporation, from the inception of TFI through the consummation on this
date of the purchase by Employer from Employee of all of the outstanding capital
stock of TFI (the "Stock Purchase") pursuant to the terms of the Stock Purchase
Agreement dated of even date herewith between Employer and Employee (the "Stock
Purchase Agreement");
WHEREAS, Employer desires to continue to employ Employee.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants herein contained, Employee and Employer hereby agree as
follows:
1. Employment. Employer agrees to employ Employee as South Texas
and Texas Gulf Coast Regional Manager, subject to the terms and conditions
hereinafter set forth. Employee hereby accepts such employment and agrees that
he will, during the continuance hereof, devote his full time and attention and
abilities to the duties of employment assigned to him by the Vice President of
Operations or President of Employer.
2. Term. The term of this Agreement shall begin on the date of
this Agreement and shall end on December 31, 2003, subject to the terms and
conditions hereinafter contained.
3. Place of Employment. Employer agrees that Employee will have
his principal office at and will perform his principal duties at Employer's
field office, located in Corpus Christi, Texas. Notwithstanding the foregoing,
Employee acknowledges that it may be necessary from time to time for him in the
performance of his duties, to travel on behalf of the Company and to perform
such duties while temporarily away from his principal office.
4. Compensation. As compensation to Employee for his performance
of the services required hereunder, and for his acceptance of the
responsibilities herein contained, and for his performance of all the additional
obligations of employment, Employer agrees to pay and Employee agrees to accept
the following salary, other compensation and benefits, in addition to any other
compensation and benefits under this Agreement:
(a) Salary. Employee shall be entitled to receive a salary payable
monthly at an annual rate of $90,000.
(b) Bonus. For each year of employment of Employee with Employer
under this Agreement beginning with the year ended December 31, 1999, that the
"Incentive Goals" (as defined below) relating to sales of drilling fluids in
Region I (as defined below) are met, Lone Star will pay a cash bonus to Employee
of 33% of the "Region I Net Profit" (as defined below) up to a maximum bonus for
that year of $500,000. Such bonus, if payable for a particular year, will be
paid on or before March 31 of the following year. The calculation of the various
amounts necessary to determine whether the bonus for a particular year is
payable and, if so, the amount of the bonus, will be based on generally accepted
accounting principles. For purposes of the bonus:
B-1
<PAGE> 24
"Base Year" means the trailing 12 months ending December 31,
1998.
"Incentive Goals" means both (i) a growth in Region I Gross
Sales (as defined below) for each calendar year of at least
year,25% over the Base Year compounded annually, and (ii) a Region
I Net Profit (as defined below) of at least 15% of Region I Gross
Sales for the calendar year in question. For example, if Region I
Gross Sales for the Base Year were $1,000,000, Region I Gross
Sales for the year ending December 31, 1999 must be at least
$1,250,000, Region I Gross Sales for the year ending December 31,
2000 must be at least $1,562,500, Region I Gross Sales for the
year ending December 31, 2001 must be at least $1,953,125, Region
I Gross Sales for the year ending December 31, 2022 must be at
least $2,441,406, and Region I Gross sales for the year ending
December 31, 2003 must be at least $3,051,758.
"Region I" means the South Texas and Texas Gulf Coast region
consisting of Texas Railroad Commission Districts 1 (excluding Val
Verde, Edwards and Maverick Counties), 2, 3 and 4, and all
international sales of Ultralube II generated by Employee.
"Region I Gross Profit" means the amount determined by
subtracting day-to-day Region I operating expenses (excluding
interest, taxes and depreciation) for the current calendar year on
an accrual basis from net sales (gross sales less cost of goods
sold) of drilling fluids for that year within Region I.
"Region I Gross Sales" means all revenues received by
Employer from the sale of drilling fluids in Region I by employees
of Employer including, but not limited to, Employee.
"Region I Net Profit" means the amount determined by
subtracting the sum of the Quarterly Region I Allocable Share of
Sales Overhead and Corporate Overhead (as defined below) for a
current calendar year from Region I Gross Profit for that year.
"Quarterly Region I Allocable Share of Sales and Corporate
Overhead" means the ratio of Region I Gross Sales to Total
Regional Gross Sales, determined on a calendar quarter basis using
Region I Gross Sales and Total Regional Gross Sales for the
three-month period immediately preceding such calendar quarter,
multiplied by the sum of Sales Overhead and Corporate Overhead
using Sales Overhead and Corporate Overhead for such three-month
period.
"Total Regional Gross Sales" means the sum of all revenues
received by Lone Star from the sale of drilling fluids by
employees of Lone Star including, but not limited to, Employee, in
Region I, Midcontinent region and Permian Basin region and in any
other regions in which drilling fluids are sold by Employer.
"Sales Overhead" means expenses associated with the drilling
fluids sales operations of Employer.
"Corporate Overhead" means the expenses associated with the
day-to-day operations of Employer, including Employer's
proportionate share of the overhead of PEC, but excluding Sales
Overhead and interest, taxes and depreciation.
B-2
<PAGE> 25
(c) Further Benefits. Employee shall be entitled to
participate, as long as he is employed by Employer, in all
employee benefit plans of Employer or of PEC for employees of PEC
and subsidiaries of PEC.
5. Vacations. Employee shall be entitled each calendar year to a
vacation or vacations aggregating a total of __ working days (or a pro rata
number of working days for any period less than a calendar year) and such public
holidays as are provided by Lone Star to other employees of Employer; provided
that such number of working days for the first calendar year ending December 31,
1998, shall be reduced by the number of vacation days taken by Employee between
January 1, 1998, and the date of this Agreement. Employer and Employee shall
mutually agree as to when Employee may take his vacation or vacations. Unused
vacation time shall not be carried forward to subsequent years.
6. Expenses. Employer shall pay or reimburse Employee for
reasonable or necessary out-of-pocket expenses incurred by Employee in
conjunction with the performance of his duties hereunder; provided that such
expenses are properly documented in accordance with normal procedures of
Employer.
7. Confidentiality. Employee acknowledges that information used by
PEC and its subsidiaries, including Employer, in the conduct of their respective
business is confidential information which is the sole and exclusive property of
PEC and its subsidiaries. Employee agrees that he will not, during the term of
this Agreement or at any time after the termination hereof, disclose any of such
confidential information to any third party or use such confidential information
in any way to compete with or to act in any other way adverse to Employer and
its subsidiaries. Provisions of this paragraph shall not however apply to
information which is or which becomes available to the general public through no
fault of Employee. Upon termination of Employee's employment hereunder,
regardless of the reason for such termination, Employee agrees promptly to
deliver all tangible materials constituting confidential information and all
other property of PEC and its subsidiaries, including Employer, to PEC.
8 Enforcement. The parties agree that upon any violation of the
provisions of paragraph 7 hereof, monetary damages would be inadequate and
difficult to ascertain. The parties therefore agree that upon the existence of
any such violation or threatened violation, provided that Employer is not then
in default hereunder, Employer may obtain a temporary restraining order,
preliminary injunction or other appropriate that constitutes a felony in the
jurisdiction involved not subject to further appeal or review, if such
\conviction or plea is injurious to Employer.
9. Withholding of Appropriate Taxes. It is understood and agreed
by the parties hereto that Employer shall withhold appropriate taxes from
compensation and with respect to any other economic benefits herein provided
when such withholding is, in the reasonable judgment of Employer, required by
law or regulation.
10. Termination.
(a) By Employer. Employer may terminate this Agreement only
for Cause (as defined below) upon 30 days prior written notice to
Employee.
(i) If the written notice is issued, such notice shall
specify that termination is being made for Cause and it shall
state the basis therefor.
(ii) For purposes of this Agreement, termination for
"Cause" shall mean termination because of:
a. The continued failure by Employee to substantially
perform or the gross negligence in the performance of his
duties hereunder after the Board of Directors of
Employer has made a written demand for performance which
specifically identifies the
B-3
<PAGE> 26
manner in which it believed that Employee has not
substantially performed his duties.
b. The commission by Employee of a willful act of
dishonesty or misconduct which is injurious to Employer,
or the breach of a fiduciary duty to Employer.
c. A conviction or a plea of guilty or nolo
contendere in connection with fraud or any crime that
constitutes a felony in the jurisdiction involved not
subject to further appeal or review, if such conviction or
plea is injurious to Employer.
d. The commission by Employee of an act of substance
abuse.
(b) By Employee. Employee shall have the right to terminate
this Agreement only: (i) for cause, limited to a material breach
of this Agreement by Employer which remains uncured after
reasonable notice; or (ii) if both A. Glenn Patterson and Spencer
D. Armour cease being employees of PEC and/or Employer.
11. Miscellaneous.
(a) The rights and duties of either party under this
Agreement shall not be assignable by either party except that this
Agreement and all rights and obligations hereunder may be assigned
by Employer to, and assumed by, any corporation or other business
entity which succeeds to all or substantially all of the assets
and business of Employer through merger, consolidation,
acquisition of assets or other corporate reorganization.
(b) This Agreement shall be governed by, construed, applied
and enforced in accordance with the laws of the State of Texas
except that no doctrine of choice of law shall be used to apply
any law other than that of Texas, and no defense, counterclaim or
right of set-off given or allowed by the laws of any other state
or jurisdiction, or arising out of the enactment, modification or
repeal of any law, regulation, ordinance or decree of any foreign
jurisdiction, be interposed in any action hereon. Subject to
Section 11(c) below, Employee and Employer agree that any action
or proceeding to enforce or arising out of this Agreement may be
commenced in the courts of the state of Texas or the United States
District Courts in Dallas, Texas. Employee and the Company consent
to such jurisdiction, agree that venue will be proper in such
courts and waive any objections based upon forum non conveniens.
The choice of forum set forth in this Section 11 shall not be
deemed to preclude the enforcement of any judgment obtained in
such forum or the taking of any action under this Agreement to
enforce same in any other jurisdiction.
(c) Employee or Employer agree that any dispute between or
among the parties to this Agreement relating to or in respect of
this Agreement, its negotiation, execution, performance, subject
matter, or any course of conduct or dealing or actions under or in
respect of this Agreement, shall be submitted to, and Resolved
exclusively pursuant to arbitration in accordance with the
commercial arbitration rules of the American Arbitration
Association. Such arbitration shall take place in Dallas, Texas,
and shall be subject to the substantive law of the State of Texas.
Decisions pursuant to such arbitration shall be final, conclusive
and binding on the parties subject to confirmation, modification
or challenge pursuant to 9 U.S.C. Section 1 et. seq. Upon the
conclusion of arbitration, Employee or Employer may apply to any
court of the type described in
B-4
<PAGE> 27
Section 10(b) above to enforce the decision pursuant to such
arbitration. In connection with the foregoing, the parties hereby
waive any rights to a jury trial to resolve any disputes or claims
relating to this Agreement.
(d) This Agreement and all provisions hereof shall bind and
inure to the benefit of Employer, Employee and their respective
personal representatives, heirs, successors and assigns.
(e) This Agreement and all questions arising hereunder shall
be governed by the laws of the State of Texas.
(f) If any provision of this Agreement shall be held to be
invalid, illegal or unenforceable, such provision shall be severed
or enforced to the extent possible and such invalidity, illegality
or unenforceability shall not affect the remainder of this
Agreement.
(g) This Agreement supersedes any prior agreements or
understandings, oral or written, with respect to employment of
Employee and constitutes the entire agreement with respect
thereto. This Agreement may be amended or modified only by written
agreement subscribed to by both of the parties hereto.
(h) The waiver by either party of a breach of any provision
of this Agreement by the other shall not operate or be construed
as a waiver of any subsequent breach of the same provision or any
other provision of this Agreement.
(i) All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, sent
by overnight courier or telecopier (with a confirmation copy sent
by overnight courier) to the parties at the following addresses
(or at such other address for a party as shall be specified by
like notice):
(i) To Employee, to:
Mark Campbell
6262 Weber, Suite 112
Corpus Christi, , Texas 78413
Facsimile: (512) 851-8155
(ii) To Employer, to:
Lone Star Mud, Inc.
415 West Wall Street, Suite 530
Midland, Texas 79701
Facsimile: (915) 684-7446
Attention: Spencer D. Armour III
President
with copies to:
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Box 1416
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
B-5
<PAGE> 28
(j) This Agreement shall become effective simultaneously with
the Closing (as defined in the Stock Purchase Agreement) of the
Stock Purchase.
IN WITNESS WHEREOF, Employee and Employer have duly executed this
Agreement.
EMPLOYER:
LONE STAR MUD, INC., a Texas corporation
By:
---------------------------------------
Spencer D. Armour III
President
EMPLOYEE:
---------------------------------------
Mark Campbell
B-6
<PAGE> 1
EXHIBIT 2.10
AGREEMENT
AMONG
PATTERSON ENERGY, INC.,
PATTERSON DRILLING COMPANY
AND
PADRE INDUSTRIES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
THE TRANSACTION
<S> <C> <C>
SECTION 1.1 The Transaction...............................................................................1
SECTION 1.2 Asset Purchase-Purchase Consideration.........................................................1
SECTION 1.3 Closing.......................................................................................3
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PEC AND PDC
SECTION 2.1 Organization, Standing and Power..............................................................3
SECTION 2.2 Authority; Non-Contravention..................................................................3
SECTION 2.3 Capital Structure.............................................................................4
SECTION 2.4 SEC Documents.................................................................................4
SECTION 2.5 Brokers.......................................................................................5
SECTION 2.6 Litigation....................................................................................5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PADRE
SECTION 3.1 Organization, Standing and Power..............................................................5
SECTION 3.2 Authority; Non-Contravention..................................................................5
SECTION 3.3 Capital Structure.............................................................................6
SECTION 3.4 Environmental Matters.........................................................................6
SECTION 3.5 Title.........................................................................................7
SECTION 3.6 Labor Matters.................................................................................7
SECTION 3.7 Drilling Contracts............................................................................8
SECTION 3.8 Litigation....................................................................................8
SECTION 3.9 Drilling Rigs, Equipment and Rolling Stock....................................................8
SECTION 3.10 Brokers.......................................................................................8
SECTION 3.11 Vote of the Padre Stockholders................................................................8
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.1 Fees and Expenses.............................................................................8
SECTION 4.2 Reasonable Best Efforts.......................................................................8
SECTION 4.3 Padre Performance of Drilling Contracts.......................................................8
SECTION 4.4 Padre and T Billings Indemnification..........................................................8
SECTION 4.5 PEC and PDC Indemnification...................................................................9
SECTION 4.6 Public Announcements..........................................................................9
SECTION 4.7 Nasdaq National Market........................................................................9
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 4.8 Personal Property Taxes.......................................................................9
SECTION 4.9 Sales and Transfer Taxes......................................................................9
ARTICLE V
CONDITIONS PRECEDENT TO THE TRANSACTION
SECTION 5.1 Conditions to Each Party's Obligation to Effect the Transaction...............................9
SECTION 5.2 Conditions to Obligation of Padre to Effect the Transaction..................................10
SECTION 5.3 Conditions to Obligations of PEC and PDC to Effect the Transaction...........................11
ARTICLE VI
POST-CLOSING AGREEMENTS
Section 6.1 Purchase Option..............................................................................13
ARTICLE VI
GENERAL PROVISIONS
SECTION 7.1 Notices......................................................................................13
SECTION 7.2 Interpretation...............................................................................14
SECTION 7.3 Counterparts.................................................................................14
SECTION 7.4 Entire Agreement; No Third-Party Beneficiaries...............................................14
SECTION 7.5 Governing Law................................................................................14
SECTION 7.6 Assignment...................................................................................14
SECTION 7.7 Severability.................................................................................15
SECTION 7.8 Enforcement of This Agreement................................................................15
</TABLE>
ANNEX 1..........Description of Drilling Rigs, Equipment and Rolling Stock
EXHIBIT A........Lease with Option to Purchase relating to the Real Property
EXHIBIT B........Registration Rights Agreement
EXHIBIT C .......Bill of Sale and Assignment
EXHIBIT D(I).....Non-Competition Agreement - Padre Industries, Inc.
EXHIBIT D(II)....Non-Competition Agreement - Thomas J. Billings
EXHIBIT E........Form of Investment Representation Letter
ii
<PAGE> 4
AGREEMENT
AGREEMENT, dated as of January ___, 1999 (this "Agreement"), among
PATTERSON ENERGY, INC., a Delaware corporation ("PEC"), PATTERSON DRILLING
COMPANY, a Delaware corporation ("PDC"), wholly-owned by PEC, and PADRE
INDUSTRIES, INC., a privately-held Texas corporation ("Padre").
WITNESSETH:
WHEREAS, Padre owns, among other assets, five drilling rigs,
related drilling equipment and rolling stock (collectively, the "Drilling Rigs,
Equipment and Rolling Stock"), and a shop, office, warehouse and yard located in
Corpus Christi, Texas (collectively, the "Real Property"), all as more
particularly described on Annex 1, in the case of the Drilling Rigs, Equipment
and Rolling Stock, and in the Real Property Lease/Option to Purchase (as defined
in the next recital), in the case of the Real Property;
WHEREAS, PDC desires to (i) purchase all of Padre's right, title
and interest in and to the Drilling Rigs, Equipment and Rolling Stock (the
"Asset Purchase") and (ii) lease the Real Property with an option to purchase
(the "Real Property Lease/Option to Purchase") (the Asset Purchase and the Real
Property Lease/Option to Purchase are collectively referred to herein as the
"Transaction") for the consideration set forth and provided for herein;
WHEREAS, Padre desires to enter into the Transaction; and
WHEREAS, PDC, on the one hand, and Padre, on the other, desire to
make certain representations, warranties and agreements in connection with the
Transaction and also prescribe various conditions to the Transaction.
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties agree
as follows:
ARTICLE I
THE TRANSACTION
SECTION 1.1 The Transaction. Upon the terms and subject to the
conditions of this Agreement, at the Closing (as defined in Section 1.3 below)
provided herein: (a) PDC shall purchase from Padre and Padre shall sell to PDC,
all of Padre's right, title and interest in and to the Drilling Rigs, Equipment
and Rolling Stock; and (b) PDC and Padre shall enter into a lease, with an
option to purchase, the Real Property providing for, among other matters, a
one-year lease for a total lease payment of $100,000, payable in equal monthly
installments, and a $1 million purchase price.
SECTION 1.2 Asset Purchase-Purchase Consideration.
(a) In consideration for all of Padre's right, title and interest
in and to the Drilling Rigs, Equipment and Rolling Stock, PDC agrees to pay or
deliver to Padre at the Closing (as defined in Section 1.3) 800,000 shares of
common stock of PEC ("PEC Shares"; also sometimes referred to herein as the
"Purchase Consideration").
<PAGE> 5
(b) PDC further agrees that:
(i) if the "Closing Date Share Price" (as defined below in
this Section) for the PEC Shares on the Closing Date (as defined
in Section 1.3) is less than $5.00 per PEC Share, PDC shall pay to
Padre on the Anniversary Date (as defined below in this Section)
such amount in cash as is equal to 10% of the product of the
difference between $5.00 and the Closing Date Share Price, times
the difference between 800,000 and the number of PEC Shares
Sold/Purchased (as defined below in this Section) times the
Reduction Ratio (as defined below in this Section) (the "First
Supplemental Cash Payment"); and
(ii) if the "Anniversary Date Share Price" (as defined below
in this Section) is less than $5.00 per PEC Share, PEC shall pay
to Padre on the Anniversary Date such amount in cash as is equal
to the product of the difference between 800,000 and the number of
PEC Shares Sold/Purchased (as defined below in this Section) times
the difference between $5.00 and the greater of (i) the Closing
Date Share Price or (ii) the Anniversary Date Share Price (the
"Second Supplemental Cash Payment") [the First Supplemental Cash
Payment and the Second Supplemental Cash Payment are collectively
referred to herein as the "Supplemental Cash Payments"]; provided
that if the Closing Date Share Price is at least $5.00 or the
Anniversary Date Share Price is at least $5.50 there shall be no
Supplemental Cash Payments.
By way of examples: (i) if the Closing Date Share Price and the
Anniversary Date Share Price were both $4.00 per PEC Share, the First
Supplemental Cash Payment would be $80,000 (10% of the product of $1.00 [the
difference between $5.00 and the $4.00 Closing Date Share Price] times 800,000)
and the Second Supplemental Cash Payment would be $800,000 (the product of
800,000 times $1.00 [the difference between $5.00 and the $4.00 Anniversary Date
Share Price]); (ii) if the Closing Date Share Price were $3.00 and the
Anniversary Date Share Price were $4.50, the First Supplemental Cash Payment
would be $160,000 (10% of the product of 800,000 times $2.00 [the difference
between $5.00 and the $3.00 Closing Date Share Price]), and the Second
Supplemental Cash Payment would be $400,000 (the product of 800,000 times $.50
[the difference between $5.00 and the $4.50 Anniversary Date Share Price]);
(iii) if the Closing Date Share Price were less than $5.00 and the Anniversary
Date Share Price were at least $5.50, there would be no First Supplemental Cash
Payment or Second Supplemental Cash Payment; (iv) if the Closing Date Share
Price were at least $5.00, there would be no First Supplemental Cash Payment or
Second Supplemental Cash Payment, regardless of the Anniversary Date Share
Price; and (v) if the Closing Date Share Price were $3.00, the Anniversary Date
Share Price were $5.10 and there were 200,000 PEC Shares Sold, the First
Supplemental Cash Payment would be $96,000 (10% of the product of $2.00 [the
difference between $5.00 and the $3.00 Closing Date Share Price] times 600,000
[the difference between 800,000 and the 200,000 PEC Shares Sold] times the 80%
Reduction Ratio [the $.40 difference between $5.50 and the $5.10 Anniversary
Date Share Price divided by $.50]) and there would be no Second Supplemental
Cash Payment.
(c) If prior to the Anniversary Date the PEC Shares are increased
or decreased into a different number of PEC Shares as a result of a stock
dividend or stock split, the Closing Date Share Price and all dollar figures and
numbers contained in Section 1.2(b) shall be contemporaneously increased or
decreased in inverse proportions.
(d) For purposes of this Agreement: (i) "PEC Shares
Sold/Purchased" means the total of: (x) such number of PEC Shares sold by Padre
or by any transferee of Padre as a part of an incidental registration under the
Registration Rights Agreement attached hereto as Exhibit B, and (y) such number
of PEC Option Shares purchased by PEC pursuant to the provisions of Section 6.1
of this
2
<PAGE> 6
Agreement; (ii) "Closing Date Share Price" and "Anniversary Date Share Price,"
respectively, mean the average of the daily closing price of the shares of
Common Stock of PEC, rounded to four decimal places, as reported under Nasdaq
National Market Issues Reports, the New York Stock Exchange Composite
Transactions or the American Stock Exchange Composite Transactions, as the case
may be, in The Wall Street Journal for each of the first 10 consecutive Trading
Days in the period commencing 12 Trading Days prior to the Closing Date or the
Anniversary Date, as the case may be; (iii) "Trading Day" means a day on which
the National Association of Securities Dealers, Inc., National Market ("Nasdaq
National Market") is open for trading; (iv) "Reduction Ratio" means a fraction
(expressed as a percentage) the numerator of which is equal to the difference
between $5.50 and the greater of $5.00 or the Anniversary Date Share Price (but
not to exceed $5.50) and the denominator of which is $0.50; (v) "Change of
Control" shall be deemed to have occurred if PEC shall be merged or consolidated
into another entity and PEC is not the surviving corporation; and (vi)
"Anniversary Date" means the first to occur of the following: (x) the first
anniversary of the Closing Date; (y) the last Trading Day immediately preceding
the date PEC ceases to exist as a separate entity by way of a Change in Control
or otherwise ("Cessation of Existence"); or (z) the last Trading Day immediately
preceding the date the shares of Common Stock of PEC cease to be traded on the
Nasdaq National Market, the New York Stock Exchange or the American Stock
Exchange ("Cessation of Trading").
SECTION 1.3 Closing. The closing of the Transaction (the
"Closing") shall take place in the offices of The Kleberg Law Firm, PC in Corpus
Christi, Texas, at 9:00 a.m., local time, on the date of this Agreement, or at
such other time and place as PDC and Padre shall agree. (The date on which the
Closing is held is referred to herein as the "Closing Date.")
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PEC AND PDC
PEC and PDC represents and warrants to Padre as follows:
SECTION 2.1 Organization, Standing and Power. Each of PEC and PDC
(i) is a corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware and has the requisite corporate power
and authority to carry on its business as now being conducted, and (ii) is in
good standing in each jurisdiction where the character of its business owned or
held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not individually or
in the aggregate, have a Material Adverse Effect on PEC. "Material Adverse
Change" or "Material Adverse Effect" means, when used with respect to PEC, PDC
or Padre, as the case may be, any change or effect that is or, so far as can
reasonably be determined, is likely to be materially adverse to the assets,
properties, condition (financial or otherwise), business or results of
operations of PEC and its subsidiaries taken as a whole or Padre, as the case
may be.
SECTION 2.2 Authority; Non-Contravention. Each of PEC and PDC has
all requisite power and authority to enter into this Agreement and to consummate
the Transaction. The execution and delivery by each of PEC and PDC of this
Agreement and the consummation by each of PEC and PDC of the Transaction have
been duly authorized by all necessary corporate action on the part of PEC and
PDC, as the case may be. This Agreement has been duly executed and delivered by
PEC and PDC and (assuming the valid authorization, execution and delivery of
this Agreement by Padre) constitutes a valid and binding obligation of PEC and
PDC enforceable against PEC and PDC in accordance with its terms, except to the
extent enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by the effect
of general principles of equity (regardless of whether enforceability is
considered in a proceeding in equity or at law). The execution and delivery of
this Agreement do not, and
3
<PAGE> 7
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
the loss of a material benefit under, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
PEC or PDC under, any provision of (i) the Certificate of Incorporation or
Bylaws of PEC or PDC, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to PDC or PEC, or (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to PDC or PEC or any of
their respective properties or assets, other than, in the case of clauses (ii)
or (iii), any such conflicts, violations, defaults, rights, losses, liens,
security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on PEC or PDC, materially
impair the ability of PEC or PDC to perform its obligations hereunder or prevent
the consummation of any of the transactions contemplated hereby. No filing or
registration with, or authorization, consent or approval of, any domestic
(federal and state), foreign or supranational court, commission, governmental
body, regulatory agency, authority or tribunal (a "Governmental Agency") is
required by or with respect to PEC or PDC in connection with the execution and
delivery of this Agreement by PDC or is necessary for the consummation by PEC or
PDC of the Transaction, except for (i) in connection or in compliance, with the
provisions of the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934 (the "Exchange Act"), (ii) such consents and
approvals, orders, registrations, authorizations, declarations and filings as
may be required under the "Blue Sky" laws of the State of Texas, and (iii) such
other consents, orders, authorizations, registrations, declarations and filings,
the failure of which to be obtained or made would not, individually or in the
aggregate, have a Material Adverse Effect on either PEC or PDC, materially
impair the ability of PEC or PDC to perform its obligations hereunder or prevent
the consummation of the transaction contemplated hereby.
SECTION 2.3 Capital Structure. As of the date hereof, the
authorized capital stock of PEC consists of 50,000,000 shares of common stock,
par value $0.01 per share ("PEC Common Stock") and 1,000,000 shares of preferred
stock, par value $0.01 per share ("PEC Preferred Stock"). At the close of
business on the day immediately preceding the date of this Agreement, (i)
31,671,132 shares of PEC Common Stock were validly issued and outstanding, fully
paid and nonassessable and free of preemptive rights, and (ii) no shares of PEC
Preferred Stock are issued and outstanding. The PEC Common Stock is designated
as a national market security on an inter-dealer quotation system by the
National Association of Securities Dealers, Inc. All shares of PEC Common Stock
issuable pursuant to the Asset Purchase in accordance with this Agreement will
be, when so issued, duly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights.
SECTION 2.4 SEC Documents. PEC has filed all required documents
with the Securities and Exchange Commission ("SEC") since January 1, 1997 (the
"PEC/SEC Documents"). As of their respective dates, the PEC/SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and none of the PEC/SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
consolidated financial statements of PEC (the "PEC Financial Statements")
included in the PEC/SEC Documents comply as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles (except, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly present the consolidated financial position of PEC and its
consolidated subsidiaries (including PDC) as at the dates thereof and the
consolidated results of their operations and statements of cash flows for the
periods then
4
<PAGE> 8
ended (subject, in the case of the unaudited statements, to normal year-end
audit adjustments and to any other adjustments described therein). There has
been no Material Adverse Change in PEC since the date of the most recent PEC
Financial Statements, other than as may be set forth in the Memorandum dated
January 22, 1999 (the "Memorandum") containing a copy of PEC's Annual Report on
Form 10-K for the year ending December 31, 1997, all other reports filed by PEC
with the SEC since January 1, 1998, and PEC's Third Quarter 1998 Quarterly
Report to Stockholders, a copy of which Memorandum has been previously furnished
to Padre.
SECTION 2.5 Brokers. No broker, investment banker or other person
is entitled to any broker's, finder's or similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of PEC or PDC.
SECTION 2.6 Litigation. There is no suit, action, investigation or
proceeding pending or, to the knowledge of the executive officers of PEC,
threatened against PEC at law or in equity before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or before any arbitrator of any kind, that
would impair the ability of PEC to perform its obligations hereunder or to
consummate the transactions contemplated hereby that would have a Material
Adverse Effect on PEC in the event of an unfavorable decision, finding or
outcome, and there is no judgment, decree, injunction, rule or order of any
court, governmental department, commission, board, bureau, agency,
instrumentality or arbitrator to which PEC is subject that would impair the
ability of PEC to perform its obligations hereunder or to consummate the
transactions contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PADRE
Padre represents and warrants to PEC and PDC as follows:
SECTION 3.1 Organization, Standing and Power. Padre is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Texas and has the requisite corporate power and authority
to carry on its business as now being conducted.
SECTION 3.2 Authority; Non-Contravention. Padre has all requisite
power and authority to enter into this Agreement and to consummate the
Transaction. The execution and delivery of this Agreement by Padre and the
consummation by Padre of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Padre. This
Agreement has been duly executed and delivered by Padre and (assuming the valid
authorization, execution and delivery of this Agreement by PEC and PDC)
constitutes a valid and binding obligation of Padre enforceable against it in
accordance with its terms, except to the extent enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws of general applicability relating to or affecting the enforcement
of creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding in equity or
at law). The execution and delivery of this Agreement do not, and the
consummation of the Transaction and compliance with the provisions hereof will
not, conflict with, or result in any violation of, or default (with or without
notice of lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to the loss of a material
benefit under, or result in the creation of any lien, security interest, charges
or encumbrances upon any of the properties or assets of Padre under, any
provision of (i) the Articles of Incorporation or Bylaws of Padre (true and
complete copies of which as of the date hereof have been delivered to PEC and
PDC), (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease
or other agreement, instrument, permit, concession, franchise or license
5
<PAGE> 9
applicable to Padre, or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Padre or any of its respective
properties or assets, other than, in the case of clauses (ii) or (iii), any such
conflicts, violations, defaults, rights, losses, liens, security interests,
charges or encumbrances that individually or in the aggregate, would not have a
Material Adverse Effect on Padre, materially impair the ability of Padre to
perform its obligations hereunder or prevent the consummation of any of the
transactions contemplated hereby. No filing or registration with, or
authorization, consent or approval of, any Governmental Entity is required by or
with respect to Padre in connection with the execution and delivery of this
Agreement by Padre or is necessary for the consummation by Padre of the
Transaction.
SECTION 3.3 Capital Structure. All of the issued and outstanding
shares of Padre capital stock ("Padre Stock") are owned of record and
beneficially by Thomas J. Billings and Marilyn F. Billings. There are no
options, warrants, rights, commitments, agreements, arrangements or undertakings
of any kind to which Padre is a party or by which it is bound obligating Padre
to issue, deliver or sell or cause to be issued, delivered or sold additional
shares of Padre Stock. True and correct copies of the Articles of Incorporation
and Bylaws have been furnished to PEC and PDC.
SECTION 3.4 Environmental Matters.
(a) Except to the extent that the inaccuracy of any of the
following, individually or in the aggregate, would not have a Material Adverse
Effect on Padre, to the Actual Knowledge of Padre:
(i) Padre holds, and is in compliance with and has been in
compliance with for the last three years, all Environmental Permits,
and is otherwise in substantial compliance and has been in substantial
compliance for the last three years with, all applicable Environmental
Laws and there is no condition that is reasonably likely to prevent or
materially interfere prior to the Closing Date with compliance by Padre
with Environmental Laws;
(ii) no modification, revocation, reissuance, alteration,
transfer or amendment of any Environmental Permit, or any review by, or
approval of, any third party of any Environmental Permit is required in
connection with the execution or delivery of this Agreement or the
consummation by Padre of the transactions contemplated hereby or the
operation of the business of Padre on the date of the Closing;
(iii) Padre has not received any Environmental Claim, nor has
any Environmental Claim been threatened against Padre;
(iv) Padre has not entered into, agreed to or is not subject
to any outstanding judgment, decree, order or consent arrangement with
any governmental authority under any Environmental Laws, including
without limitation those relating to compliance with any Environmental
Laws or to the investigation, cleanup, remediation or removal of
Hazardous Materials;
(v) there are no circumstances that are reasonably likely to
give rise to liability under any agreements with any person pursuant to
which Padre would be required to defend, indemnify, hold harmless, or
otherwise be responsible for any violation by or other liability or
expense of such person, or alleged violation by or other liability or
expense of such person, arising out of any Environmental Law; and
(vi) there are no other circumstances or conditions that are
reasonably likely to give rise to liability of Padre under any
Environmental Laws.
6
<PAGE> 10
(b) For purposes of this Agreement, the terms below shall have the
following meanings:
"Acknowledge Knowledge of Padre" means the present awareness
of T Billings.
"Environmental Claim" means any written complaint, notice,
claim, demand, action, suit or judicial, administrative or arbitrable
proceeding by any person to Padre asserting liability or potential
liability (including without limitation, liability or potential
liability for investigatory costs, cleanup costs, governmental response
costs, natural resource damages, property damage, personal injury,
fines or penalties) arising out of, relating to, based on or resulting
from (i) the presence, discharge, emission, release or threatened
release of any Hazardous Materials at any location, (ii) circumstances
forming the basis of any violation or alleged violation of any
Environmental Laws or Environmental Permits, or (iii) otherwise
relating to obligations or liabilities of Padre under any Environmental
Law.
"Environmental Permits" means all permits, licenses,
registrations, exemptions and other governmental authorizations
required under Environmental Laws for Padre to conduct its operations
as presently conducted.
"Environmental Laws" means all applicable foreign, federal,
state and local statutes, rules, regulations, ordinances, orders,
decrees and common law relating in any manner to pollution or
protection of the environment, to the extent and in the form that such
exist at the date hereof.
"Hazardous Materials" means all hazardous or toxic substances,
wastes, materials or chemicals, petroleum (including crude oil or any
fraction thereof) and petroleum products, asbestos and
asbestos-containing materials, pollutants, contaminants and all other
materials and substances, including but not limited to radioactive
materials regulated pursuant to any Environmental Laws or that could
result in liability under any Environmental Laws.
SECTION 3.5 Title. Set forth in Annex 1 and Annex 2 is a
description of the Drilling Rigs, Equipment and Rolling Stock and of the Real
Property, respectively, which description is accurate and complete in all
material respects. Padre has good and, in the case of the Real Property,
indefeasible title to a 100% interest in the Drilling Rigs, Equipment and
Rolling Stock and in the Real Property, subject, in each case, to no Liens
except for (i) Liens for taxes not yet delinquent or the validity of which is
being contested in good faith; and (ii) any Liens arising by operation of law
securing obligations not yet overdue. For purposes of this Agreement "Liens"
means liens, mortgages, pledges, security interests, encumbrances, claims or
charges of any kind.
SECTION 3.6 Labor Matters. (i) Padre is not a party to any
collective bargaining agreement or other material contract or agreement with any
labor organization or other representative of employees nor is any such contract
being negotiated; (ii) there is no material unfair labor practice charge or
complaint pending nor, to the knowledge of the executive officers of Padre,
threatened, with regard to employees of Padre; (iii) there is no labor strike,
material slowdown, material work stoppage or other material labor controversy in
effect, or, to the knowledge of the executive officers of Padre, threatened
against Padre; (iv) as of the date hereof, no representation question exists,
nor to the knowledge of the executive officers of Padre are there any campaigns
being conducted to solicit cards from the employees of Padre to authorize
representation by a labor organization; (v) Padre is not party to, or is not
otherwise bound by, any consent decree with any governmental authority relating
to employees or employment practices of Padre; and (vi) Padre is in compliance
with all applicable agreements, contracts and policies relating to employment,
employment practices, wages, hours and terms and conditions of employment of
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the employees, except where the failure to be in compliance with each such
agreement, contract and policy would not, either singly or in the aggregate,
have a Material Adverse Effect on Padre.
SECTION 3.7 Drilling Contracts. Padre is not a party to any
Drilling Contracts (as defined in Section 4.3 hereof) which have not been
completed as of the date hereof.
SECTION 3.8 Litigation. There is no suit, action, investigation or
proceeding pending or, to the knowledge of the executive officers of Padre,
threatened against Padre at law or in equity before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or before any arbitrator of any kind, that
would impair the ability of Padre to perform its obligations hereunder or to
consummate the transactions contemplated hereby, and there is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, board, bureau, agency, instrumentality or arbitrator to which Padre
is subject that would impair the ability of Padre to perform its obligations
hereunder or to consummate the transactions contemplated hereby.
SECTION 3.9 Drilling Rigs, Equipment and Rolling Stock. Annex 1
sets forth or incorporates by reference a list of all drilling rigs, equipment
and rolling stock relating to the contract drilling operations of Padre, which
list is true, correct and complete in all material respects, all of which
drilling rigs, equipment and rolling stock are included in the Drilling Rigs,
Equipment and Rolling Stock.
SECTION 3.10 Brokers. No broker, investment banker or other person
is entitled to any broker's, finder's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Padre, except for Steven B. Erickson. Padre
will be solely responsible for paying Mr. Erickson for his services.
SECTION 3.11 Vote of the Padre Stockholders. No vote of the
stockholders of Padre is required by law, the Articles of Incorporation or
Bylaws of Padre or otherwise to adopt this Agreement and approve the
Transaction.
ARTICLE IV
ADDITIONAL AGREEMENTS
SECTION 4.1 Fees and Expenses. All costs and expenses incurred by
PEC or PDC in connection with this Agreement and the transactions contemplated
hereby shall be paid by PEC; such costs and expenses incurred by Padre shall be
paid by Padre.
SECTION 4.2 Reasonable Best Efforts. Upon the terms and subject to
the conditions set forth in this Agreement, each of the parties agrees to use
all reasonable best efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Transaction and the
other transactions contemplated by this Agreement and the prompt satisfaction of
the conditions hereto.
SECTION 4.3 Padre Performance of Drilling Contracts. Padre shall
fully perform all obligations of Padre under each of the contract drilling
contracts (collectively, the "Drilling Contracts") to which Padre is a party as
of the Closing Date, if any.
SECTION 4.4 Padre and T Billings Indemnification. On and after the
date of Closing, Padre and Thomas J. Billings ("T Billings"), the Chairman of
the Board of Padre, shall jointly and
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severally indemnify and hold PEC and PDC harmless against and in respect of all
actions, suits, demands, judgments, costs and expenses (including reasonable
attorneys' fees of PEC or PDC), relating to any misrepresentation, breach of any
representation or warranty or non-fulfillment of any agreement on the part of
Padre contained in this Agreement. This indemnification provided for in this
Section 4.4 shall terminate and be of no further force and effect two years from
the Closing Date, except as to any representation or warranty as to which a
written notice of claim for indemnification has been given to Padre and T
Billings prior to the expiration of such two-year period.
SECTION 4.5 PEC and PDC Indemnification. On and after the Closing
Date, PEC and PDC shall jointly and severally indemnify and hold Padre harmless
against and in respect of all actions, suits, demands, judgments, costs and
expenses (including reasonable attorneys' fees of Padre) relating to (i) any
misrepresentation, breach of any representation or warranty or non-fulfillment
of any agreement on the part of PEC or PDC contained in this Agreement or the
Memorandum, or (ii) any of the drilling contracts entered into by PDC or PEC on
or after the Closing Date involving the drilling rigs included as a part of the
Drilling Rigs, Equipment and Rolling Stock.
SECTION 4.6 Public Announcements. Unless otherwise required by law
or the rules and regulations of the SEC or the Nasdaq National Market, neither
PDC, PEC nor Padre shall issue (a) any press release or make any public
statement with respect to the Transaction prior to Closing, or (b) any press
release or make any public statement with respect to the Transaction after
Closing which discloses the Purchase Consideration.
SECTION 4.7 Nasdaq National Market. PEC shall use its reasonable
best efforts to list on the Nasdaq National Market, upon official notice of
issuance to Padre, the shares of PEC Common Stock to be issued in connection
with the Transaction.
SECTION 4.8 Personal Property Taxes. Padre and PDC agree that ad
valorem taxes for 1999 on the Drilling Rigs, Equipment and Rolling Stock shall
be prorated between Padre and PDC to the Closing Date. The parties agree that
the proration of these ad valorem taxes shall be based on the 1999 property tax
statement or statements for ad valorem taxes on the Drilling Rigs, Equipment and
Rolling Stock. The prorations shall be made promptly upon receipt of these tax
statements. Padre agrees that PDC shall have the right to protest the 1999
appraised property values on the Drilling Rigs, Equipment and Rolling Stock. If
PDC elects to do so, Padre will execute and deliver to PDC such documents as PDC
may request in connection with its protest.
SECTION 4.9 Sales and Transfer Taxes. Padre and PDC agree that
Padre will be pay all sales and transfer taxes, if any, attributable to the sale
hereby of the Drilling Rigs and Equipment, and PDC will pay all sales and
transfer taxes, if any, attributable to the sale hereby of the Rolling Stock.
ARTICLE V
CONDITIONS PRECEDENT TO THE TRANSACTION
SECTION 5.1 Conditions to Each Party's Obligation to Effect the
Transaction. The respective obligations of each party to effect the Transaction
shall be subject to the fulfillment or waiver (where permissible) at or prior to
the date of Closing of each of the following conditions:
(a) Nasdaq National Market Listing. The 800,000 shares of PEC
Shares issuable on the Closing Date pursuant to this Agreement shall have been
authorized for listing on the Nasdaq National Market upon official notice of
issuance.
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(b) No Order. No Governmental Entity or court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which is then in effect and has
the effect of prohibiting the Transaction; provided that, in the case of any
such decree, injunction or other order, each of the parties shall have used
reasonable best efforts to prevent the entry of any such injunction or other
order and to appeal as promptly as practicable any decree, injunction or other
order that may be entered.
(c) Lease with Option to Purchase. The Lease with Option to
Purchase relating to the Real Property in the form attached hereto as Exhibit A
shall have been executed and delivered by PDC and Padre.
(d) Registration Rights Agreement. The Registration Rights
Agreement, relating to the PEC Shares, in the form attached hereto as Exhibit B
shall have been executed and delivered by Padre and PEC.
SECTION 5.2 Conditions to Obligation of Padre to Effect the
Transaction. The obligation of Padre to effect the Transaction shall be subject
to the fulfillment at or prior to the Closing of the following additional
conditions; provided that Padre may waive any of such conditions in its sole
discretion:
(a) Performance of Agreements and Representations and
Warranties. PEC and PDC shall have performed in all material respects
each of their agreements contained in this Agreement required to be
performed on or prior to the Closing, and each of the representations
and warranties of PEC and PDC contained in this Agreement shall be true
and correct on and as of the Closing Date as if made on and as of such
date.
(b) Officers' Certificate. PEC and PDC shall have furnished to
Padre a certificate, dated the Closing, signed by the respective
appropriate officers of PEC and PDC, certifying to the effect that to
the best of the knowledge and belief of each of them, the conditions
set forth in Section 5.1 and Section 5.2(a) have been satisfied in
full.
(c) Opinion of Baker & Hostetler LLP. Padre shall have
received an opinion from Baker & Hostetler LLP, counsel to PEC and PDC,
dated the Closing Date, substantially to the effect that:
(i) The incorporation, existence and good standing of PEC and
PDC are as stated in this Agreement; the authorized shares of PEC and
PDC are as stated in this Agreement; all outstanding shares of PEC
Common Stock are duly and validly authorized and issued, fully paid and
nonassessable and have not been issued in violation of any preemptive
right of any stockholders.
(ii) Each of PEC and PDC has full corporate power and
authority to execute, deliver and perform this Agreement and this
Agreement has been duly authorized, executed and delivered by PEC or
PDC, as the case may be, and (assuming due and valid authorization,
execution and delivery by Padre) constitutes the legal, valid and
binding agreement of PEC and PDC, enforceable against PEC and PDC in
accordance with its terms, except to the extent enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer or other similar laws of general applicability
relating to or affecting the enforcement of creditors' rights and by
the effect of general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity or at law), and
except as rights to indemnity may be limited by applicable law.
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<PAGE> 14
(iii) The execution and performance by PEC and PDC of this
Agreement will not violate the Certificate of Incorporation or Bylaws
of PEC or PDC, respectively, and, to the knowledge of such counsel,
will not violate, result in a breach of or constitute a default under
any material lease, mortgage, contract, agreement, instrument, law,
rule, regulation, judgment, order or decree to which PEC or PDC is a
party or by which they or any of their properties or assets may be
bound.
(iv) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body
which has not been obtained is required on behalf of PEC and PDC for
the consummation of the transactions contemplated by this Agreement.
(v) To the knowledge of such counsel, there are no actions,
suits or proceedings, pending or threatened against or affecting PEC or
PDC by any Governmental Entity which seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement.
(vi) The shares of PEC Common Stock to be issued pursuant to
this Agreement will be, when so issued, duly authorized, validly issued
and outstanding, fully paid and nonassessable.
(vii) The 800,000 PEC Shares have been authorized for listing
on the Nasdaq National Market subject to official notice of issuance.
In rendering such opinion, counsel for PEC may rely as to matters of fact upon
the representations of officers of PEC or PDC contained in any certificate
delivered to such counsel and certificates of public officials. Such opinion
shall be limited to the General Corporation Law of the State of Delaware and the
laws of the United States of America and the State of Texas.
(d) Delivery of Purchase Consideration. PEC and PDC shall have
made delivery of the Purchase Consideration as provided in Section 1.2 of this
Agreement.
SECTION 5.3 Conditions to Obligations of PEC and PDC to Effect the
Transaction. The obligations of PEC and PDC to effect the Transaction shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, provided that PEC may waive any such conditions in its
sole discretion:
(a) Performance of Obligations; Representations and Warranties.
Padre shall have performed in all material respects each of its agreements
contained in this Agreement required to be performed on or prior to the Closing
and each of the respective representations and warranties of Padre contained in
this Agreement shall be true and correct on and as of the Closing as if made on
and as of such date.
(b) Officers' Certificate. Padre shall have furnished to PEC a
certificate, dated the Closing, certifying to the effect that to the best of the
knowledge and belief of Padre, the conditions set forth in Section 5.1 and
Section 5.3(a) have been satisfied.
(c) Opinion of The Kleberg Law Firm, a Professional Corporation.
PEC shall have received an opinion from The Kleberg Law Firm, a Professional
Corporation, counsel to Padre, dated the Closing Date, substantially to the
effect that:
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(i) The incorporation, existence and good standing of Padre
are as stated in this Agreement.
(ii) Padre has full corporate power and authority to execute,
deliver and perform this Agreement and its Non-Competition Agreement,
and this Agreement and its Non-Competition Agreement have each been
duly authorized, executed and delivered by Padre, and each (assuming
the due and valid authorization, execution and delivery by PEC and PDC)
constitutes the legal, valid and binding agreement of Padre enforceable
against Padre in accordance with its terms, except to the extent
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws
of general applicability relating to or affecting the enforcement of
creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law), and except as rights to indemnity may be limited by
applicable law.
(iii) The execution and performance by Padre of this Agreement
and its Non-Competition Agreement will not violate the Articles of
Incorporation or Bylaws of Padre and will not violate, result in a
breach of, or constitute a default under, any material lease, mortgage,
contract, agreement, instrument, law, rule, regulation, judgment, order
or decree known to such counsel to which Padre is a party or to which
it or any of its properties or assets may be bound.
(iv) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body
which has not been obtained is required on behalf of Padre for
consummation of the transactions contemplated by this Agreement.
(v) To the knowledge of such counsel, there are no actions,
suits or proceedings, pending or threatened against or affecting Padre
by any Governmental Entity which seek to restrain, prohibit or
invalidate the transactions contemplated by this Agreement.
(vi) The Non-Competition Agreement between PEC, PDC and T
Billings constitutes the legal, valid and binding agreement of T
Billings enforceable against him in accordance with its terms, except
to the extent enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer or other similar laws
of general applicability relating to or affecting the enforcement of
creditors' rights and by the effect of general principles of equity
(regardless of whether enforceability is considered in a proceeding in
equity or at law), and except as rights to indemnity may be limited by
applicable law.
In rendering such opinion, counsel for Padre may rely as to matters of fact upon
the representations of officers of Padre contained in any certificate delivered
to such counsel and certificates of public officials. Such opinion shall be
limited to the laws of the United States of America and the State of Texas.
(d) Bill of Sale and Assignment. Padre shall have executed and
delivered the Bill of Sale and Assignment, in the form attached hereto as
Exhibit C, covering the Drilling Rigs, Equipment and Rolling Stock set forth on
Annex 1.
(e) Non-Competition Agreements. A Non-Competition Agreement in the
respective forms attached hereto as Exhibits D(I) and D(II) shall have been
executed and delivered by PEC, PDC and Padre or T Billings, as the case may be.
(f) Titles. Padre shall have endorsed and delivered the title
certificates to the Rolling Stock described in Annex 1.
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(g) Investment Representation Letter. Padre shall have executed
and delivered an investment representation letter substantially in the form
attached hereto as Exhibit E.
ARTICLE VI
POST-CLOSING AGREEMENTS
Section 6.1 Purchase Option. Padre agrees that PEC shall have the
option ("Option"), exercisable as provided in this Section, to purchase from
Padre up to 300,000 PEC Shares (the "PEC Option Shares") at a price of $5.50 per
share (the "Option Price"). Except as provided below in this Section, the Option
may be exercised on, but only on, the third Trading Day after the first
anniversary of the date on which the PEC Option Shares are issued to Padre
pursuant to Section 1.2 of this Agreement, this date being referred to herein as
the "Option Date." For example, if the PEC Option Shares were issued to Padre on
January 27, 1999, the Option Date would be February 1, 2000. The Option must be
exercised by giving written notice to Padre specifying the number of PEC Option
Shares as to which the Option is exercised accompanied by a certified or bank
check for the full amount of the purchase price. Padre agrees that it will not
sell, transfer or otherwise dispose of any of the PEC Option Shares before the
Option Date or the earlier expiration of the Option as provided in the next two
sentences of this Section. If PEC shall cease to exist as a separate corporate
entity prior to the Option Date other than as a result of a Change of Control,
the Option described in this Section shall become null and void. If in
connection with a Change of Control the PEC Shares are converted into cash, the
Option may be exercised by PEC on, but only on, the Trading Day immediately
preceding the closing date of such Change of Control. If in connection with a
Change of Control the PEC Shares are converted into stock or securities of the
surviving corporation (collectively, the "Surviving Stock"), then the surviving
corporation shall have the option to purchase up to 100% of the Surviving Stock
on the Option Date by paying to Padre an amount equal to the product of (i) the
percentage of the Surviving Stock as to which the option is exercised, times
(ii) $1,650,000. The surviving corporation may exercise its option in the same
manner as required of PEC under this Section. In the event of a stock dividend
or stock split of the shares of PEC Common Stock prior to the Option Date, the
number of PEC Option Shares and the Option Price shall be contemporaneously
increased or decreased, as the case may be, in inverse proportions in the manner
provided in Section 1.2(c) of this Agreement.
ARTICLE VII
GENERAL PROVISIONS
SECTION 7.1 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered personally,
sent by overnight courier or telecopied (with a confirmatory copy sent by
overnight courier) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to PEC or PDC, to:
Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1416
Snyder, Texas 79550
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
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with copies to:
Thomas H. Maxfield, Esq.
Baker & Hostetler LLP
303 East 17th Avenue, Suite 1100
Denver, Colorado 80203-1264
(b) if to Padre, to:
Thomas J. Billings
1111 Hermann Drive 14D
Houston, Texas 77004
with copies to:
Richard L. Leshin, Esq.
The Kleberg Law Firm, P.C.
Suite 900 North Tower
800 N. Shoreline Blvd.
Corpus Christi, Texas 78401
SECTION 7.2 Interpretation. When a reference is made in this
Agreement to a Section, such reference shall be to a Section of this Agreement
unless otherwise indicated, and the words "hereof," "herein" and "hereunder" and
similar terms refer to this Agreement as a whole and not to any particular
provision of this Agreement, unless the context otherwise requires. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
SECTION 7.3 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
SECTION 7.4 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, including the documents and instruments referred to herein, (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties any rights or remedies hereunder; provided, however, that legal
counsel for the parties hereto may rely upon the representations and warranties
contained herein and in the certificates delivered pursuant to Sections 5.2(c)
and 5.3(c).
SECTION 7.5 Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Texas, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 7.6 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties without the prior written consent of the other parties; provided,
however, that Padre may assign some or all of its rights under this Agreement to
T Billings. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and assigns.
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SECTION 7.7 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 7.8 Enforcement of This Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
IN WITNESS WHEREOF, PEC, PDC and Padre have executed this
Agreement as of the date first written above.
PEC:
PATTERSON ENERGY, INC.
By: /s/ JAMES C. BROWN
----------------------------------------------
James C. Brown
Vice President - Finance
PDC:
PATTERSON DRILLING COMPANY
By: /s/ JAMES C. BROWN
----------------------------------------------
James C. Brown
Vice President - Finance
PADRE:
PADRE INDUSTRIES, INC.
By: /s/ THOMAS J. BILLINGS
----------------------------------------------
Thomas J. Billings
Chairman of the Board
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TO INDUCE PATTERSON ENERGY, INC. AND PATTERSON DRILLING COMPANY TO
ENTER INTO THIS AGREEMENT AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE
RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY ACKNOWLEDGED, THE UNDERSIGNED, BEING
AN OFFICER, DIRECTOR AND STOCKHOLDER OF PADRE INDUSTRIES, INC, HEREBY ACCEPTS
AND AGREES TO BE BOUND BY THE INDEMNIFICATION PROVISIONS OF SECTION 4.4 OF THE
ABOVE AGREEMENT.
/s/ THOMAS J. BILLINGS
---------------------------------------------
Thomas J. Billings
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ANNEX 1
TO
AGREEMENT
DESCRIPTION OF DRILLING RIGS, EQUIPMENT AND ROLLING STOCK
A. Drilling Rigs and Equipment
Rig No. Drawworks Manufacturer
------- ----------------------
Rig No. 4................................... RMI Model 4610
Rig No. 7 .................................. Skytop Model H4610
Rig No. 8 .................................. Skytop Model H14610
Rig No. 9................................... RMI Model 4610
Rig No. 10.................................. RMI Model 4610
All parts and equipment, including engines, mud pumps, hooks and
blocks, derricks, substructures, rotary tables, blow-out prevention
equipment, drill bits and all tubular goods on the rigs and in the yard
owned by Padre, all of which are set forth on Attachment A to Appendix
I to the Bill of Sale and Assignment attached to this Agreement as
Exhibit C.
B. Rolling Stock
All rolling stock set forth on Attachment B to Appendix I to the Bill
of Sale and Assignment attached to this Agreement as Exhibit C.
<PAGE> 21
EXHIBIT A
[LEASE WITH OPTION TO PURCHASE]
<PAGE> 22
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement") is made and entered
into as of the ___ day of January, 1999, by and between Patterson Energy, Inc.,
a Delaware corporation (hereinafter called the "Company"), and Padre Industries,
Inc., a Texas corporation (hereinafter called "Padre").
WHEREAS, pursuant to that certain Agreement of even date herewith (the
"Asset Purchase Agreement"), by and between the Company and Padre, the Company
has agreed to issue 800,000 shares of the Company's common stock, par value $.01
per share (the "Common Stock") to Padre; and
WHEREAS, this Agreement is being entered into in connection with and as
a condition to the parties closing the transactions contemplated under the Asset
Purchase Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement the following
terms shall have the following respective meanings:
"Affiliate" shall mean a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, the person specified.
"Closing Date" shall mean the date on which the Shares are issued
to the Holder.
"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
"Exchange Act" shall mean the Securities Exchange Act of 1934, or
any successor thereto, as the same shall be amended from time to time.
"Holder" shall mean Padre and its successors and assigns, and any
subsequent successors and assigns, of the Registrable Securities or any portion
thereof.
The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" shall mean (i) the Shares (as defined
below) and (ii) any securities issued or issuable with respect to the Shares by
way of stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization or
otherwise.
"Registration Expenses" shall mean all expenses incurred by
Company in connection with the Company's complying with Section 3 hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, blue sky fees and
expenses and accountants' expenses, including without limitation, any special
audits or "comfort" letters incidental to or required by any such registration
and any fees and disbursements of underwriters customarily paid by issuers or
sellers of securities (but excluding underwriting discounts and commissions).
Ex. B-1
<PAGE> 23
"Requesting Holder" shall mean any Holder of Registrable
Securities who shall request registration of Registrable Securities pursuant
hereto.
"Securities Act" shall mean the Securities Act of 1933, or any
successor thereto, as the same shall be amended from time to time.
"Shares" shall mean 500,000 shares of the total 800,000 shares of
Common Stock.
2. Restrictions on Transfer. The Shares are being acquired for
investment for Padre's own account and not as a nominee or agent and not with a
present view to the resale or distribution of any part thereof, except in
compliance with the Securities Act. Padre acknowledges that the Shares are
considered "restricted securities" within the meaning of the Securities Act.
3. Registration Under Securities Act, etc.
3.1 Incidental Registration.
(a) Right to Include Registrable Securities. If during the
one-year period ending on the first anniversary of this Agreement
the Company proposes to register any of its equity securities
under the Securities Act, whether or not for sale for its own
account, on a form and in a manner which would permit registration
of Registrable Securities for sale to the public under the
Securities Act, it will each such time give prompt written notice
to all Holders of its intention to do so, describing such
securities and specifying the form and manner and the other
relevant facts involved in such proposed registration and upon the
written request of any such Holder delivered to the Company within
twenty (20) business days after the giving of any such notice
(which request shall specify the Registrable Securities intended
to be disposed of by such Holder and the intended method or
methods of disposition thereof), the Company will use its best
efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to
register by Holders to the extent requisite to permit the
disposition (in accordance with the intended methods as aforesaid)
of the Registrable Securities so to be registered, provided that
(i) if, at any time after giving such written notice of its
intention to register any of its securities and prior to the
effective date of the registration statement filed in connection
with such registration, the Company shall determine for any reason
not to register such securities, the Company may, at its election
give written notice of such determination to each Holder and
thereupon shall be relieved of its obligation to register any
Registrable Securities in connection with such registration (but
not from its obligation to pay the Registration Expenses in
connection therewith as provided herein); (ii) if (A) the
registration so proposed by the Company involves an underwritten
primary registration on behalf of the Company to be distributed
(on a firm commitment basis) by or through one or more
underwriters of recognized standing under underwriting terms
appropriate for such a transaction, and (B) the managing
underwriter of such underwritten offering shall advise the Company
in writing that, in its good faith judgment, all the shares to be
offered by the Company and other parties are greater than can be
accommodated without interfering with the successful marketing of
all the securities to be then offered publicly for the account of
the Company, then the managing underwriter or underwriters shall
include in such registration (1) first, the securities the Company
proposes to register to sale, and (2) second, the Registrable
Securities requested to be included in such registration by the
Requesting Holders, pro rata, and (3) any other securities
requested by persons other than Holders to be included in such
registration, if any, pro rata; (iii) if (A) the registration so
proposed by the Company is an underwritten secondary registration
on behalf of holders
Ex. B-2
<PAGE> 24
of the Company's securities, to be distributed (on a firm
commitment basis) by or through one or more underwriters of
recognized standing under underwriting terms appropriate for such
a transaction, and (B) the managing underwriter of such
underwritten offering shall advise the Company in writing that, in
its good faith judgment, all the shares to be offered by such
requesting holder, the Company and other parties are greater than
can be accommodated without interfering with the successful
marketing of all of the securities to be then offered publicly for
the account of the Company, then the managing underwriter shall
include in such registration (1) first, the securities requested
to be included therein by the holders requesting such
registration, (2) second, the securities which are Registrable
Securities, (3) any securities to be included in such registration
on behalf of the Company, and (4) any other securities requested
by persons other than Holders to be included in such registration,
if any, pro rata.
(b) Expenses. The Company will pay all Registration Expenses
in connection with each registration of Registrable Securities
pursuant to this Agreement.
3.2 Registration Procedures. If and whenever the Company
effects the registration of any Registrable Securities under the Securities Act
as provided in Section 3.1, the Company will promptly:
(a) prepare and (in any event within sixty (60) days) file
with the Commission a registration statement with respect to such
Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective, such
registration statement to comply as to form and content in all
material respects with the Commission's forms, rules and
regulations.
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions
of the Securities Act with respect to the disposition of all
Registrable Securities and other securities covered by such
registration statement until the earlier of (i) such time as all
of such Registrable Securities and other securities have been
disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement or (ii) the expiration of six (6) months in the case of
a registration of Registrable Securities, after such registration
statement becomes effective, and will furnish to each such seller
prior to the filing thereof a copy of any amendment or supplement
to such registration statement or prospectus and shall not file
any such amendment or supplement to which any such seller shall
have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations
thereunder;
(c) furnish to each seller of Registrable Securities one
originally executed registration statement, with all amendments,
supplements and additional documentation; such number of conformed
copies of such registration statement and of each such amendment
and supplement thereto (in each case including all exhibits) as
such seller may reasonable request; such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus and any summary prospectus) as required by
the Securities Act as such seller may reasonably request; such
documents, if any, incorporated by reference in such registration
statement or prospectus; and such other documents as such seller
may reasonable request.
Ex. B-3
<PAGE> 25
(d) use its reasonable best efforts to register or qualify
all Registrable Securities and other securities covered by such
registration statement under such other securities or blue sky
laws of such jurisdiction as each seller shall reasonably request,
to keep such registration or qualification in effect for so long
as such registration statement stays in effect, and do any and all
other acts and things which may be necessary or advisable to
enable such seller to consummate the disposition in such
jurisdictions of its Registrable Securities covered by such
registration statement, except that the Company shall not for any
such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but
for the requirements of this subdivision (d) be obligated to be so
qualified, or to subject itself to taxation in any such
jurisdiction, or to consent to general service of process in any
such jurisdiction;
(e) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make
available to its securities holders, as soon as reasonably
practicable, an earnings statement covering the period of at least
twelve (12) months beginning with the first month of the first
fiscal quarter after the effective date of such registration
statement, if such earnings statement is necessary to satisfy the
provisions of Section 11(a) of the Securities Act;
(f) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such
registration statement from and after a date not later than the
effective date of such registration statement; and
(g) use its reasonable best efforts to list all Common Stock
covered by such registration statement on each securities exchange
on which any Common Stock is then listed or quote all such Common
Stock on NASDAQ if the Company's Common Stock is quoted on NASDAQ,
or, if the Company's Common Stock is not then quoted on NASDAQ or
listed on any national securities exchange, use its best efforts
to have such Common Stock covered by such registration statement
quoted on NASDAQ or, at the option of the Company, listed on a
national securities exchange.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing and as shall be required by law or by the
Commission in connection therewith.
3.3 Underwritten Offerings.
(a) Inclusion of Registrable Securities. If the Company at
any time proposed to register any of its securities under the
Securities Act as contemplated by Section 3.1 and such securities
are to be distributed by or through one or more underwriters, the
Company will use its best efforts, if requested by any Holder who
requests incidental registration of Registrable Securities in
connection therewith pursuant to Section 3.1, to arrange for such
underwriters to include the Registrable Securities to be offered
and sold by such Holder among the securities to be distributed by
or through such underwriters; provided that, for purposes of this
sentence, best efforts shall not require the Company to reduce the
amount of sales price of such securities proposed to be
distributed by or through such underwriters. Holders of
Registrable Securities to be distributed by such underwriters
shall be parties to the underwriting agreement between the Company
and such underwriters and the representations and warranties by,
and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the
benefit of such Holders of Registrable Securities. The Company
will
Ex. B-4
<PAGE> 26
cooperate with such Holders to the end that the conditions
precedent to the obligations of such Holders under such
underwriting agreement shall not include conditions that are not
customary in underwriting agreements with respect to combined
primary and secondary distributions and shall be otherwise
satisfactory to such Holders. No such Holder shall be required by
the Company to make any representations or warranties other than
reasonable representations, warranties or agreements regarding
such Holder, such Holder's Registrable Securities and such
Holder's intended method or methods of distribution and any other
representations required by law.
(b) Holdback Agreements. If any registration pursuant to
Section 3.1 shall be in connection with an underwritten public
offering, each Holder of Registrable Securities agrees by
acquisition of such Registrable Securities, if so required by the
managing underwriter, not to effect any public sale or
distribution of Registrable Securities (other than as part of such
underwritten public offering) within seven (7) days prior to the
effective date of such registration statement or ninety (90) days
after the effective date of such registration statement.
3.4 Indemnification.
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities
Act, the Company will, and hereby does, indemnify and hold
harmless Holder, its directors, trustees, employees, and officers
and each other person, if any, who controls Holder within the
meaning of the Securities Act, in each case, against any losses,
claims, damages, liabilities or expenses, joint or several
(including, without limitation, the costs and expenses of
investigating, preparing for and defending any legal proceeding,
including reasonable attorney's fees), to which such Holder or any
such director, trustee, officer, employee or controlling person
may become subject under the Securities Act or otherwise, insofar
as such losses, claims, damages, liabilities or expenses (or
actions or proceedings in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in any registration statement under
which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any
document incorporated by reference therein, or (ii) any omission
or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse Holder and each such
director, trustee, officer, employee, and controlling person for
any legal or any other expenses incurred by them in connection
with investigating or defending or settling any such loss, claim,
liability, action or proceeding; provided that the Company shall
not be liable in any such case to the extent that any loss, claim,
damage, liability or expense (or action or proceeding in respect
thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in
such registration statement, any such preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished
to the Company through an instrument duly executed by Holder or
any such director, trustee, officer, employee or controlling
person specifically stating that it is for use in preparation
thereof. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of Holder or
any such director, trustee, officer, employee or controlling
person and shall survive the transfer of such securities by
Holder. The Company will make provision for contribution in lieu
of any such indemnity that may be disallowed as shall be
reasonably requested by Holder.
Ex. B-5
<PAGE> 27
(b) Indemnification by Holder. In the event of any
registration of any securities of the Company under the Securities
Act (pursuant to which Holder sells Registrable Securities covered
by such registration statement), Holder will, and hereby does,
indemnify and hold harmless the Company, each director of the
Company, each officer of the Company who shall sign such
registration statement and each other person, if any, who controls
the Company within the meaning of the Securities Act from and
against losses, claims, damages and liabilities caused by any
untrue statement or alleged untrue statement of material fact
contained in such registration statement, any preliminary
prospectus, final prospectus or summary prospectus included
therein, or any amendment or supplement thereto, or caused by any
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make statements
therein not misleading, if such statement or omission was made in
reliance upon and in conformity with written information furnished
to the Company through an instrument duly executed by Holder
specifically stating that it is for use in the preparation of such
registration statement, preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement. Such indemnity shall
remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any such director, officer
or controlling person and shall survive the transfer of such
securities by Holder.
(c) Notice of Claims, etc. In case any proceeding (including
any governmental investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to
this Section 3.4, such person (hereinafter called the "indemnified
party") shall promptly notify the person against whom such
indemnity may be sought (hereinafter called the "indemnifying
party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to
the indemnified party to represent the indemnified party and any
other party the indemnifying party may designate in such
proceeding and shall pay the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel,
but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention
of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying
party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or
potential differing interests between them. The indemnifying party
shall not be liable for the settlement of any proceeding effected
without its written consent, but if settled with such consent or
if there is a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
(d) Indemnification Unavailable. If the indemnification
provided for in this Section 3.4 is unavailable as a matter of law
to an indemnified party in respect of any losses, claims, damages
or liabilities referred to therein, then each indemnifying party
under any such paragraph, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by such indemnified party
on the one hand and the indemnifying parties on the other or (ii)
if the allocation provided by clause (i) above is not permitted by
applicable law, or such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but
also the relative fault of such indemnified party on the one hand
and the indemnifying parties on the other in connection with the
statement or omissions which resulted in such losses, claims,
Ex. B-6
<PAGE> 28
damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of such indemnified party and
the indemnifying parties shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact
relates to information supplied by such parties and the parties'
relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The parties
agree that it would not be just and equitable if contribution
pursuant to this Section 3.4(d) were determined by pro rata
allocation or by any other method of allocation which does not
take account of the equitable considerations referred to above.
The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to above
shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses incurred by such indemnified
party in connection with investigating, defending or settling any
such action or claim.
(e) No Settlement, etc. No indemnifying party shall, except
with the written consent of the indemnified party, consent to
entry of any judgment or entry into settlement that does not
include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or action. No Holder or
person controlling such Holder other than the Company shall be
obligated to make contribution hereunder that in the aggregate
exceeds the total public offering price of the Registrable
Securities sold by such Holder, less the aggregate amount of any
damages that such Holder and its controlling persons have
otherwise been required to pay in respect to the same claim or any
substantially similar claim. The obligations of such Holders to
contribute are several in proportion to their respective ownership
of the securities covered by such registration statement and not
joint.
(f) Indemnity Operative and in Full Force. The indemnity and
contribution agreements contained in this Section 3.4 shall remain
operative and in full force and effect regardless of any
termination of this Agreement.
4. Rule 144. At all times following completion by the Company of its
initial public offering of equity securities pursuant to registration in
accordance with the Securities Act, the Company shall take such action as Holder
may reasonably request, all to the extent required from time to time to enable
such Holder to sell shares of Registrable Securities without registration under
the Securities Act within the limitation of the exemptions provided by (a) Rule
144 under the Securities Act, as such Rule may be amended from time to time, or
(b) any similar rule or regulation hereafter adopted by the Commission. Upon the
request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
5. Amendments and Waivers. This Agreement may be amended, and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained a
written consent to such amendment, action or omissions to act of the Holder or
Holders of at least 51% or more of the shares of Registrable Securities (and, in
the case of any amendment, action or omission to act which adversely affects any
Holder of Registrable Securities or a group of holders of Registrable
Securities, the written consent of each such Holder or each member of such
group).
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the Holder of such
Registrable Securities for purposes of any request or other action by any Holder
or Holders of Registrable Securities pursuant to this Agreement or any
determination of any number or
Ex. B-7
<PAGE> 29
percentage of shares of Registrable Securities held by any Holder or Holders of
Registrable Securities contemplated by this Agreement. If the beneficial owner
of any Registrable Securities so elects, the Company may require assurances
reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities.
7. Notices. Notices and other communications under this Agreement
shall be in writing and shall be sent by registered mail, postage prepaid,
addressed:
(a) to any Holder at the address provided to the Company in
writing by such Holder or as shown on stock transfer books of the
Company unless such Holder has advised the Company in writing of a
different address as to which notices shall be sent under this
Agreement, and
(b) if to the Company at P.O. Drawer 1416, Snyder, Texas 79550 to
the attention of its President or to such other address as the Company
shall have furnished to each Holder.
8. Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other party; provided that Padre may
assign this Agreement to an Affiliate of Padre without the prior written consent
of the Company, but with reasonably prompt notice to the Company of such
assignment.
9. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, whether so expressed or not, and, in particular, shall inure
to the benefit of and be enforceable by, any Holder or Holders of Registrable
Securities. This Agreement embodies the entire agreement and understanding
between the Company and the other parties hereto with respect to the subject
matter hereof and supersedes all prior agreements and understandings relating to
the subject matter hereof. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for purposes of reference only and shall not limit or
otherwise affect the meaning hereof. This Agreement may be executed in any
number of counterparts, each of which shall be an original but all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
PATTERSON ENERGY, INC.
By:
-------------------------------------------------
James C. Brown
Vice President - Finance
PADRE INDUSTRIES, INC.
By:
-------------------------------------------------
Thomas J. Billings
President
Ex. B-8
<PAGE> 30
EXHIBIT C
BILL OF SALE AND ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS, that, pursuant to that certain
Agreement, dated January ___, 1999 (the "Agreement"), among PATTERSON ENERGY,
INC., a Delaware corporation ("PEC"), PATTERSON DRILLING COMPANY ("PDC"), a
Delaware corporation wholly owned by PEC, and PADRE INDUSTRIES, INC. ("Padre"),
a Texas corporation (Padre is referred to herein as the "Assignor"), the
Assignor, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, hereby grants, bargains, sells, conveys and
transfers unto PDC (the "Assignee"), all of the Assignor's right, title and
interest in and to the Drilling Rigs, Equipment and Rolling Stock set forth in
Appendix I attached hereto and incorporated herein by this reference ("Assets").
Assignor disclaims to the maximum extent permitted by law any and
all implied warranties (other than with respect to title) concerning the Assets.
TO HAVE AND TO HOLD the same unto the Assignee and the Assignee's
successors and assigns forever. The Assignor hereby covenants and agrees that it
has the full right, power and authority to sell, convey and transfer the
foregoing property to the Assignee pursuant to this Bill of Sale and Assignment.
IN WITNESS WHEREOF, the Assignor has caused this Bill of Sale and
Assignment to be duly executed by its duly authorized officer as of the ____ day
of January, 1999.
PADRE:
PADRE INDUSTRIES, INC.
By:
----------------------------------------------
Thomas J. Billings
Chairman of the Board
Ex. C-1
<PAGE> 31
APPENDIX I
TO
BILL OF SALE AND ASSIGNMENT
FROM
PADRE INDUSTRIES, INC.
TO
PATTERSON DRILLING COMPANY
(List of Assets Assigned)
A. Drilling Rigs and Equipment
Rig No. Drawworks Manufacturer
------- ----------------------
Rig No. 4............................... RMI Model 4610
Rig No. 7 .............................. Skytop Model H4610
Rig No. 8 .............................. Skytop Model H14610
Rig No. 9............................... RMI Model 4610
Rig No. 10.............................. RMI Model 4610
All parts and equipment, including engines, mud pumps, hooks and
blocks, derricks, substructures, rotary tables, blow-out prevention
equipment, drill bits and all tubular goods on the rigs and in the yard
owned by Padre, all of which are set forth on Attachment A to this
Appendix I to the Bill of Sale and Assignment.
B. ROLLING STOCK
All rolling stock set forth on Attachment B to this Appendix I to the
Bill of Sale and Assignment.
Ex. C-2
<PAGE> 32
EXHIBIT D(I)
PATTERSON ENERGY, INC.
AND
PATTERSON DRILLING COMPANY
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT is made and entered into this
day of January, 1999 (this "Agreement"), between and among PATTERSON ENERGY,
INC., a Delaware corporation ("PEC"), PATTERSON DRILLING COMPANY, a Delaware
corporation ("PDC") wholly owned by PEC, and PADRE INDUSTRIES, INC., a Texas
corporation ("Padre").
RECITALS:
A. Simultaneously with the execution of this Agreement, PDC has
consummated the transactions contemplated by that certain Agreement, dated
January 27, 1999 (the "Asset Purchase Agreement"), among PEC, PDC and Padre
providing for, among other things, the purchase by PDC of the drilling rigs,
related equipment and rolling stock owned by Padre and the lease by PDC of
certain real property, with improvements thereon, owned by Padre.
B. The execution and delivery of this Agreement is a condition to
the consummation of the transactions contemplated by the Asset Purchase
Agreement, and the parties are entering into this Agreement in order to fulfill
such condition.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Period of Agreement.
The period of this Agreement shall commence on the date hereof and
remain in effect through the earlier of: (i) January 27, 2004, or (ii) 30 days
after the date on which payments are to be made to Padre pursuant to Section 1.2
of the Asset Purchase Agreement, if the payments are not made during this 30-day
period (the "Non-Compete Period").
2. Covenant Not to Compete.
(a) Padre covenants and agrees that during the Non-Compete Period,
Padre shall not, without the prior written consent of PEC and PDC, directly or
indirectly, alone or in association with any other person, carry on, be engaged,
concerned, or take part in, render services to, or own, share in the earnings
of, or invest in the stock, bonds, or other securities of, any person which is
engaged in the business of contract drilling oil and gas wells within the State
of Texas (the "Competitive Business"); provided, however, that Padre may: (i)
invest and/or engage in any business that routinely provides third-party
services (as such term is commonly used in the contract oil and gas well
drilling business) to a Competitive Business, but is not engaged in the actual
conduct of a Competitive Business; or (ii) invest in stock, bonds, or other
securities of any Competitive Business (but without otherwise participating in
the Competitive Business) if: (A) such stock, bonds, or other securities are
listed on any national securities exchange or are registered under Section 12(g)
of the Securities Exchange Act of 1934, as amended; (B) the investment does not
exceed, in the case of any class of capital stock of any one issuer, two percent
Ex. D(I)-1
<PAGE> 33
(2%) of the issued and outstanding shares, or, in the case of bonds or other
securities of any one issuer, two percent (2%) of the aggregate principal amount
thereof issued and outstanding; and (C) such investment would not prevent,
directly or indirectly, the transaction of business by PEC or PDC or any
affiliate of PEC or PDC with any state, district, territory, or possession of
the United States or any governmental subdivision, agency, or instrumentality
thereof by virtue of any statute, law, regulation or administrative practice.
The period of time during which Padre is prohibited from engaging in certain
activities by this Section shall be extended by the length of time during which
Padre is in breach of the terms of this section.
(b) It is understood by and between the parties hereto that the
foregoing covenant by Padre not to enter into competition with PEC or PDC as set
forth in Section 2(a) hereof is an essential element of this Agreement and the
Asset Purchase Agreement and that, but for the agreement of Padre to comply with
such covenant, neither PEC nor PDC would have agreed to enter into this
Agreement or the Asset Purchase Agreement. PEC and PDC on the one hand, and
Padre on the other hand, have independently consulted with their respective
counsel and have been advised in all respects concerning the reasonableness and
propriety of such covenant, with specific regard to the nature of the business
conducted by PEC and PDC and their respective affiliates. Padre also agrees that
such covenant is reasonable in scope, geographic area, and duration, and that
compliance with such covenant would not impose economic hardship on Padre.
3. Restrictions on Soliciting Business of PEC and PDC.
Padre further covenants and agrees that during the Non-Compete
Period, Padre will not, either for itself or for any other person or entity,
directly or indirectly, engage in any of the following activities in a
Competitive Business without the express prior written consent of PEC and PDC:
(a) Solicit or hire any of the employees of PEC or PDC or solicit
or take away any of PEC's or PDC's customers, lessors, or suppliers or attempt
any of the foregoing;
(b) Acquire or attempt to acquire rights providing any product or
service in a Competitive Business within the territory described in Section 2
hereof; or
(c) Engage in any act which would interfere with or harm any
business relationship PEC or PDC has with any customer, lessor, employee,
principal or supplier.
4. Specific Performance.
Without intending to limit the remedies available to PEC or PDC,
Padre acknowledges that PEC or PDC will have no adequate remedies at law if
Padre violates the terms of Section 2 or 3, hereof. In such event, Padre agrees
that PEC or PDC shall have the right, in addition to any other rights it may
have, to obtain in any court of competent jurisdiction specific performance of
such Sections of this Agreement or injunctive relief to restrain any breach or
threatened breach thereof. Nothing herein shall be construed as prohibiting PEC
or PDC from pursuing any other remedies available to PEC or PDC (whether at law
or in equity) for such breach or threatened breach, including, without
limitation, the recovery of monetary damages from Padre.
The provisions of this Section 4 shall survive the expiration,
termination or cancellation of this Agreement.
Ex. D(I)-2
<PAGE> 34
5. Attorneys Fees and Costs.
If an action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys fees, costs and necessary expenses in addition to any other
relief to which that party may be entitled. This provision is applicable to this
entire Agreement.
6. Representations and Warranties of PEC, PDC and Padre.
(a) Representations and Warranties of PEC and PDC. PEC and PDC
hereby joint and severally represent and warrant to Padre that: (i) it has all
requisite power to enter into and perform their obligations under this
Agreement; (ii) this Agreement has been duly and validly authorized by all
necessary corporate action on the part of PEC and PDC; (iii) the execution of
this Agreement by PEC and PDC and performance of their obligations hereunder do
not require the consent or approval of any other party; and (iv) this Agreement
is a valid and binding obligation of PEC and PDC.
(b) Representations and Warranties of Padre. Padre hereby
represents and warrants to PEC and PDC that: (i) Padre has the capacity and
power to enter into and perform obligations of Padre under this Agreement; (ii)
Padre has duly and validly executed this Agreement; (iii) the execution of this
Agreement and performance of obligations of Padre hereunder do not require the
consent or approval of any other party; and (iv) this Agreement constitutes a
valid and binding obligation of Padre.
7. General Provisions.
(a) Compliance with Laws. The parties agree that they will comply
with all applicable laws and regulations of government bodies or agencies in
their respective performance of their obligations under this Agreement.
(b) Governing Law and Construction. This Agreement will be
governed by and construed in accordance with the laws of the State of Texas
without reference to its conflict-of-laws principles. This Agreement's final
form resulted from review and negotiations among the parties and their
attorneys, and no part of this Agreement should be construed against any party
on the basis of authorship.
(c) Forum for Dispute Resolution. If any dispute arises among the
parties concerning the interpretation or performance of any portion of this
Agreement which the parties are unable to resolve themselves, and any party
brings an action against any other party seeking a declaratory order, specific
performance, damages, or any other legal or equitable relief based on this
Agreement, the parties agree that the forum for any such action shall be an
appropriate federal or state court in Texas having jurisdiction, agree that
venue will be proper in such courts, and waive any objections based on
inconvenience of the forum, and further agree that the prevailing party in any
such action, as determined by the court, shall be awarded its reasonable
attorneys' fees and costs in addition to any relief or judgment the court
awards.
(d) Entire Agreement; Amendment. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter
contained herein and supersedes any previous oral or written communications,
representations, understandings or agreements with respect thereto. The terms of
this Agreement may be modified only in a writing, signed by authorized
representatives of both parties.
Ex. D(I)-3
<PAGE> 35
(e) Assignability. This Agreement will be binding upon the
parties' respective successors and permitted assigns. Neither party may assign
this Agreement and/or any of its rights and/or obligations hereunder without the
prior written consent of the other party, and any such attempted assignment will
be void; provided, however, that PEC or PDC may assign this Agreement to a
subsidiary or affiliate without the prior written consent of Padre, and provided
further that a transfer by PEC or PDC as a result of a merger or sale of all or
substantially all of the assets of PDC or PEC to a third party that assumes
PDC's or PEC's obligations and rights hereunder, as the case may be, by
operation of law or otherwise, shall not constitute a prohibited assignment
under this Section 7(e).
(f) Waiver. A waiver of a breach or default under this Agreement
will not constitute a waiver of any other breach or default. Failure or delay by
either party to enforce compliance with any term or condition of this Agreement
will not constitute a waiver of such term or condition.
(g) Severability. If any provision of this Agreement is declared
to be invalid, the parties agree that such invalidity will not affect the
validity of the remaining provisions of this Agreement, and further agree, to
the extent possible, to substitute for the invalid provision a valid provision
that approximates the intent and economic effect of the invalid provision as
closely as possible.
(h) Headings. The titles of the Sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
(i) Notice. Any notice, request, consent, demand or other
communication required to be given under this Agreement will be in writing and
will be given personally, by facsimile or by mailing the same, first-class,
postage prepaid to the appropriate address and facsimile number set forth below
or to such other person or at such other address as may hereafter be designated
by like notice. Notices by mail will be considered delivered and become
effective three days after the mailing thereof. All notices by facsimile will be
considered delivered and become effective immediately upon the confirmed (by
answer back or other tangible printed verification or successful receipt)
sending thereof.
To PEC: Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1410
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
To PDC: Patterson Drilling Company
4510 Lamesa Highway
P.O. Drawer 1410
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: A. Glenn Patterson
President and Chief Operating Officer
Ex. D(I)-4
<PAGE> 36
To Padre: Padre Industries, Inc.
c/o The Kleberg Law Firm, P.C.
Suite 900 North Tower
800 N. Shoreline Blvd.
Corpus Christi, Texas 78401
Attention: Richard L. Leshin
To T Billings: Thomas J. Billings
c/o The Kleberg Law Firm, P.C.
Suite 900 North Tower
800 N. Shoreline Blvd.
Corpus Christi, Texas 78401
Attention: Richard L. Leshin
(j) Counterparts. This Agreement may be executed in counterparts
and by the parties hereto in separate counterparts, each of which will be deemed
an original, but all of which together will constitute one and the same
instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to
be executed by their respective representatives as of the day and year first
above written.
PEC:
PATTERSON ENERGY, INC.
By:
-------------------------------------------
James C. Brown
Vice President - Finance
PDC:
PATTERSON DRILLING COMPANY
By:
-------------------------------------------
James C. Brown
Vice President - Finance
PADRE:
PADRE INDUSTRIES, INC.
By:
-------------------------------------------
Thomas J. Billings
Chairman of the Board
Ex. D(I)-5
<PAGE> 37
EXHIBIT D(II)
PATTERSON ENERGY, INC.
AND
PATTERSON DRILLING COMPANY
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT is made and entered into this
day of January, 1999 (this "Agreement"), between and among PATTERSON ENERGY,
INC., a Delaware corporation ("PEC"), PATTERSON DRILLING COMPANY, a Delaware
corporation ("PDC") wholly owned by PEC, and THOMAS J. BILLINGS, an individual
residing in Corpus Christi, Texas ("T Billings").
RECITALS:
A. Simultaneously with the execution of this Agreement, PDC has
consummated the transactions contemplated by that certain Agreement, dated
January 27, 1999 (the "Asset Purchase Agreement"), among PEC, PDC and PADRE
INDUSTRIES, INC. ("Padre"), providing for, among other things, the purchase by
PDC of the drilling rigs, related equipment, rolling stock and certain real
property with improvements thereon owned by Padre.
B. T Billings is an officer, a director and one of two
stockholders of Padre.
C. The execution and delivery of this Agreement is a condition to
the consummation of the transactions contemplated by the Asset Purchase
Agreement, and the parties are entering into this Agreement in order to fulfill
such condition.
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Period of Agreement.
The period of this Agreement shall commence on the date hereof and
remain in effect through the earlier of (i) January 27, 2004, (ii) the death of
T Billings, or (iii) 30 days after the date on which payments are to be made to
Padre pursuant to Section 1.2 of the Asset Purchase Agreement, if the payments
are not made during this 30-day period (the "Non-Compete Period").
2. Covenant Not to Compete.
(a) T Billings covenants and agrees that during the Non-Compete
Period, T Billings shall not, without the prior written consent of PEC and PDC,
directly or indirectly, and whether as a principal or as an agent, officer,
director, employee, consultant, or otherwise, alone or in association with any
other person, carry on, be engaged, concerned, or take part in, render services
to, or own, share in the earnings of, or invest in the stock, bonds, or other
securities of, any person which is engaged in the business of contract drilling
oil and gas wells within the State of Texas (the "Competitive Business");
provided, however, that T Billings may: (i) invest and/or engage in any business
that routinely provides third-party services (as such term is commonly used in
the contract oil and gas well drilling business) to a Competitive Business, but
is not engaged in the actual conduct of a Competitive Business; or (ii) invest
in stock, bonds, or other securities of any Competitive Business (but without
otherwise participating in the
Ex. D(II)-1
<PAGE> 38
Competitive Business) if: (A) such stock, bonds, or other securities are listed
on any national securities exchange or are registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended; (B) the investment does not exceed,
in the case of any class of capital stock of any one issuer, two percent (2%) of
the issued and outstanding shares, or, in the case of bonds or other securities
of any one issuer, two percent (2%) of the aggregate principal amount thereof
issued and outstanding; and (C) such investment would not prevent, directly or
indirectly, the transaction of business by PEC or PDC or any affiliate of PEC or
PDC with any state, district, territory, or possession of the United States or
any governmental subdivision, agency, or instrumentality thereof by virtue of
any statute, law, regulation or administrative practice. The period of time
during which T Billings is prohibited from engaging in certain activities by
this Section shall be extended by the length of time during which T Billings is
in breach of the terms of this section.
(b) It is understood by and between the parties hereto that the
foregoing covenant by T Billings not to enter into competition with PEC or PDC
as set forth in Section 2(a) hereof is an essential element of this Agreement
and the Asset Purchase Agreement and that, but for the agreement of T Billings
to comply with such covenant, neither PEC nor PDC would have agreed to enter
into this Agreement or the Asset Purchase Agreement. PEC and PDC on the one hand
and T Billings on the other hand have independently consulted with their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenant, with specific regard to the
nature of the business conducted by PEC and PDC and their respective affiliates.
T Billings also agrees that such covenant is reasonable in scope, geographic
area, and duration, and that compliance with such covenant would not impose
economic or professional hardship on T Billings.
3. Restrictions on Soliciting Business of PEC and PDC.
T Billings further covenants and agrees that during the
Non-Compete Period, T Billings will not, either for himself or for any other
person or entity, directly or indirectly, engage in any of the following
activities in a Competitive Business without the express prior written consent
of PEC and PDC:
(a) Solicit or hire any of the employees of PEC or PDC or solicit
or take away any of PEC's or PDC's customers, lessors, or suppliers or attempt
any of the foregoing;
(b) Acquire or attempt to acquire rights providing any product or
service in a Competitive Business within the territory described in Section 2
hereof; or
(c) Engage in any act which would interfere with or harm any
business relationship PEC or PDC has with any customer, lessor, employee,
principal or supplier.
4. Specific Performance.
Without intending to limit the remedies available to PEC or PDC, T
Billings acknowledges that PEC or PDC will have no adequate remedies at law if T
Billings violates the terms of Section 2 or 3, hereof. In such event, T Billings
agrees that PEC or PDC shall have the right, in addition to any other rights it
may have, to obtain in any court of competent jurisdiction specific performance
of such Sections of this Agreement or injunctive relief to restrain any breach
or threatened breach thereof. Nothing herein shall be construed as prohibiting
PEC or PDC from pursuing any other remedies available to PEC or PDC (whether at
law or in equity) for such breach or threatened breach, including, without
limitation, the recovery of monetary damages from T Billings.
The provisions of this Section 5 shall survive the expiration,
termination or cancellation of this Agreement.
Ex. D(II)-2
<PAGE> 39
5. Attorneys Fees and Costs.
If an action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys fees, costs and necessary expenses in addition to any other
relief to which that party may be entitled. This provision is applicable to this
entire Agreement.
6. Representations and Warranties of PEC, PDC and T Billings.
(a) Representations and Warranties of PEC and PDC. PEC and PDC
hereby jointly and severally represent and warrant to T Billings that: (i) they
have all requisite power to enter into and perform their obligations under this
Agreement; (ii) this Agreement has been duly and validly authorized by all
necessary corporate action on the part of PEC and PDC; (iii) the execution of
this Agreement by PEC and PDC and performance of their obligations hereunder do
not require the consent or approval of any other party; and (iv) this Agreement
is a valid and binding obligation of PEC and PDC.
(b) Representations and Warranties of T Billings. T Billings
hereby represents and warrants to PEC and PDC that: (i) T Billings has the
capacity and power to enter into and perform obligations of T Billings under
this Agreement; (ii) T Billings has duly and validly executed this Agreement;
(iii) the execution of this Agreement and performance of obligations of T
Billings hereunder do not require the consent or approval of any other party;
and (iv) this Agreement constitutes a valid and binding obligation of T
Billings.
7. General Provisions.
(a) Compliance with Laws. The parties agree that they will comply
with all applicable laws and regulations of government bodies or agencies in
their respective performance of their obligations under this Agreement.
(b) Governing Law and Construction. This Agreement will be
governed by and construed in accordance with the laws of the State of Texas
without reference to its conflict-of-laws principles. This Agreement's final
form resulted from review and negotiations among the parties and their
attorneys, and no part of this Agreement should be construed against any party
on the basis of authorship.
(c) Forum for Dispute Resolution. If any dispute arises among the
parties concerning the interpretation or performance of any portion of this
Agreement which the parties are unable to resolve themselves, and any party
brings an action against any other party seeking a declaratory order, specific
performance, damages, or any other legal or equitable relief based on this
Agreement, the parties agree that the forum for any such action shall be an
appropriate federal or state court in Texas having jurisdiction, agree that
venue will be proper in such courts, and waive any objections based on
inconvenience of the forum, and further agree that the prevailing party in any
such action, as determined by the court, shall be awarded its reasonable
attorneys' fees and costs in addition to any relief or judgment the court
awards.
(d) Entire Agreement; Amendment. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter
contained herein and supersedes any previous oral or written communications,
representations, understandings or agreements with respect thereto. The terms of
this Agreement may be modified only in a writing, signed by authorized
representatives of both parties.
Ex. D(II)-3
<PAGE> 40
(e) Assignability. This Agreement will be binding upon the
parties' respective successors and permitted assigns. Neither party may assign
this Agreement and/or any of its rights and/or obligations hereunder without the
prior written consent of the other party, and any such attempted assignment will
be void; provided, however, that PEC or PDC may assign this Agreement to a
subsidiary or affiliate without the prior written consent of T Billings, and
provided further that a transfer by PEC or PDC as a result of a merger or sale
of all or substantially all of the assets of PDC with or to a third party that
assumes PDC's or PEC's obligations and rights, as the case may be, by operation
of law or otherwise, shall not constitute a prohibited assignment under this
Section 7(e).
(f) Waiver. A waiver of a breach or default under this Agreement
will not constitute a waiver of any other breach or default. Failure or delay by
either party to enforce compliance with any term or condition of this Agreement
will not constitute a waiver of such term or condition.
(g) Severability. If any provision of this Agreement is declared
to be invalid, the parties agree that such invalidity will not affect the
validity of the remaining provisions of this Agreement, and further agree, to
the extent possible, to substitute for the invalid provision a valid provision
that approximates the intent and economic effect of the invalid provision as
closely as possible.
(h) Headings. The titles of the Sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.
(i) Notice. Any notice, request, consent, demand or other
communication required to be given under this Agreement will be in writing and
will be given personally, by facsimile or by mailing the same, first-class,
postage prepaid to the appropriate address and facsimile number set forth below
or to such other person or at such other address as may hereafter be designated
by like notice. Notices by mail will be considered delivered and become
effective three days after the mailing thereof. All notices by facsimile will be
considered delivered and become effective immediately upon the confirmed (by
answer back or other tangible printed verification or successful receipt)
sending thereof.
To PEC: Patterson Energy, Inc.
4510 Lamesa Highway
P.O. Drawer 1410
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: Cloyce A. Talbott
Chairman and Chief Executive Officer
To PDC: Patterson Drilling Company
4510 Lamesa Highway
P.O. Drawer 1410
Snyder, Texas 79550
Facsimile: (915) 573-0281
Attention: A. Glenn Patterson
President and Chief Operating Officer
Ex. D(II)-4
<PAGE> 41
To T Billings: Thomas J. Billings
c/o The Kleberg Law Firm, P.C.
Suite 900 North Tower
800 N. Shoreline Blvd.
Corpus Christi, Texas 78401
Attention: Richard L. Leshin
(j) Counterparts. This Agreement may be executed in counterparts
and by the parties hereto in separate counterparts, each of which will be deemed
an original, but all of which together will constitute one and the same
instrument.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to
be executed by their respective representatives as of the day and year first
above written.
PEC:
PATTERSON ENERGY, INC.
By:
----------------------------------------
James C. Brown
Vice President - Finance
PDC:
PATTERSON DRILLING COMPANY
By:
----------------------------------------
James C. Brown
Vice President - Finance
T BILLINGS:
-------------------------------------------
Thomas J. Billings
Ex. D(II)-5
<PAGE> 42
EXHIBIT E
FORM
OF
INVESTMENT REPRESENTATION LETTER
January 27, 1999
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, Texas 79549
This letter is being submitted to Patterson Energy, Inc. ("PEC")
in connection with and as a condition to PEC's closing of the transaction
contemplated by the Agreement among PEC, Patterson Drilling Company ("PDC") and
Padre Industries, Inc. ("Padre"), dated of even date with this letter (the
"Agreement"). Capitalized terms not defined herein shall have the meaning given
them in the Memorandum (as defined below).
1. Representations and Warranties.
The undersigned hereby represents and warrants to PEC that the
following statements are true:
a. The undersigned has been furnished a copy of the Memorandum,
dated January 20, 1999 (the "Memorandum") containing a copy of PEC's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997, and all other
reports filed by PEC with the Securities and Exchange Commission since January
1, 1998 (collectively, the "Reports") and has carefully reviewed the Memorandum
and the Reports, including, but not limited to, (i) the statements in the
Memorandum relating to taxation of the transaction and lack of free
transferability of the PEC Shares to be issued by PEC as consideration for the
transaction, and (ii) the section entitled "Disclosure Concerning
Forward-Looking Statements," setting forth certain Cautionary Statements or risk
factors relating to PEC and PDC and their businesses and operations.
b. The undersigned has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of an
investment in PEC vis-a-vis the PEC Shares to be issued by PEC as consideration
for the transactions.
c.The undersigned has had an opportunity to ask questions of PEC
and PDC and its management concerning PEC and PDC, the businesses of PEC and PDC
and the PEC Shares and, if asked, all such questions have been answered to the
full satisfaction of the undersigned.
d. The undersigned understands that PEC has not registered the
offer or sale of the PEC Common Stock under the Securities Act of 1933, as
amended (the "Act"), in reliance upon an exemption therefrom under Section 4(2)
of the Act and the provisions of Regulation D promulgated thereunder. The
undersigned therefore acknowledges that in no event may it sell or otherwise
transfer the PEC Common Stock without registration under the Act (see paragraph
(h) below), unless an exemption from registration is available.
e. The undersigned represents that it will acquire the PEC Shares
for its own account, with no intention to distribute or offer to distribute the
same to others without registration under the Act (unless an exemption from
registration is available), and understands that the issuance by PEC of the PEC
Common Stock will be predicated upon the undersigned's lack of such intention.
Ex. E-1
<PAGE> 43
f. The undersigned understands that neither the Securities and
Exchange Commission nor the securities commissioner of any state has received or
reviewed any documents relative to an investment in PEC, or has made any finding
or determination relating to the fairness of an investment in PEC.
g. The undersigned acknowledges that stop transfer instructions
will be placed with PEC's transfer agent to restrict the resale, pledge,
hypothecation or other transfer of the PEC Shares.
h. The undersigned acknowledges that, except as provided in the
Registration Rights Agreement attached to the Agreement as Exhibit B, PEC is
under no obligation to register the PEC Shares for sale under the Act or to
assist the undersigned in complying with any exemption from registration under
the Act, or any state securities laws.
i. If other than a natural person, the undersigned was not
organized for the specific purpose of acquiring the PEC Common Stock.
j. The undersigned understands and acknowledges that the foregoing
representations and warranties will be relied upon by PEC in connection with the
issuance of the PEC Shares.
k. Each of the two stockholders of the undersigned has an
individual net worth, or joint net worth with the undersigned's spouse in excess
of $1 million.
l. The undersigned has total assets of at least $5,000,000 and was
not formed for the specific purpose of acquiring the PEC Common Stock.
2. Indemnification.
The undersigned agrees to indemnify and hold harmless PEC and PDC,
or either of them, the officers, directors and affiliates of either of them and
each other person, if any, who controls either of them, within the meaning of
Section 15 of the Act, against any and all loss, liability, claim, damage and
expense whatsoever (including, but not limited to, any and all expenses
reasonably incurred in investigating, preparing or defending against any
litigation commenced or threatened or any claim whatsoever) arising out of or
based upon any false representation or warranty or failure by the undersigned to
comply with any covenant or agreement made by the undersigned herein.
3. Survival.
All representations, warranties and covenants contained in this
letter shall survive the closing of the transactions.
Very truly yours,
PADRE:
PADRE INDUSTRIES, INC.
By:
----------------------------------
Thomas J. Billings
President
Ex. E-2
<PAGE> 1
EXHIBIT 10.1.4
[NORWEST BANK LETTERHEAD]
March 29, 1999
Mr.Cloyce Talbott
Mr. James Brown
Chief Financial Officer
Patterson Energy, Inc.
4510 Lamesa Highway
Snyder, TX 79549
RE: NON-COMPLIANCE WITH LOAN AGREEMENT DATED DECEMBER 9, 1997 (AMENDED
MARCH 26, 1998)
REPLACEMENT OF NET INCOME COVENANT WITH EBITDA/INTEREST COVERAGE
COVENANT
Dear Cloyce and James:
In accordance with the Loan Agreement between Patterson Energy, Inc. (Borrower).
and Norwest Bank Texas, N.A. (Lender), this letter shall serve as formal
acknowledgment by Lender and notification to all parties that Borrower is not in
compliance with Article 6.22 (Net Income Covenant) of said Loan Agreement.
For the period ending 12/31/98 only, Lender agrees to waive the subject
performance requirement provided that the Borrower has fully satisfied its
payment obligations under the terms of its note for both the February 1st and
March 1st, 1999 note payments. Such waiver does not preclude the Lender from
exercising any right or remedy in the future. It is the Lender's intention for
Borrower to be in full compliance with all provisions of the Loan Agreement.
Since it is likely that this covenant may not be met in March of this year, we
would offer to modify the covenant in the following manner:
Article 6.22 will be deleted.
Article 6.26 will be added reflecting that the borrower will maintain its ratio
of Earnings Before Interest Expense, Taxes, Depreciation, Depletion and
Amortization to Interest Expense of at least 2.25x to 1.00 (measured on a
quarterly basis).
The company will agree to provide a pledge of its oil and gas properties (or a
mutually agreeable indirect pledge of its oil and gas properties).
The company will agree to provide financial information on a monthly basis (loan
agreement monitoring will remain quarterly).
Upon receipt and review of the Borrower's quarter-end financial statements for
the period ending March 31, 1999, Lender will notify Borrower of any provision
of the loan agreement that is out of compliance and any action that the Bank
will be taking.
<PAGE> 2
Patterson Energy, Inc.
Net Income Covenant Waiver
Page 2
March 29, 1999
If you have any questions relating to this letter, please contact me at
940/766-8322.
Sincerely,
/s/ JAMES B. FRANK
James B. Frank
Business Banking Manager
ACKNOWLEDGED AND ACCEPTED THIS 29TH DAY OF MARCH, 1999.
PATTERSON ENERGY, INC.
BY: /s/ CLOYCE TALBOTT
------------------------------------
CLOYCE TALBOTT, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
PATTERSON DRILLING COMPANY
AS GUARANTOR
BY: /s/ JAMES C. BROWN
------------------------------------
JAMES C. BROWN
CHIEF FINANCIAL OFFICER
PATTERSON PETROLEUM, INC.
AS GUARANTOR
BY: /s/ JAMES C. BROWN
------------------------------------
JAMES C. BROWN
CHIEF FINANCIAL OFFICER
<PAGE> 3
Patterson Energy, Inc.
Net Income Covenant Waiver
Page 3
March 29, 1999
PATTERSON PETROLEUM TRADING COMPANY, INC.
AS GUARANTOR
BY: /s/ JAMES C. BROWN
------------------------------------
JAMES C. BROWN
CHIEF FINANCIAL OFFICER
CC: CHARLIE FREEL - BANK ONE
KEVIN HUMPHRIES - BANK OF OKLAHOMA
<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, 1999 and terminating on December 31, 1999.
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 20th day of December, 1998.
LESSOR: LESSEE:
TALBOTT AVIATION, INC. PATTERSON ENERGY, INC.
/s/ CLOYCE A. TALBOTT /s/ GLENN PATTERSON
- ---------------------------- --------------------------
CLOYCE A. TALBOTT, PRESIDENT GLENN PATTERSON, PRESIDENT
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Patterson Energy, Inc. on Form S-8 (File No.'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 March 1, 1999, on our audits of the consolidated
financial statements of Patterson Energy, Inc. as of December 31, 1997 and 1998
and for the years ended December 31, 1996, 1997 and 1998, which report is
included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 31, 1999
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