<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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 (I.R.S. Employer Identification No.)
incorporation or 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. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of March 24, 2000 was $934,494,274, based
upon the average bid and asked prices of $28.50 and $30.50, respectively, on the
Nasdaq National Market.
As of March 24, 2000, the registrant had outstanding 32,694,940 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 2000 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 in Texas, New Mexico, Oklahoma, Louisiana and Utah. 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 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, 67 are capable of drilling to depths of
12,000 feet and greater, including 25 that are capable of drilling to 15,000
feet and greater. During the fiscal year ended December 31, 1999, the Company
drilled 842 wells for 189 non-affiliated customers maintaining an average
utilization rate of 45%.
Over the past six 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) through
1999, the Company's consolidated operating revenues increased from $25.0 million
to $151.5 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 Permian Basin and South Texas. Oil and
natural gas operations comprised approximately 6% of the Company's consolidated
operating revenues for the year ended
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December 31, 1999. At December 31, 1999, the Company's proved developed reserves
were approximately 1.9 million BOE and had a present value (discounted at 10%
before income taxes) of estimated future net revenues of approximately $17.2
million. For the year ended December 31, 1999, the Company incurred an
approximate $275,000 impairment charge to its oil and natural gas properties
which was primarily attributable to a change in the respective reserve estimate.
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 Permian Basin of West Texas and
Southeastern New Mexico and in South Texas.
DRILLING FLUID OPERATIONS. 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 8% 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 with its acquisition of Lone
Star Mud, Inc. during January 1998 and Tejas Drilling Fluids, Inc. in September
1998.
The Company's corporate 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, Midland, San Angelo, Corpus
Christi, LaGrange and Kilgore, Texas, Hobbs, New Mexico, Vernal, Utah, and
Oklahoma City, Oklahoma 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 acquired 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 1999. 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.
Furthermore, 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 ACQUISITION
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from a privately held, non-affiliated entity
based in Corpus Christi, Texas. The purchase price consisted of 800,000 shares
of the Company's stock at a guaranteed value of $5.00 per share. As part of the
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acquisition agreement, the Company had the option exercisable on February 1,
2000 to buy back 300,000 of the 800,000 shares at $5.50 per share. The Company
exercised the option on February 1, 2000. The fair market value of the drilling
rigs and related equipment was estimated and the purchase price of $4.0 million,
representing the guaranteed value of the Company's common stock, was allocated
among such assets.
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) contract drilling fluid services. The contract drilling segment
operated at a profit during the years ended December 31, 1997 and December 31,
1998 and at a loss for the year ended December 31, 1999. The oil and natural gas
segment operated at a profit for the years ended December 31, 1997 and 1999 and
at a loss for the year ended December 31, 1998. The drilling fluids segment
generated an operating profit for the year ended December 31, 1998 and an
operating loss for the year ended December 31, 1999. 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, 90 of the
operable drilling rigs are based in Texas (53 in west Texas, 22 in south Texas,
11 in east Texas and four in north Texas), 10 are based in New Mexico, four in
Oklahoma, four in Louisiana, three in Utah, two in Mississippi and one in
Alabama. The drilling rigs have rated maximum depth capabilities ranging from
8,000 feet to 25,000 feet.
The drilling rigs are equipped with engines, drawworks or hoists, derricks
or masts, pumps to circulate the drilling fluid (mud), blowout preventers, drill
string (pipe) and related equipment. Depth of the well and drill site conditions
are the principal factors in determining the size and type of drilling rig used
for a particular job. The Company's drilling rigs are utilized for both
exploration and development drilling and can be used for either vertical or
horizontal drilling.
In order to drill a well, the operator of the well assembles a number of
different contractors to provide the necessary services. Included among these
contractors are the drilling contractors, such as the Company, as well as other
contractors specializing in such matters as logging, completion and, in the case
of horizontal wells, specialists in the technical aspects of such drilling.
The Company has achieved its current position as a leading provider of
contract drilling services in its areas of operations by providing high quality
services to its customers at competitive rates. Although generally of lesser
importance than price, the Company believes that the condition of a drilling
fleet, the reputation of the contract driller and the quality and experience of
the drilling supervisors in the field are of significant importance to
prospective customers. The Company has and will continue to strive to maintain
its drilling fleet in good working condition. In addition to normal repair and
maintenance expenses, the Company spends significant funds each year on an
ongoing program of modifying and upgrading its drilling rigs. The Company also
strives to employ experienced and dedicated drilling supervisors for its various
drilling rigs in the field. The Company intends to continue its ongoing rig
maintenance program and to continue to retain high quality, experienced drilling
supervisors in order to build upon its reputation in the market place. In
addition, if favorable opportunities arise, the Company may seek to further
expand its drilling rig fleet through selected acquisitions.
DRILLING CONTRACTS. Most of the Company's drilling contracts are with
established customers and are obtained on a competitive bid basis, although some
contracts are obtained on a negotiated basis. Generally, the contracts are
entered into for short-term periods and cover the drilling of a single well with
the terms and rates varying depending upon the nature and duration of the work,
the equipment and services supplied and other
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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 continues to earn revenue, even
though drilling may be temporarily suspended (such as time delays for various
reasons, including stuck drill strings and blow-outs).
Footage contracts usually require the Company to bear some of the drilling
costs in addition to providing the drilling rig. Under a footage contract, the
Company would normally determine the manner of drilling and type of equipment to
be used, subject to certain customer specifications, and also would bear the
risk and expense of mechanical malfunctions, equipment shortages and other
delays arising from drilling problems. Compensation is based on a
rate-per-foot-drilled basis at completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, the Company contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment and
services required. The Company bears the risk of drilling the well to the
contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because the Company assumes substantially
greater economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, the Company
could sustain substantial losses.
The following table sets forth for each of the periods indicated the
approximate percentage of the Company's drilling revenues attributable to
daywork, footage and turnkey contracts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
TYPE OF REVENUES 1997 1998 1999
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Daywork..................................................... 62% 64% 58%
Footage..................................................... 35 24 22
Turnkey..................................................... 3 12 20
</TABLE>
Contract drilling operations depend on the availability of drill pipe, bits
and other related equipment, 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.
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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, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR ENDED
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Number of wells drilled..................................... 1,115 1,028 842
Average rigs available for service.......................... 73 106 114
Average rig utilization rate(1)............................. 89% 54% 45%
</TABLE>
- ---------------
(1) Rig utilization is based on a 365-day year for rigs available for service
during the periods indicated. A rig is utilized when it is operating or
being moved, assembled or dismantled under contract.
CUSTOMERS. For the year ended December 31, 1999, the Company drilled wells
for 189 nonaffiliated customers. This compares with 251 nonaffiliated customers
for the year ended December 31, 1998. No single customer accounted for 10% or
more of the Company's consolidated operating revenues for the fiscal year ended
December 31, 1999. 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 Petroleum Corporation, Apache Corporation, ARCO Permian, The Houston
Exploration Company, Chevron U.S.A. Production Company, Cobra Oil and Gas
Corporation, Louis Dreyfuss Natural Gas, EOG Resources, Mitchell Energy
Corporation, Texaco Exploration & Production Inc., Phillips Petroleum Company,
Santa Fe Energy Corporation and Union Pacific Resource Company.
As of December 31, 1999 the Company was drilling a total of 71 wells, four
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:
<TABLE>
<CAPTION>
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC
- ------------------ ---------- ---------------
<S> <C> <C>
8,000 to 9,999.............................................. 26(1) --
10,000 to 11,999............................................ 26 --
12,000 to 14,999............................................ 40 2
15,000 and greater.......................................... 16(2) 9
---- --
Totals............................................ 108 11
==== ==
</TABLE>
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(1) Includes 3 inoperable rigs.
(2) Includes 2 inoperable rigs.
The Company owns 113 trucks and 152 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, New
Mexico and Oklahoma. 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.
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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 two operating areas: (i) the
Permian Basin of west Texas and southeast New Mexico and (ii) 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, 1999, the Company was the operator of 155 wells, of which it was the
drilling contractor for 143 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 such proved developed reserves as of December 31, 1997, 1998 and
1999. 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, 1999, 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 19
of Notes to Consolidated Financial Statements included as a part of Item 8 of
this Report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Proved Developed Reserves:
Oil (Bbls)............................................. 945 946 1,205
Gas (Mcf).............................................. 3,788 3,490 4,118
Total (BOE)............................................ 1,576 1,528 1,891
Estimated future net revenue before income taxes......... $15,012 $9,232 $24,741
Present value of estimated future net revenues before
income taxes, discounted at 10%........................ $11,422 $6,770 $17,240
</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 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,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Average net daily production:
Oil (Bbls)............................................... 1,159 835 698
Gas (Mcf)................................................ 4,024 2,742 2,745
Total (BOE).............................................. 1,830 1,292 1,156
Average sales prices:
Oil (per Bbl)............................................ $17.86 $12.16 $18.08
Gas (per Mcf)............................................ 2.19 1.93 2.22
Average production (lifting) costs (per BOE)............. $ 3.41 $ 4.08 $ 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, 1999. One or more completions in the same well bore are counted as
one well.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
----- ---
<S> <C> <C>
Oil......................................................... 194 63.83
Gas......................................................... 75 8.54
--- -----
Total............................................. 269 72.37
=== =====
</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, 1999:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ----------------
LOCATION GROSS NET GROSS NET
-------- ----- --- ----- ---
<S> <C> <C> <C> <C>
South Texas...................................... 34,044 6,608 60,326 14,374
Permian Basin.................................... 20,164 3,452 40,270 8,619
------ ------ ------- ------
Total.................................. 54,208 10,060 100,596 22,993
====== ====== ======= ======
</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, 2000........................................... 50,196 10,886
December 31, 2001........................................... 19,268 4,651
December 31, 2002 and later................................. 31,132 7,456
------- ------
Total............................................. 100,596 22,993
======= ======
</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, 1997, 1998 and 1999.
<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>
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
1999........................................ 27 5.21 7 1.71 8 1.00 4 .48
-- ----- -- ---- -- ---- -- ----
Total.................................. 74 15.10 21 4.98 18 2.68 32 5.70
== ===== == ==== == ==== == ====
</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. During the year, a company
owned in part by a relative of Cloyce A. Talbott, the Company's Chairman and
Chief Executive Officer, served as a first purchaser of substantially all of the
oil produced from Company-operated leases. See Note 17 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, 1999.
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
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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
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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 $40.0 million per occurrence with a $40.0 million
aggregate. The Company's customers generally require the Company to have at
least $1.0 million of third party liability coverage. Since April 1, 1992, the
Company has carried workers' compensation insurance, with a deductible of
$100,000 per occurrence. If multiple workers' compensation claims are filed, the
Company could incur significant expenses, which in turn could have a material
adverse impact on its financial condition and operations.
The Company believes that it is adequately insured for public liability and
property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect the Company against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. The Company also carries insurance to cover physical damage to or
loss of its drilling rigs; however, it does not carry insurance against loss of
earnings resulting from such damage or loss. In view of the difficulties that
may
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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 1,546 full-time persons (73 office
personnel and 1,473 field personnel) at December 31, 1999. The number of
drilling rig employees will fluctuate depending upon the number of operable
drilling rigs and the demand for contract drilling services. The Company
considers its employee relations to be satisfactory. None of the Company's
employees is represented by a union.
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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------------------------------
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:
PATTERSON IS DEPENDENT ON THE OIL AND NATURAL GAS INDUSTRY AND MARKET PRICES FOR
OIL AND NATURAL GAS. DECLINES IN OIL AND NATURAL GAS PRICES HAVE ADVERSELY
AFFECTED PATTERSON'S OPERATIONS.
Patterson's revenue, profitability and 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 international military, political
and economic conditions and the ability of the Organization of Petroleum
Exporting Countries to set and maintain production and prices. All of these
factors are beyond our control. Low level commodity prices beginning in the
fourth quarter of 1997 and continuing into mid-1999 have materially adversely
affected our operations. We expect oil and natural gas prices to continue to be
volatile and to effect our financial condition and operations and ability to
access sources of capital.
INDUSTRY CONDITIONS FOR CONTRACT DRILLING SERVICES HAVE BEEN POOR FOR MUCH OF
THE TIME SINCE MID-1982.
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
Patterson, ongoing movement of drilling rigs from region to region or
reactivation of onshore drilling rigs or new construction of drilling rigs could
adversely effect utilization rates and pricing, even in an environment of
stronger oil and natural gas prices and increased drilling activity. We cannot
predict either the future level of demand for our contract drilling services or
future conditions in the contract drilling business. Notwithstanding the
significant improvement in oil and natural gas prices since mid-1999, the demand
for contract drilling services, although improving, remains relatively weak.
There can be no assurance that the demand for contract drilling services will
increase proportionally with the current higher prices or of the duration of the
higher commodity prices.
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SHORTAGES OF DRILL PIPE AND OTHER DRILLING EQUIPMENT COULD ADVERSELY AFFECT
PATTERSON'S DRILLING OPERATIONS.
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 at least one year in advance. The price increase and delay in delivery of
drill pipe caused Patterson to substantially increase capital expenditures in
its contract drilling segment. A return to higher demand levels for contract
drilling services could reinstate the problems associated with drill pipe
shortages and could cause shortages in other drilling rig parts. Severe
shortages could impair Patterson's ability to obtain the equipment required for
its contract drilling operations.
THE CONTRACT DRILLING INDUSTRY IN WHICH PATTERSON OPERATES IS HIGHLY
COMPETITIVE.
The inability to compete effectively in the contract drilling industry
would adversely impact Patterson's operations. Price is generally the most
important competitive factor. 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 and its
relationship with existing customers. We believe that we compete 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 budgets of oil and natural gas companies, which are in turn
influenced primarily by the financial condition of such companies, by general
economic conditions, by prices of oil and natural gas, and from time to time
political considerations and policies. It is not practical to estimate the
number of contract drilling competitors of Patterson, some of which have
substantially greater resources than Patterson. Also, in recent years, many
drilling companies have consolidated or merged with other companies. Although
this consolidation has decreased the total number of competitors, Patterson
believes the competition for drilling services will continue to be intense.
There is also substantial competition for the acquisition of oil and
natural gas leases suitable for exploration and for the hiring of experienced
personnel. Patterson's competitors in the exploration, development and
production segment of its operations 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. Patterson's
ability to increase its holdings of oil and natural gas reserves in the future
is directly dependent upon its ability to select, acquire and develop suitable
prospects in competition with those companies. Many competitors have financial
resources, staff, facilities and other resources significantly greater than
those of Patterson.
LABOR SHORTAGES COULD ADVERSELY AFFECT PATTERSON'S DRILLING OPERATIONS.
The increase in domestic drilling demand from mid-1995 through the third
quarter of 1997 and related increase in contract drilling activity caused a
shortage of qualified drilling rig personnel in the industry. This increase
adversely impaired our ability to attract and retain sufficient qualified
personnel and to market and operate our drilling rigs. Further, the labor
shortages resulted in wage increases, which impacted our operating margins. A
return to higher demand levels for contract drilling services could reinstate
the problems associated with labor shortages.
PATTERSON HAS SIGNIFICANT BORROWINGS; FAILURE TO REPAY COULD RESULT IN
FORECLOSURE ON DRILLING RIGS.
Patterson has a $60 million credit facility with an outstanding principal
balance of $50 million at March 31, 2000. All of Patterson's drilling assets are
pledged as collateral on the facility. The loan is payable in monthly payments
of interest only until February 2001, at which time the loan will convert to a
term loan with a 60-month principal and interest amortization. A decline in
general economic conditions in the oil and gas industry could adversely affect
Patterson's ability to repay the loan. Failure to repay could, at the lender's
election, result in acceleration of the maturity date of the loan and
foreclosure on the drilling assets.
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Additionally, the loan agreement contains a number of covenants, including
financial covenants, the failure of which to satisfy could also cause
acceleration of the maturity date and require immediate repayment.
CONTINUED GROWTH THROUGH RIG ACQUISITIONS IS NOT ASSURED.
Patterson substantially increased its drilling rig fleet over the four-year
period ending in the first quarter of 1998 through strategic acquisitions.
Although the land drilling industry has experienced significant consolidation
over the past couple of years, Patterson believes that significant acquisition
opportunities are still available. However, there can be no assurance that
suitable acquisitions can be found. We are likely to continue to face intense
competition from other companies for available acquisition opportunities.
There can be no assurance that Patterson will have sufficient capital
resources to complete acquisitions, that acquisitions can be completed on terms
acceptable to us or that any completed acquisition would improve Patterson's
financial condition, results of operation, business or prospects in any material
manner. In fact, Patterson may incur substantial indebtedness to finance future
acquisitions and also may issue equity securities or convertible securities in
connection with any such acquisitions. Additional debt service requirements
could represent a significant burden on our results of operations and financial
condition and the issuance of additional equity or convertible shares could be
dilutive to our existing stockholders. Also, continued growth could strain
Patterson's management, operations, employees and resources.
PATTERSON'S OPERATIONS ARE SUBJECT TO OPERATING HAZARDS AND UNINSURED RISKS.
Contract drilling and oil and natural gas activities are subject to a
number of risks and hazards. These could cause serious injury or death to
persons, suspension of drilling operations, serious damage to equipment or
property of others, and damage to producing formations in surrounding areas. Our
operations could also cause environment damage, particularly through oil spills,
gas leaks, discharges of toxic gases or extensive uncontrolled fires. In
addition, we could become subject to liability for reservoir damages. The
occurrence of a significant event, including pollution or environmental damage,
could materially affect our operations and financial condition.
We believe we are adequately insured or indemnified against normal and
foreseeable risks in our operations in accordance with industry standards.
However, such insurance or indemnification may not be adequate to protect
Patterson against liability from all consequences of well disasters, extensive
fire damage or damage to the environment. There is no assurance that Patterson
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. In
addition to insurance, Patterson generally seeks to obtain indemnity agreements
whenever possible from its customers requiring them to hold Patterson harmless
if production or reservoir damage occurs. However, even when we are successful
in obtaining contractual indemnification, the customer may not maintain adequate
insurance to support such indemnification.
VIOLATIONS OF ENVIRONMENTAL LAWS AND REGULATIONS COULD MATERIALLY ADVERSELY
AFFECT PATTERSON'S OPERATIONS.
Patterson'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 clean-up 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 to the fault on the part of such person. Such laws and regulations may expose
us to liability for the conduct of, or conditions caused by, others, or for our
acts that were in compliance with all applicable laws at the time such acts were
performed.
Although we generally have been able to obtain some degree of contractual
indemnification from our customers in most of our day rate drilling contracts
against pollution and environmental damages, there is no assurance that
Patterson will be able to enforce the indemnification in all instances, that the
customer will be financially able in all cases to comply with its indemnity
obligations, or that Patterson will be able to obtain
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such indemnification agreements in the future. No such indemnification is
typically available for turnkey contracts. While we also maintain insurance
coverage against certain environmental liabilities, including pollution caused
by sudden and accidental oil spills, we cannot assure that we will continue to
be able to secure or carry this insurance or, if Patterson were able to do so,
that the coverage would be adequate to cover the liabilities.
SOME OF PATTERSON'S CONTRACT DRILLING SERVICES ARE DONE UNDER TURNKEY CONTRACTS,
WHICH ARE FINANCIALLY RISKY.
A portion of Patterson's contract drilling is done under turnkey contracts,
which involve substantial risks. Under turnkey drilling contracts, Patterson
contracts to drill a well to a contract depth under specified conditions for a
fixed price. The risks to us under these types of drilling contracts are
substantially greater than on a well drilled on a daywork basis since we assume
most of the risks associated with the drilling operations generally assumed by
the operator of the well in a daywork 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,
Patterson could suffer substantial losses associated with that contract.
Generally, the weaker the demand for our drilling services, the higher the
percentage of our turnkey contracts. For each of the years in the two-year
period ended December 31, 1999, the percentage of our contract drilling revenues
attributable to turnkey contracts was 12.0%, and 20.0%, respectively.
ESTIMATES OF PATTERSON'S OIL AND NATURAL GAS RESERVES ARE UNCERTAIN.
Estimates of our proved developed reserves and future net revenues are
based on engineering reports prepared by an independent petroleum engineer based
upon a review of production histories and other geologic, economic, ownership
and engineering data provided by Patterson. These estimates are based on several
assumptions that the SEC requires oil and natural gas companies to use,
including, for example, constant oil and natural gas prices. Such estimates are
inherently imprecise indications of future net revenues. Actual future
production, revenues, taxes, production costs and development costs may vary
substantially from those assumed in the estimates. Any significant variance
could materially affect the estimates. In addition, our reserves might be
subject to upward or downward adjustment based on future production, results of
future exploration and development, prevailing oil and natural gas prices and
other factors.
RISKS RELATED TO PATTERSON'S OPERATIONS
THE LOSS OF SERVICES OF KEY OFFICERS COULD HURT PATTERSON'S OPERATIONS.
Patterson is highly dependent on 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, Chief Executive Officer and the
President, respectively, could have a detrimental affect on Patterson. Patterson
has no employment agreements with any of its executive officers. We maintain key
man life insurance on the lives of Messrs. Talbott and Patterson in the amount
of $3 million each.
ANTI-TAKEOVER MEASURES IN PATTERSON'S CHARTER DOCUMENTS AND UNDER STATE LAW
COULD DISCOURAGE AN ACQUISITION OF PATTERSON AND THEREBY AFFECT THE RELATED
PURCHASE PRICE.
Patterson, as a Delaware corporation, is subject to the Delaware General
Corporation Law, including Section 203, an anti-takeover law enacted in 1988.
Patterson has also enacted certain anti-takeover measures, including a
stockholders rights plan. In addition, our Board of Directors has the authority
to issue up to one million shares of preferred stock and to determine the price,
rights (including voting rights), conversion ratios, preferences and privileges
of that stock without further vote or action by the holders of the common stock.
As a result of these measures and others, potential acquirers of Patterson may
find it more difficult or be discouraged from attempting to effect an
acquisition transaction with us, thereby possibly depriving holders of Patterson
securities of certain opportunities to sell or otherwise dispose of such
securities at above-market prices pursuant to their transactions.
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PATTERSON HAS PAID NO DIVIDENDS ON ITS COMMON STOCK AND HAS NO PLANS TO PAY
DIVIDENDS IN THE FORESEEABLE FUTURE.
Patterson 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 terms of our existing credit facility
prohibit payment of dividends by Patterson without the prior written consent of
the note holders
PARTICIPATION BY PATTERSON DIRECTORS AND OFFICERS IN OIL AND NATURAL GAS
PROSPECTS COULD CREATE CONFLICTS OF INTEREST.
Certain of Patterson's directors and executive officers and their
respective affiliates have participated and may continue to participate from
time to time in oil and natural gas prospects and properties in which Patterson
has an interest. Conflicts of interest may arise between such persons and
Patterson as to the advisability of conducting drilling and recompletion
activities on these properties. Of the 155 wells operated by Patterson at
December 31, 1999, Patterson's directors, officers and/or their respective
affiliates were working interest owners in approximately 115 wells.
PATTERSON BOARD MAY ISSUE PREFERRED STOCK WITH RIGHTS AND PREFERENCES ADVERSE TO
COMMON STOCK.
Patterson has a class of authorized preferred stock. Patterson's Board of
Directors, without stockholder approval, may issue shares of the preferred stock
with rights and preferences adverse to the voting power or other rights of the
holders of common stock. Patterson has not issued any shares of preferred stock.
However, as of December 31, 1999, an aggregate of 326,756 shares of preferred
stock had been reserved for issuance upon exercise of the Rights described under
"Description of Capital Stock -- Stockholder Rights Plan," below.
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GLOSSARY
The following are definitions of certain industry terms used in this
report:
Bbls....................... Refers to barrels of 42 U.S. gallons and represents
the basic unit for measuring the production of
crude oil and condensate.
BOE........................ Refers to barrels of oil equivalent. In reference
to natural gas, natural gas equivalents are
determined using the rate of six Mcf of natural gas
(including natural gas liquids) to one Bbl of crude
oil or condensate.
Developed Acreage.......... Lease acres spaced or assigned to productive wells.
Development Well........... A well drilled within the proved area of an oil or
gas reservoir to a depth known to be productive.
Exploratory Well........... A well drilled to find and produce oil and gas in
an unproved area, to find a new reservoir in a
field previously found to be productive of oil or
gas in another reservoir, or to extend a known
reservoir.
Gross Acre................. An acre in which a working interest is owned. The
number of gross acres is the total number of acres
in which a working interest is owned.
Gross Well................. A well in which a working interest is owned. The
number of gross wells is the total number of wells
in which a working interest is owned.
Mcf........................ Refers to a volume of 1,000 cubic feet under
prescribed conditions of pressure and temperature
and represents the basic unit for measuring volumes
of produced gas.
Net Acre................... Deemed to exist when the sum of the fractional
ownership working interests in gross acres equals
one. The number of net acres is the sum of the
fractional ownership working interests owned in
gross acres expressed as whole numbers and
fractions thereof.
Net Well................... Deemed to exist when the sum of fractional
ownership working interests in gross wells equals
one. The number of net wells is the sum of the
fractional ownership working interests owned in
gross wells expressed as whole numbers and
fractions thereof.
Productive Well............ A well that is found capable of producing oil
and/or gas in paying quantities.
Proved Reserves............ Estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and
engineering data demonstrate with reasonable
certainty to be recoverable in future years from
known reservoirs under existing economic
conditions; i.e., prices and costs as of the date
the estimate is made.
Proved Developed
Reserves................... Proved oil and gas reserves which can be expected
to be recovered through existing wells with
existing equipment and operating methods.
Undeveloped Acreage........ Leased acres on which wells have not been drilled
or completed to a point that would permit the
production of commercial quantities of oil and gas,
regardless of whether such acreage contains proved
reserves.
Working Interest........... The operating interest under a lease, the owner of
which has the right to explore for and produce oil
and gas covered by the lease. The full working
interest bears 100% of the costs of exploration,
development, production and operation, and is
entitled to the portion of the gross proceeds of
production which remains after proceeds allocable
to royalty and overriding royalty interests or
other lease burdens have been deducted.
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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>
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
1999:
First quarter............................................... $ 6.06 $ 2.75
Second quarter.............................................. 10.81 4.38
Third quarter............................................... 16.31 8.38
Fourth quarter.............................................. 15.94 10.00
</TABLE>
As of March 27, 2000, there were approximately 450 holders of record
(approximately 16,400 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.
In addition, the terms of an existing credit facility prohibit payment of
dividends by Patterson without the prior written consent of the noteholders.
During calendar 1999, Patterson issued a total of 825,776 shares of common
stock that were not registered under the Securities Act of 1933, as amended. The
shares were issued in two separate transactions as follows:
(a) During January 1999, Patterson issued a total of 800,000 of its
common stock valued at $5.00 per share as partial consideration for the
acquisition of five drilling rigs and related equipment from an unrelated
entity. See Items 1 and 2, "Business and Properties -- Recent Acquisition,"
for additional information; and
(b) The remaining 25,776 shares were issued by Patterson as
consideration for the acquisition of certain drilling equipment acquired
during June 1999 from an unrelated entity. The shares were valued at
$8.0625 per share, the market price of the shares on the date of the
transaction.
No underwriter was involved in either of the transactions and no sales
commissions, fees or similar compensation were paid to any person in connection
with the issuance of the shares. Patterson believes that the issuance of the
shares in each instance was exempt from the registration requirements of Section
5 of the Securities Act by virtue of Section 4(2) of the Securities Act and/or
under Rule 506 of Regulation D promulgated thereunder.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company as of December 31,
1995, 1996, 1997, 1998 and 1999 and for each of the five years then ended 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,
--------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues:
Drilling................................ $57,599 $73,590 $178,332 $165,997 $131,287
Oil and natural gas..................... 6,845 10,118 12,445 7,170 8,563
Drilling fluids......................... -- -- -- 13,397 11,686
------- ------- -------- -------- --------
Total................................ 64,444 83,708 190,777 186,564 151,536
------- ------- -------- -------- --------
Operating costs and expenses:
Drilling................................ 46,505 59,564 128,416 128,838 113,569
Oil and natural gas..................... 2,669 3,465 4,402 3,676 2,500
Drilling fluids......................... -- -- -- 10,205 9,864
Impairment of oil and natural gas
properties........................... 159 549 355 3,816 275
Depreciation, depletion and
amortization......................... 7,523 9,960 17,497 28,091 28,156
General and administrative.............. 5,063 5,416 6,786 9,313 7,299
------- ------- -------- -------- --------
Total................................ 61,919 78,954 157,456 183,939 161,663
------- ------- -------- -------- --------
Operating income (loss)................... 2,525 4,754 33,321 2,625 (10,127)
------- ------- -------- -------- --------
Other income (expense).................... (111) (2,737) 1,787 (2,857) (3,341)
------- ------- -------- -------- --------
Income (loss) before income taxes......... 2,414 2,017 35,108 (232) (13,468)
Income tax expense (benefit).............. (787) (2,254) 12,866 93 (4,341)
------- ------- -------- -------- --------
Net income (loss)......................... $ 3,201 $ 4,271 $ 22,242 $ (325) $ (9,127)
======= ======= ======== ======== ========
Net income (loss) per common share:
Basic................................... $ 0.18 $ 0.22 $ 0.78 $ (0.01) $ ( 0.28)
======= ======= ======== ======== ========
Diluted................................. $ 0.18 $ 0.21 $ 0.75 $ (0.01) $ ( 0.28)
======= ======= ======== ======== ========
Weighted average number of common shares
outstanding:
Basic................................... 17,517 19,167 28,492 31,645 32,499
======= ======= ======== ======== ========
Diluted................................. 18,082 20,086 29,505 31,645 32,499
======= ======= ======== ======== ========
BALANCE SHEET DATA:
Total assets.............................. $62,991 $87,913 $203,200 $236,605 $236,257
Notes payable............................. 13,816 25,849 23,250 55,714 50,000
Stockholders' equity...................... 37,656 43,482 146,932 156,852 152,788
</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 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.
20
<PAGE> 21
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, 1999, the Company had working capital of approximately
$27.0 million and cash and cash equivalents of approximately $8.8 million as
compared to working capital of approximately $30.5 million and cash and cash
equivalents of approximately $9.0 million as of December 31, 1998. For the year
ended December 31, 1999, the Company generated net cash from operations of
approximately $24.0 million, received proceeds of approximately $606,000 from
the exercise of stock options and sold property and equipment for proceeds of
approximately $1.2 million. These funds were used primarily to provide certain
necessary refurbishment of approximately $14.0 million to the Company's operable
drilling fleet, to fund leasehold acquisition, exploration and development of
approximately $5.1 million and to reduce net amounts owed under a then existing
term loan by approximately $5.7 million.
On January 27, 1999, the Company completed the acquisition of five drilling
rigs and other related equipment from a privately held, non-affiliated entity
based in Corpus Christi, Texas. The purchase price consisted of 800,000 shares
of the Company's stock at a guaranteed value of $5.00 per share. As part of the
acquisition agreement, the Company had the option exercisable on February 1,
2000 to buy back 300,000 of the 800,000 shares at $5.50 per share. The Company
exercised the option on February 1, 2000. The fair market value of the drilling
rigs and related equipment was estimated and the purchase price of $4.0 million,
representing the guaranteed value of the Company's common stock, was allocated
among such assets.
On October 28, 1999, the Company registered $150 million of various debt
and equity securities with the Securities and Exchange Commission on a Form S-3
Registration Statement. None of these securities were offered for sale under the
Form S-3 as of December 31, 1999 and there can be no assurance that the Company
could raise capital at acceptable terms using the registration statement.
On December 22, 1999, the Company entered into a credit agreement with
Transamerica Equipment Financial Services Corporation (the "Transamerica
Credit") providing for a non-revolving credit facility of $60.0 million. The
terms of the credit agreement included payments of interest only through January
1, 2001 at which time the outstanding principal amount will convert to a term
loan with a maturity date of January 1, 2006. The Company borrowed $50.0 million
under the credit facility and paid, prior to maturity, principal and interest
amounts outstanding, under its then existing term loan. As a result, the Company
expensed approximately $123,000 of deferred financing costs associated with the
term loan. This amount was included in interest expense at December 31, 1999, as
management does not consider the amount significant enough to warrant treatment
as an extraordinary item.
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.
21
<PAGE> 22
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
For the year ended December 31, 1999, contract drilling revenues were
approximately $131.3 million as compared to $166.0 million for the same period
in 1998; a decrease of approximately 21%. Average rig utilization was 45% on an
average of 114 rigs available for service for the year ended December 31, 1999
as compared to 54% on an average of 106 rigs available for service for the
twelve months ended December 31, 1998. Direct drilling costs were $113.6 million
or 87% of drilling revenues for the year ended December 31, 1999; while direct
drilling costs were $128.8 million or 78% of related drilling revenues for 1998.
General and administrative expense for the contract drilling operations was
approximately $4.1 million for the year ended December 31, 1999 as compared to
approximately $6.1 million in 1998. The decrease in general and administrative
expense was largely attributable to the Company's decision to close its
administrative offices in Dallas, Abilene and Wichita Falls, Texas. The Dallas
office was acquired during February 1998 in the Company's acquisition of
Robertson Onshore Drilling Company and the Abilene office was acquired during
September 1997 in the Company's acquisition of Wes-Tex Drilling Company.
Additionally, the Company imposed a company-wide compensation reduction and
certain layoffs during January and February 1999 in an effort to reduce its
overhead costs in response to the significantly weakened economic conditions of
the industry. Depreciation and amortization expense for the contract drilling
segment increased from $22.4 million for the year ended December 31, 1998 to
approximately $24.4 million for the same twelve-month period in 1999. For the
twelve months ended December 31, 1999, operating loss from the Company's
contract drilling operations was approximately $10.3 million as compared to
income of approximately $9.3 million in 1998. The decline in the contract
drilling segment's operating results was reflective of reduced pricing in the
Company's contract services caused by significantly weakened commodity prices,
particularly for crude oil throughout fiscal year 1998 and the initial months of
1999, and the resulting 9% decrease in the Company's utilization rate.
Notwithstanding the recent improvement in oil and natural gas prices, there can
be no assurance that the demand for contract drilling services will increase
proportionally with the current higher commodity prices or of the duration of
the higher commodity prices.
Oil and natural gas sales revenues were approximately $6.8 million for the
year ended December 31, 1999, as compared to approximately $5.6 million in 1998.
The volume of oil and natural gas sold by the Company decreased by approximately
11% in 1999, as compared to fiscal year 1998. The average price per Bbl of crude
oil received by the Company was $18.08 in 1999, as compared to $12.16 in 1998,
and the average price per Mcf of natural gas was $2.22 in 1999, as compared to
$1.93 in 1998. Lease operating and production costs were $4.08 per BOE in both
1998 and 1999. General and administrative expense for the oil and natural gas
segment was approximately $1.2 million and $1.3 million for the years ended
December 31, 1999 and 1998, respectively. Exploration costs were approximately
$611,000 and $669,000 for the years ended December 31, 1999 and 1998,
respectively. Depreciation and depletion expense was approximately $2.7 million
in 1999, as compared to approximately $4.8 million in 1998. The decrease in
depreciation and depletion expense was reflective of the substantial increase in
the market price received for crude oil in December 31, 1999 versus December 31,
1998 which resulted in increases in reserve quantities and a related reduction
of the unit of production rates. Specifically, the market price was $11.16 per
barrel at December 31, 1998 and $24.90 per barrel at December 31, 1999, an
increase of approximately 123%. During 1998, primarily as a result of the
industry's significantly reduced commodity prices at December 31, 1998, the
Company impaired certain of its oil and natural gas properties by $3.8 million.
Comparatively, the Company incurred impairment expense of approximately $275,000
in 1999. Other revenues generated by the oil and natural gas segment, consisting
primarily of fees generated from lease operating activities, were approximately
$1.7 million and $1.5 million for the years ended December 31, 1999 and 1998,
respectively. For the year ended December 31, 1999, the oil and natural gas
segment generated income from operations of approximately $1.9 million as
compared to a loss of approximately $6.2 million for the year ended December 31,
1998. The fluctuation in the segment's operating results was primarily
attributable to the increase in the underlying commodity prices as discussed
above.
Operating revenues from the Company's drilling fluid services were
approximately $11.7 million and $13.4 million for the twelve months ended
December 31, 1999 and 1998, respectively. Operating costs
22
<PAGE> 23
incurred by the drilling fluids segment were approximately $9.9 million in 1999
as compared to costs of approximately $10.2 million in 1998. For the twelve
months ended December 31, 1999, depreciation and amortization expense was $1.1
million as compared to approximately $895,000 in 1998. General and
administrative expense for the drilling fluids segment was approximately $2.0
million and $1.9 million for the twelve months ended December 31, 1999 and 1998,
respectively. This increase was partially due to the addition of the
administrative office in Corpus Christi, Texas acquired during September 1998
with the Company's purchase of Tejas Drilling Fluids, Inc. For the twelve months
ended December 31, 1999, the drilling fluids segment generated a net loss from
operations of approximately $1.4 million as compared to net operating income of
approximately $360,000 for the comparative twelve month period in 1998. The net
loss from operations was consistent with the decline in the segment's operating
revenues and expenses as discussed above and reflective of the deterioration in
the industry's economic conditions.
For the year ended December 31, 1999, the Company incurred interest expense
of approximately $4.1 million as compared to $4.5 million in 1998 and earned
interest income of approximately $445,000 and $767,000 in 1999 and 1998,
respectively. In 1999, the Company recognized a net gain on the sale of property
and equipment of $129,000 as compared to approximately $636,000 in 1998.
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 during 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 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
23
<PAGE> 24
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.
INCOME TAXES
At December 31, 1999, the Company had tax net operating loss ("NOL")
carryforwards of approximately $34.5 million. These NOL carryforwards expire at
various dates from 2004 through 2019, 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
a deferred income tax benefit of approximately $7.1 million for the year ended
December 31, 1999 and deferred income tax expense of approximately $6.5 million
for the year ended December 31, 1998.
24
<PAGE> 25
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. Low level commodity prices beginning in the fourth quarter of 1997
and continuing into mid-1999 have adversely impacted the Company's operations.
Although there has been significant improvement in oil and natural gas prices
since mid-1999, Patterson expects oil and natural gas prices to continue to be
volatile and therefore to affect the financial condition and operations of
Patterson and its ability to access capital sources.
IMPACT OF INFLATION
The Company believes that inflation will not have a significant impact on
its financial position.
RECENTLY-ISSUED ACCOUNTING STANDARDS
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, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The provisions of SFAS No. 133 are not expected to have a
material impact on the Company's consolidated financial statements.
YEAR 2000 ISSUE
The year 2000 issue related to whether the Company's computer systems would
properly recognize date sensitive information due to the change in year to 2000,
or "00." Systems that fail to properly recognize such information could generate
erroneous data or cause a system to fail.
To date, the Company has not experienced any significant problems as a
result of the commencement of the year 2000. There remains a possibility that
residual consequences stemming from the change to the year 2000 could occur and,
if these consequences become widespread, they could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations. However, the Company considers this possibility remote and does not
anticipate any significant problems due to the year 2000 issue.
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 the $50.0 million outstanding under its
credit facility with Transamerica Equipment Financial Services Corporation. The
credit facility, which matures on January 1, 2006, bears interest at LIBOR plus
3.51%. The Company's exposure to interest rate risk due to changes in LIBOR is
not expected to be material and at December 31, 1999, 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.
25
<PAGE> 26
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 2000 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.
26
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1 of this report.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
financial statements or notes thereto.
(a)(3) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein.
<TABLE>
<C> <S>
2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)
2.2 Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)
2.2.1 Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)
2.3 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(3)
2.3.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.4 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.5 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.6 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).(4)
2.7 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.(4)
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)
10.1 Loan and Security Agreement dated December 21, 1999 among
Patterson Drilling Company and Transamerica Equipment
Financial Services Corporation.
10.1.1 Promissory Note dated December 21, 1999 between Patterson
Drilling Company and Transamerica Equipment Financial
Services Corporation.
10.1.2 Corporate guarantees of Lone Star Mud, Inc. and Patterson
Energy, Inc.
10.2 Aircraft Lease, dated December 20, 1999, (effective January
1, 2000) between Talbott Aviation, Inc. and Patterson
Energy, Inc.
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C>
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.
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers LLP.
23.2 Consent of Independent Petroleum Engineer -- M. Brian Wallace, P.E.
27.1 Financial Data Schedule as of December 31, 1999 and for the twelve months 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 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K for the year ended December
31, 1998.
(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.
(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.
28
<PAGE> 29
(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.
(1) Report dated November 3, 1999 announcing execution of a commitment letter
with Transamerica Equipment Financial Services Corporation to provide a $60
million credit facility; filed December 7, 1999.
(2) Report dated October 29, 1999 announcing the filing of a $150 million
Universal Shelf Registration Statement with the SEC; filed December 7, 1999.
(3) Report dated October 28, 1999 announcing the Company's results from
operations for the period ended September 30, 1999; filed December 28, 1999.
29
<PAGE> 30
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-6
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 31
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 at December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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
February 24, 2000
F-2
<PAGE> 32
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
---- ----
(IN THOUSANDS, EXCEPT FOR
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,986 $ 8,792
Accounts receivable:
Trade, less allowance for doubtful accounts of $417,519
and $364,519 at December 31, 1998 and 1999,
respectively.......................................... 28,616 41,571
Oil and natural gas sales.............................. 426 803
Costs of uncompleted drilling contracts in excess of
related billings....................................... 100 87
Federal income taxes receivable........................... 8,400 --
Inventories............................................... 1,283 1,970
Deferred income taxes..................................... 1,568 964
Undeveloped oil and natural gas properties held for
resale................................................. 3,214 2,658
Other current assets...................................... 890 1,919
-------- --------
Total current assets.............................. 53,483 58,764
Property and equipment, at cost, net........................ 136,677 133,824
Intangible assets, net...................................... 45,875 41,818
Other assets................................................ 570 1,851
-------- --------
Total assets...................................... $236,605 $236,257
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of note payable........................ $ 8,571 $ --
Accounts payable:
Trade.................................................. 9,748 23,676
Revenue distribution................................... 1,390 2,407
Other.................................................. 73 1,201
Accrued expenses.......................................... 3,170 4,432
-------- --------
Total current liabilities......................... 22,952 31,716
-------- --------
Deferred income taxes, net.................................. 9,566 1,688
Deferred liabilities........................................ 92 65
Note payable, less current maturities....................... 47,143 50,000
-------- --------
56,801 51,753
-------- --------
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 31,671,132 and 32,675,678 issued and outstanding
at December 31, 1998 and 1999, respectively............ 317 327
Additional paid-in capital................................ 112,544 117,597
Retained earnings......................................... 43,991 34,864
-------- --------
Total stockholders' equity........................ 156,852 152,788
-------- --------
Total liabilities and stockholders' equity........ $236,605 $236,257
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 33
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating revenues:
Drilling.................................................. $178,332 $165,997 $131,287
Drilling fluids........................................... -- 13,397 11,686
Oil and natural gas sales................................. 10,773 5,641 6,834
Well operation fees....................................... 1,632 1,442 1,567
Other..................................................... 40 87 162
-------- -------- --------
190,777 186,564 151,536
-------- -------- --------
Operating costs and expenses:
Direct drilling costs..................................... 128,416 128,838 113,569
Drilling fluids........................................... -- 10,205 9,864
Lease operating and production............................ 2,274 1,924 1,720
Impairment of oil and natural gas properties.............. 355 3,816 275
Exploration costs......................................... 647 669 611
Dry holes and abandonments................................ 1,481 1,083 169
Depreciation, depletion and amortization.................. 17,497 28,091 28,156
General and administrative................................ 6,786 9,313 7,299
-------- -------- --------
157,456 183,939 161,663
-------- -------- --------
Operating income (loss)..................................... 33,321 2,625 (10,127)
-------- -------- --------
Other income (expense):
Net gain on sale of assets................................ 1,499 636 129
Interest income........................................... 1,056 767 445
Interest expense.......................................... (1,045) (4,471) (4,101)
Other..................................................... 277 211 186
-------- -------- --------
1,787 (2,857) (3,341)
-------- -------- --------
Income (loss) before income taxes........................... 35,108 (232) (13,468)
-------- -------- --------
Income tax expense (benefit):
Current................................................... 10,353 (6,358) 2,767
Deferred.................................................. 2,513 6,451 (7,108)
-------- -------- --------
12,866 93 (4,341)
-------- -------- --------
Net income (loss)........................................... $ 22,242 $ (325) $ (9,127)
======== ======== ========
Net income (loss) per common share:
Basic..................................................... $ 0.78 $ (0.01) $ (0.28)
======== ======== ========
Diluted................................................... $ 0.75 $ (0.01) $ (0.28)
======== ======== ========
Weighted average number of common shares outstanding:
Basic..................................................... 28,492 31,645 32,499
======== ======== ========
Diluted................................................... 29,505 31,645 32,499
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 34
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, 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
Issuance of common stock.................. 826 8 4,200 -- 4,208
Stock option compensation................. -- -- 250 -- 250
Exercise of stock options................. 179 2 603 -- 605
Net loss.................................. -- -- -- (9,127) (9,127)
------ ---- -------- ------- --------
December 31, 1999........................... 32,676 $327 $117,597 $34,864 $152,788
====== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 35
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 22,242 $ (325) $ (9,127)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Abandonment of oil and natural gas properties............. -- 694 169
Depreciation, depletion and amortization.................. 17,497 28,091 28,156
Impairment of oil and natural gas properties.............. 355 3,816 275
Net gain on sale of assets................................ (1,499) (636) (129)
Tax benefit related to exercise of stock options.......... 2,912 -- --
Deferred income tax expense (benefit)..................... 2,513 6,451 (7,108)
Compensation related to issuance of stock options......... -- -- 250
Decrease in deferred compensation liabilities............. (27) (595) (27)
Change in operating assets and liabilities:
(Increase) decrease in trade accounts receivable..... (20,989) 16,116 (12,955)
(Increase) decrease in cost of uncompleted drilling
contracts in excess of related billings........... -- (100) 13
(Increase) decrease in oil and natural gas sales
receivable........................................ 226 347 (377)
Increase in inventories.............................. -- (1,283) (687)
(Increase) decrease in Federal income taxes
receivable........................................ -- (8,400) 8,400
(Increase) decrease in undeveloped oil and natural
gas properties held for resale.................... (111) 873 556
(Increase) decrease in other current assets.......... 32 (375) (712)
Increase (decrease) in trade accounts payable........ (3) (2,378) 13,928
Increase (decrease) in revenue distribution
payable........................................... 920 (1,962) 1,017
Increase (decrease) in state and Federal income taxes
payable........................................... 6,752 (6,874) --
Increase (decrease) in accrued expenses.............. 3,018 (1,972) 1,262
Increase (decrease) in other current payables........ 604 (1,496) 1,128
-------- -------- --------
Net cash provided by operating activities......... 34,442 29,992 24,032
-------- -------- --------
Cash flows from investing activities:
Net sales (purchases) of investment securities............ (22) 566 --
Acquisitions.............................................. (49,400) (45,453) --
Purchases of property and equipment....................... (34,861) (34,148) (19,085)
Sales of property and equipment........................... 4,164 1,361 1,248
Change in other assets.................................... (13) 567 (1,281)
-------- -------- --------
Net cash used in investing activities............. (80,132) (77,107) (19,118)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 23,250 40,150 50,000
Payments on notes payable................................. (25,849) (7,686) (55,714)
Issuance of common stock and redeemable warrants.......... 59,400 -- --
Proceeds from exercise of stock options................... 8,733 299 606
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 65,534 32,763 (5,108)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 19,844 (14,352) (194)
Cash and cash equivalents at beginning of year.............. 3,494 23,338 8,986
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 23,338 $ 8,986 $ 8,792
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
F-6
<PAGE> 36
PATTERSON ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................ $1,045 $4,471 $3,782
Income taxes........................................ 691 8,000 48
</TABLE>
Noncash investing and financing activities:
During 1999, the Company issued 825,776 shares of its common stock in two
separate unrelated transactions to acquire the drilling assets of Padre
Industries, Inc. for an aggregate purchase price of approximately $4.0 million
(see Notes 2 and 9) and other drilling equipment for approximately $208,000 (see
Note 9).
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>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 37
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 (GP) LLC, Patterson (LP) LLC, Patterson
Drilling Company LP, LLLP, Lone Star Mud LP, LLLP, Patterson Petroleum LP, LLLP
and Patterson Petroleum Trading Company LP, LLLP (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 natural gas companies and independent producers in Texas, New
Mexico, Oklahoma, Louisiana and Utah.
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 the significant reduction in the price of crude oil during 1998 and
the first half of 1999. Although there has been significant improvement in oil
and natural gas prices since mid-1999, the Company expects such commodity prices
to continue to be volatile and therefore to affect the financial condition and
operations of the Company and its ability to access capital.
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 losses become
known or are anticipated.
Inventories -- Inventories consist primarily of chemical products to be
used in conjunction with the Company's contract drilling fluid activities. The
inventories are stated at the lower of cost or market. Cost is determined by the
first-in, first-out method.
F-8
<PAGE> 38
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 $11.7 million, $20.2 million and $22.0 million for the
years ended December 31, 1997, 1998 and 1999, 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 $4.8
million, $4.6 million and $2.7 million for the years ended December 31, 1997,
1998 and 1999, 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 $355,000, $3.8 million and $275,000
of impairment to such properties for the years ended December 31, 1997, 1998 and
1999, 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 and/or revisions to existing reserve estimates.
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 operations. 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.
F-9
<PAGE> 39
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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 for the years ended December 31,
1997, 1998 and 1999 was approximately $942,452, $3.3 million and $3.6 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 year ended December 31, 1997, the dilutive
securities, consisting of certain stock options and warrants as described in
Note 10, were approximately 1.0 million. Dilutive securities of approximately
1.5 million and 2.4 million were excluded from the December 31, 1998 and 1999
calculations of Diluted EPS as a result of the Company's net loss for each of
the years.
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.
Stock based compensation -- The Company grants stock options to employees
and non-employee directors under stock-based incentive compensation plans, (the
"Plans"). The Company applies Accounting Principles Board ("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 -- 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
F-10
<PAGE> 40
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
certain derivative instruments embedded in other contracts, and for hedging
activities. This statement, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The provisions of
SFAS No. 133 are not expected to have a material impact on the Company's
consolidated financial statements.
Reclassifications -- Certain reclassifications have been made to the 1997
and 1998 consolidated financial statements in order for them to conform with the
1999 presentation. The reclassifications had no effect on net income (loss) or
stockholders' equity for these years.
2. MERGER AND ACQUISITIONS
1999 ACQUISITION
Padre Industries, Inc. -- On January 27, 1999, the Company completed the
acquisition of five drilling rigs and other related equipment from a privately
held, non-affiliated entity based in Corpus Christi, Texas. The purchase price
consisted of 800,000 shares of the Company's stock at a guaranteed value of
$5.00 per share. As part of the acquisition agreement, the Company had the
option exercisable on February 1, 2000 to buy back 300,000 of the 800,000 shares
at $5.50 per share. The Company exercised the option on February 1, 2000. The
fair market value of the drilling rigs and related equipment was estimated and
the purchase price of $4.0 million, representing the guaranteed value of the
Company's common stock, was allocated among such assets.
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>
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>
F-11
<PAGE> 41
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITIONS -- (CONTINUED)
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 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.................................... 401
-------
Total purchase price................................... $24,211
=======
</TABLE>
The aforementioned acquisitions completed during fiscal years 1997, 1998
and 1999 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.
F-12
<PAGE> 42
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CASH
Included in cash as of December 31, 1998 and 1999 was approximately $1.4
million and $2.4 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, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Drilling rigs and related equipment.................... $199,331 $ 215,312
Producing oil and natural gas properties............... 27,856 32,962
Other equipment........................................ 2,135 2,143
Buildings.............................................. 3,953 4,226
Land................................................... 1,534 1,492
-------- ---------
234,809 256,135
Less accumulated depreciation and depletion............ (98,132) (122,311)
-------- ---------
$136,677 $ 133,824
======== =========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Goodwill.................................................. $46,482 $46,983
Covenants not to compete.................................. 2,673 1,673
Other..................................................... 979 979
------- -------
50,134 49,635
Less accumulated amortization............................. (4,259) (7,817)
------- -------
$45,875 $41,818
======= =======
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consisted of the following at December 31, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Salaries, wages and related payroll taxes................... $1,276 $2,318
Workers' compensation liability............................. 1,157 1,370
Sales taxes................................................. 472 359
Other....................................................... 265 385
------ ------
$3,170 $4,432
====== ======
</TABLE>
F-13
<PAGE> 43
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE
Notes payable consisted of the following at December 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<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 was
collateralized by certain accounts receivable, drilling
rigs and other related drilling equipment................. $55,714 $ --
Line of credit agreement with Transamerica Equipment
Financial Services Corporation providing for an advancing,
non-revolving credit facility of $60.0 million, monthly
payments of interest only at LIBOR plus 3.51% (9.51% at
December 31, 1999) through January 1, 2001 at which time
the outstanding principal balance converts to a term loan
with a maturity of January 1, 2006. The obligation is
collateralized by drilling rigs and other related
equipment................................................. -- 50,000
Less current maturities................................... (8,571) --
------- -------
$47,143 $50,000
======= =======
</TABLE>
During December 1997, the Company entered into a line of credit agreement
("the Norwest Line") with Norwest Bank Texas, N.A. ("Norwest") which amended and
restated its existing agreement that was entered into in June 1997. As amended,
the Norwest Line provided for an advancing, non-revolving credit facility of
$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. During 1997 and 1998, the Company
borrowed $23.25 million and $36.75 million, respectively, under the Norwest Line
to fund acquisitions (see Note 2).
On December 22, 1999, the Company entered into a credit agreement with
Transamerica Equipment Financial Services Corporation (the "Transamerica
Credit") providing for a non-revolving credit facility of $60.0 million. The
terms of the credit agreement include payments of interest only through January
1, 2001 at which time the outstanding principal amount will convert to a term
loan with a maturity date of January 1, 2006. The Company borrowed $50.0 million
under the credit facility and paid, prior to maturity, principal and interest
amounts outstanding, under the existing Norwest Line. As a result, the Company
expensed approximately $123,000 of deferred financing costs associated with the
Norwest Line. This amount was included in interest expense at December 31, 1999,
as management does not consider the amount significant enough to warrant
treatment as an extraordinary item.
Five-year maturities of note payable -- Scheduled maturities of the
Transamerica Credit for the periods subsequent to December 31, 1999, are as
follows (in thousands):
<TABLE>
<S> <C>
2000........................................................ $ --
2001........................................................ 9,167
2002........................................................ 10,000
2003........................................................ 10,000
2004........................................................ 10,000
Thereafter.................................................. 10,833
-------
Total............................................. $50,000
=======
</TABLE>
F-14
<PAGE> 44
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE -- (CONTINUED)
The Transamerica Credit contains a number of representations, warranties
and covenants, the breach of which, at the election of Transamerica, 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 the sum of all principal and interest payments and unfinanced
capital expenditure costs during the measurement period of at least
1.2 to 1.0;
- Maintenance on an annual basis of a ratio of total liabilities to
tangible net worth not to exceed 3.0 to 1.0;
- Maintenance on an annual basis of a minimum tangible net worth of
$80.0 million;
- Without written consent of Transamerica, 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 Transamerica.
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
$230,289 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 expire in
November 2000, 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
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 $40.0
million per occurrence with a $40.0 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 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.
F-15
<PAGE> 45
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY
During June 1999, the Company issued 25,776 shares of its common stock as
consideration for certain drilling equipment acquired from an unrelated entity.
The common stock was recorded at $8.0625 per share, its fair market value on the
date of purchase.
On January 27, 1999, the Company issued 800,000 shares of its common stock
as consideration for the Company's acquisition of the drilling assets of Padre
Industries, Inc. The common stock was recorded at its guaranteed value of $5.00
per share, or an aggregate purchase price of $4.0 million. On February 1, 2000,
the Company exercised its option to buy back 300,000 shares of its common stock
previously issued in conjunction with this acquisition for $5.50 per share (see
Note 2).
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.
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.
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.
F-16
<PAGE> 46
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
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 2.8 million shares of common stock (net
of any forfeitures and expirations as defined below) have been granted to date
under the Stock Incentive Plan to three executive officers and various other
employees of the Company. The outstanding options were variously granted since
1995. Each of the options has a 10-year term and the exercise prices were equal
to the fair market value of the Company's common stock on the respective grant
dates. The options granted to the employees vest either (i) 20% a year,
beginning on the grant date and 20% for the next four anniversaries of the date
of grant, (ii) 11.2% a year for the first five years, beginning on the grant
date, and 22% on each of the next two anniversaries of the grant date, or (iii)
0.0% for the first year, approximately 4% for each of the next two anniversaries
and 25% on each of the next four anniversaries of the date of grant. A total of
525,290 options granted under the Stock Incentive Plan have been exercised,
113,800 have been forfeited and 17,200 have expired as of December 31, 1999.
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. 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, 1999, 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 have expired as of December 31, 1999.
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 required by the Outside Directors' Plan, the exercise price of the
options will be equal to the fair market value of the Company's common stock on
the date of grant. Outside directors are automatically granted options to
purchase 20,000 shares and an additional 4,000 shares for each subsequent year
that they serve up to a maximum of 40,000 shares per director. Each option is
exercisable one year after the date of grant and expires five years from the
date of grant. The options become immediately exercisable in the event of a
change of control (as defined in the Outside Directors' Plan) of the Company.
The table below sets forth information regarding options granted under the
Outside Directors' Plan. Each of the options are granted with an exercise price
per share equal to fair market value on the grant date. A total
F-17
<PAGE> 47
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
of 4,000 options granted under the Outside Directors' Plan have been forfeited
and 32,000 options have been exercised as of December 31, 1999.
<TABLE>
<CAPTION>
DATE GRANTED OPTIONS GRANTED EXERCISE PRICE/SHARE
- ------------ --------------- --------------------
<S> <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
June 6, 1999..................... 8,000 ................... 8.875
July 30, 1999.................... 4,000 ................... 9.625
-------
Total options
granted.............. 104,000
=======
</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, 1997,
1998 and 1999 and the changes during each of the three years then ended are
presented below (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- --------------------------- ---------------------------
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.................... 732 $ 2.59 1,130 $ 9.47 1,475 $10.12
Granted at the money........ 648 14.76 515 9.79 1,144 3.75
----- ------ ----- ------ ----- ------
Total granted....... 1,380 8.30 1,645 9.57 2,619 7.34
Exercised................... 250 3.03 129 2.25 179 3.39
Forfeited................... -- -- 30 12.47 83 5.30
Expired..................... -- -- 11 13.26 6 12.34
----- ------ ----- ------ ----- ------
Outstanding at end of year.... 1,130 $ 9.47 1,475 $10.12 2,351 $ 7.70
===== ====== ===== ====== ===== ======
Exercisable at end of year.... 344 $ 6.83 563 $ 9.05 892 $ 9.34
===== ====== ===== ====== ===== ======
Weighted average fair value of
options granted during the
year........................ $ 6.15 $ 4.99 $ 2.15
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING CONTRACTED LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICES
----------- --------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.81 to $5.00 1,209,210 3.12 $8.40 329,170 $ 3.02
$5.01 to $15.81 1,141,300 12.55 $7.95 562,500 $13.03
--------- ----- ----- ------- ------
2,350,510 7.70 $8.18 891,670 $ 9.34
========= ===== ===== ======= ======
</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 1998 respectively; dividend yield
of 0.00%; risk-free interest rates are different for each grant and range from
F-18
<PAGE> 48
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
4.98% 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, 51.08% for all 1998 grants and
61.97% for all 1999 grants.
Public Relations Services Stock Options -- In June 1999, the Company issued
options covering a total of 50,000 shares of common stock at an exercise price
of $8.0625 per share to a consultant as partial compensation for public
relations services rendered to the Company. The options granted to the
consultant have an exercise price equal to the fair market value of the stock at
date of grant. The options were fully exercisable upon grant date. The Company
accounted for the option grant in accordance with SFAS No. 123, and as such, a
charge for stock compensation expense of $250,000, which represents the fair
value of the options on the date of grant, is included in general and
administrative expenses for the year ended December 31, 1999.
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 1997, 1998 and 1999 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------ -------------------
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................................. $ -- $ 1,329 $ -- $ 1,817 $ -- $ 2,178
APB 25 charge......................... $ -- $ -- $ -- $ -- $ -- --
Net income (loss)..................... $22,242 $20,913 $ (325) $(2,142) $(9,127) $(11,305)
======= ======= ====== ======= ======= ========
Net income (loss) per common share:
Basic............................... $ 0.78 $ 0.73 $(0.01) $ (0.07) $ (0.28) $ (0.35)
======= ======= ====== ======= ======= ========
Diluted............................. $ 0.75 $ 0.71 $(0.01) $ (0.07) $ (0.28) $ (0.35)
======= ======= ====== ======= ======= ========
</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.
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. The warrants were exercisable upon
issuance and would have expired on December 31, 1997. During November 1997, the
Company registered certain securities with the Commission on a Form S-3
Registration Statement which included the aforementioned 300,000 shares upon
exercise of the underlying warrants.
F-19
<PAGE> 49
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS AND WARRANTS -- (CONTINUED)
Tabular Summary -- The following table summarizes information regarding the
Company's stock options and warrants granted under the provisions of the
aforementioned plans: as well as stock options and warrants issued pursuant to
certain transactions described in Notes 2 and 9:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
GRANTED SHARES EXERCISE PRICE
- ------- ------ ----------------
<S> <C> <C>
1997............................................ 1,448,000 $11.02
1998............................................ 515,000 9.79
1999............................................ 1,193,800 3.93
EXERCISED
1997............................................ 1,808,720 $ 4.88
1998............................................ 132,720 2.31
1999............................................ 178,770 3.39
SURRENDERED
1997............................................ 1,184 $ 2.07
1998............................................ 43,568 12.10
1999............................................ 89,800 5.80
OUTSTANDING AT YEAR END
1997............................................ 1,144,856 $ 9.37
1998............................................ 1,483,568 10.08
1999............................................ 2,408,798 7.69
EXERCISABLE AT YEAR END
1997............................................ 347,800 $ 6.78
1998............................................ 573,936 8.96
1999............................................ 949,958 9.21
</TABLE>
11. LEASES
The Company incurred rent expense, consisting primarily of daily rental
charges for the use of drilling equipment, of $5.0 million, $4.3 million and
$2.5 million, for the periods ended December 31, 1997, 1998 and 1999,
respectively. The Company's obligations under non-cancelable operating lease
agreements are not material to the Company's operations.
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current....................................... $ 9,444 $(6,358) $ 2,767
Deferred...................................... 2,420 6,451 (7,108)
------- ------- -------
11,864 93 (4,341)
State income tax expense:
Current....................................... 909 -- --
Deferred...................................... 93 -- --
------- ------- -------
Total income tax expense (benefit).............. $12,866 $ 93 $(4,341)
======= ======= =======
</TABLE>
F-20
<PAGE> 50
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES -- (CONTINUED)
The effective income tax rate varies from the Federal statutory rate as
follows for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate.................................. 35.0% 34.0% 34.0%
Nondeductible amortization.......................... -- (102.75) (2.2)
Statutory depletion in excess of basis.............. (1.1) 44.29 0.8
State income taxes.................................. 2.9 -- --
Non-deductible expenses............................. -- (12.83) (0.3)
Other, net.......................................... (0.2) (2.8) (0.1)
---- ------- ----
Effective tax rate.................................. 36.6% (40.09)% 32.2%
==== ======= ====
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. The Company expects the
deferred tax assets at December 31, 1999 to be realized as a result of the
reversal during the carryforward period of existing taxable temporary
differences giving rise to deferred tax liabilities and the generation of
taxable income in the carryforward period.
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,
1997 CHANGE 1997 CHANGE 1998 CHANGE 1999
---------- ------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards.......... $ 2,411 $(1,195) $1,216 $ 218 $ 1,434 $10,294 $ 11,728
Investment tax credit
carryforwards.......... 375 -- 375 -- 375 -- 375
AMT credit carryforwards... 282 -- 282 -- 282 2,933 3,215
Depletion carryforwards.... 394 (394) -- -- -- -- --
Other...................... 254 796 1,050 78 1,128 23 1,151
------- ------- ------ ------- -------- ------- --------
3,716 (793) 2,923 296 3,219 13,250 16,469
Valuation allowance........ -- -- -- -- -- -- --
------- ------- ------ ------- -------- ------- --------
Deferred tax assets........ 3,716 (793) 2,923 296 3,219 13,250 16,469
Deferred tax liabilities:
Property and equipment
basis difference....... (2,329) (1,553) (3,882) (7,335) (11,217) (5,976) (17,193)
------- ------- ------ ------- -------- ------- --------
Net deferred tax asset
(liability).......... $ 1,387 $(2,346) $ (959) $(7,039) $ (7,998) $ 7,274 $ (724)
======= ======= ====== ======= ======== ======= ========
</TABLE>
For tax return purposes, the Company had tax NOL carryforwards of
approximately $34.5 million at December 31, 1999. If unused, the aforementioned
tax NOL carryforwards will expire in various amounts in years 2004 to 2019.
F-21
<PAGE> 51
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES -- (CONTINUED)
During 1995, the Company's NOL carryforwards became subject to an annual
limitation due to a change of over 50% in the stock ownership of the Company as
defined in Internal Revenue Service Code Section 382(g). 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. At December 31, 1999,
approximately $4.2 million of NOL carryforwards were subject to the NOL
limitation.
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 and 1999 fiscal
years.
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 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, 90 of the operable drilling rigs are based in Texas (53 in west
Texas, 22 in south Texas, 11 in east Texas and four in north Texas), 10 are
based in southeast New Mexico, four in Oklahoma, four in Louisiana, three in
Utah, two in Mississippi, and one in Alabama. The drilling rigs have rated
maximum depth capabilities ranging from 8,000 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 Permian Basin and south Texas. Oil and natural gas operations
comprised approximately 6% of the Company's consolidated operating revenues for
the year ended December 31, 1999. 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, 1999, the Company's proved developed reserves were approximately
1.9 million BOE and had a present value (discounted at 10% before income taxes)
of estimated future net revenues of approximately $17.2 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, 1997, 1998 and 1999, the
Company incurred approximately $355,000, $3.8 million and $275,000,
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 8% 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
F-22
<PAGE> 52
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS SEGMENTS -- (CONTINUED)
1998 with its acquisitions of Lone Star Mud, Inc. during January 1998 and Tejas
Drilling Fluids, Inc. in September 1998 and have operations in Texas, New
Mexico, Oklahoma and Colorado.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Contract drilling......................................... $178,332 $165,997 $131,287
Oil and natural gas....................................... 12,445 7,170 8,563
Drilling fluids........................................... -- 13,397 11,686
-------- -------- --------
Total revenues.................................... $190,777 $186,564 $151,536
======== ======== ========
Income (loss) from operations:
Contract drilling......................................... $ 32,745 $ 9,329 $(10,283)
Oil and natural gas....................................... 2,352 (6,217) 1,874
Drilling fluids........................................... -- 360 (1,403)
-------- -------- --------
35,097 3,472 (9,812)
Interest income........................................... 1,056 767 445
Interest expense.......................................... (1,045) (4,471) (4,101)
-------- -------- --------
Income (loss) before income taxes......................... $ 35,108 $ (232) $(13,468)
======== ======== ========
Identifiable assets:
Contract drilling......................................... $162,726 $185,237 $167,599
Oil and natural gas....................................... 23,777 15,411 6,644
Drilling fluids........................................... -- 20,063 13,577
Corporate(a).............................................. 16,697 15,894 55,855
-------- -------- --------
Total assets................................................ $203,200 $236,605 $243,675
======== ======== ========
Depreciation, depletion and amortization:
Contract drilling......................................... $ 12,541 $ 22,416 $ 24,417
Oil and natural gas....................................... 4,956 4,780 2,674
Drilling fluids........................................... -- 895 1,065
-------- -------- --------
Total depreciation, depletion and amortization.............. $ 17,497 $ 28,091 $ 28,156
======== ======== ========
Capital expenditures:
Contract drilling......................................... $ 74,495 $ 67,471 $ 17,917
Oil and natural gas....................................... 9,766 7,734 5,260
Drilling fluids........................................... -- 4,396 195
-------- -------- --------
Total capital expenditures.................................. $ 84,261 $ 79,601 $ 23,372
======== ======== ========
</TABLE>
- ---------------
(a) Corporate assets primarily include cash on hand managed by the parent
corporation and certain deferred Federal income tax assets.
F-23
<PAGE> 53
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. OIL AND NATURAL GAS EXPENDITURES
Gross oil and natural gas expenditures by the Company for the years ended
December 31, 1997, 1998 and 1999 are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs....................... $ 2,577 $1,585 $ 2,185
Exploration costs................................ 7,680 6,510 7,178
Development costs................................ 2,412 1,126 2,061
------- ------ -------
$12,669 $9,221 $11,424
======= ====== =======
</TABLE>
The aggregate amount of capitalized costs of oil and natural gas properties
as of December 31, 1998 and 1999 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
---- ----
<S> <C> <C>
Proved properties....................................... $ 27,856 $ 32,962
Accumulated depreciation, depletion and amortization.... (21,809) (24,893)
-------- --------
Net proved properties................................... $ 6,047 $ 8,069
======== ========
</TABLE>
16. 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,
1998 and 1999, the Company's demand deposits and temporary cash investments
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deposit in FDIC and SIPC-insured institutions under
$100,000 and cash on hand............................... $ 1,755 $ 1,361
Deposit in FDIC and SIPC-insured institutions over
$100,000 and cash on hand............................... 11,097 11,146
------- -------
12,852 12,507
Less outstanding checks and other reconciling items....... (3,866) (3,715)
------- -------
Cash and cash equivalents................................. $ 8,986 $ 8,792
======= =======
</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, 1997, 1998 and 1999. Included in
general and administrative expense for the periods ended December 31, 1997 and
1998 are provisions for doubtful receivables of $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-24
<PAGE> 54
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. 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 $171,803, $211,495 and $222,583
for the lease of the airplane during 1997, 1998 and 1999, 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 1997 and 1999. Revenues for 1997 and 1999 were approximately
$1.4 million and $275,642 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 1997, 1998 and 1999. Sales of oil to
that entity, both royalty and working interest (including the Company) were
approximately $12.9 million, $8.1 million and $8.4 million for 1997, 1998 and
1999, 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 $10.5 million, $6.9 million and $6.1
million from these properties in 1997, 1998 and 1999, respectively, to the
aforementioned persons or entities. These persons or entities reimbursed the
Company for joint operating costs of $12.8 million, $7.4 million and $5.9
million in 1997, 1998 and 1999, respectively.
18. SUBSEQUENT EVENT
On February 4, 2000, Patterson Energy, Inc. executed an Agreement in
Principle whereby Patterson would acquire High Valley Drilling, Inc.
Consideration for the acquisition will include 1,150,000 unregistered shares of
Patterson's common stock valued at $18 per share and three-year warrants to
acquire an additional 127,000 shares at an exercise price of $22.00 per share.
19. 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, 1997, 1998 and 1999. 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.
F-25
<PAGE> 55
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED DATA
(UNAUDITED) -- (CONTINUED)
OIL AND NATURAL GAS RESERVE QUANTITIES
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCF)
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Estimated quantity, January 1, 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
Revision in previous estimates....................... (169) 287
Extensions, discoveries and other additions.......... 683 1,358
Purchases............................................ -- --
Sales of reserves-in-place........................... -- --
Production........................................... (255) (1,017)
----- ------
Estimated quantity, January 1, 2000.................. 1,205 4,118
===== ======
</TABLE>
RESULTS OF OPERATIONS FOR OIL AND NATURAL GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and natural gas sales................................... $10,773 $ 5,641 $6,834
Gain (loss) on sale of oil and natural gas properties....... 803 68 9
------- ------- ------
11,576 5,709 6,843
------- ------- ------
Costs and expenses:
Production costs.......................................... 2,274 1,924 1,720
Exploration expenses...................................... 2,128 1,752 780
Depreciation, depletion and amortization.................. 4,956 4,780 2,674
Impairment of oil and natural gas properties.............. 355 3,816 275
Income tax expense (benefit).............................. 633 (2,231) 533
------- ------- ------
10,346 10,041 5,982
------- ------- ------
Results of operations for oil and natural gas producing
activities................................................ $ 1,230 $(4,332) $ 861
======= ======= ======
</TABLE>
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND
NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM
F-26
<PAGE> 56
PATTERSON ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. SUPPLEMENTARY OIL AND NATURAL GAS RESERVE INFORMATION AND RELATED DATA
(UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Future gross revenues........................... $23,933 $16,451 $39,024
Future development and production costs......... (8,921) (7,219) (14,283)
Future income tax expense (a)................... (3,679) (1,929) (7,392)
------- ------- -------
Future net cash flows........................... 11,333 7,303 17,349
Discount at 10% per annum....................... (2,710) (1,953) (5,267)
------- ------- -------
Standardized measure of discounted future net
cash flows.................................... $ 8,623 $ 5,350 $12,082
======= ======= =======
</TABLE>
- ---------------
(a) Future income taxes are computed by applying the statutory tax rate to
future net cash flows less the tax basis of the properties and net operating
loss attributable to oil and gas operations and investment tax credit
carryforwards as of year-end; statutory depletion and tax credits applicable
to future oil and gas-producing activities are also considered in the income
tax computation.
CHANGES IN THE STANDARDIZED MEASURE OF NET CASH FLOWS OF PROVED DEVELOPED OIL
AND GAS RESERVES DISCOUNTED AT
10% PER ANNUM
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure at beginning of year................... $13,300 $ 8,623 $ 5,350
Sales and transfers of oil and gas produced, net of
production costs.......................................... (5,195) (2,773) (3,696)
Net changes in sales price and future production and
development costs......................................... 1,347 (5,056) 3,177
Extensions, discoveries and improved recovery, less related
costs..................................................... 5,061 3,018 3,711
Sales of minerals-in-place.................................. (4,775) (9) --
Revision of previous quantity estimates..................... (1,024) (804) 6,872
Accretion of discount....................................... 1,922 1,193 709
Changes in production rates and other....................... 231 (224) 1,614
Net change in income taxes.................................. (2,244) 1,382 (5,655)
------- ------- -------
Standardized measure at end of year......................... $ 8,623 $ 5,350 $12,082
======= ======= =======
</TABLE>
F-27
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Patterson Energy, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PATTERSON ENERGY, INC.
Date: March 30, 2000 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, 1999.
<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/ JONATHAN D. NELSON Vice President -- Finance, Chief
- -------------------------------------------------------- Financial Officer, Secretary and
Jonathan D. Nelson Treasurer
(Principal Accounting Officer)
/s/ ROBERT C. GIST Director
- --------------------------------------------------------
Robert C. Gist
/s/ SPENCER D. ARMOUR, III Director
- --------------------------------------------------------
Spencer D. Armour, III
/s/ VINCENT A. ROSSI, JR. Director
- --------------------------------------------------------
Vincent A. Rossi, Jr.
</TABLE>
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Plan and Agreement of Merger dated October 14, 1993, between
Patterson Energy, Inc., a Texas corporation, and Patterson
Energy, Inc., a Delaware corporation, together with related
Certificates of Merger.(1)
2.2 Agreement and Plan of Merger, dated April 22, 1996 among
Patterson Energy, Inc., Patterson Drilling Company and
Tucker Drilling Company, Inc.(2)
2.2.1 Amendment to Agreement and Plan of Merger, dated May 16,
1996 among Patterson Energy, Inc., Patterson Drilling
Company and Tucker Drilling Company, Inc.(3)
2.3 Asset Purchase Agreement, dated June 4, 1997, among
Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(3)
2.3.1 Amendment to Asset Purchase Agreement, dated June 4, 1997,
among Patterson Energy Inc., Patterson Drilling Company and
Wes-Tex Drilling Company.(5)
2.4 Agreement and Plan of Merger, dated January 20, 1998, among
Patterson Energy, Inc., Patterson Onshore Drilling Company
and Robertson Onshore Drilling Company.(7)
2.5 Stock Purchase Agreement, dated January 5, 1998, among
Patterson Energy, Inc., Spencer D. Armour, III. And Richard
G. Price.(19)
2.6 Stock Purchase Agreement, dated September 17, 1998, among
Lone Star Mud, Inc. and Mark Campbell (shareholder of Tejas
Drilling Fluids, Inc.).(4)
2.7 Asset Purchase Agreement, dated January 27, 1999, among
Patterson Energy, Inc., Patterson Drilling Company and Padre
Industries, Inc.(4)
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)
10.1 Loan and Security Agreement dated December 21, 1999 among
Patterson Drilling Company and Transamerica Equipment
Financial Services Corporation.
10.1.1 Promissory Note dated December 21, 1999 between Patterson
Drilling Company and Transamerica Equipment Financial
Services Corporation.
10.1.2 Corporate guarantees of Lone Star Mud, Inc. and Patterson
Energy, Inc.
10.2 Aircraft Lease, dated December 20, 1999, (effective January
1, 2000) 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)
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.
23.1 Consent of Independent Accountants -- PricewaterhouseCoopers
LLP.
23.2 Consent of Independent Petroleum Engineer -- M. Brian
Wallace, P.E.
27.1 Financial Data Schedule as of December 31, 1999 and for the
twelve months 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 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K" to Form 10-K for the year ended December
31, 1998.
(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.
(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.
<PAGE> 60
(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 10.1
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "Agreement") dated December 21,
1999 is entered into by and among PATTERSON DRILLING COMPANY (the "Borrower"), a
Delaware corporation having its principal place of business and chief executive
office at 4510 Lamesa Highway, Snyder, Texas 79549, with a mailing address of
P.O. Drawer 1416, Snyder, Texas 79550; TRANSAMERICA EQUIPMENT FINANCIAL SERVICES
CORPORATION, a Delaware corporation (the "Lender"), having its principal office
at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018; and the undersigned GUARANTORS.
WHEREAS, Borrower has requested that Lender enter into certain
financing arrangements with Borrower pursuant to which Lender may make loans to
Borrower; and
WHEREAS, Lender is willing to make such loans and advances on the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS.
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. All references to the plural herein shall
also mean the singular and to the singular shall also mean the plural. All
references to Lender pursuant to the definitions set forth in the recitals
hereto, or to any other person herein, shall include their respective successors
and assigns. The words, "hereof," "herein," "hereunder," "this Agreement" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not any particular provision of this Agreement and as
this Agreement now exists or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced. The word "including" when used in this
Agreement shall mean "including, without limitation." An Event of Default shall
exist or continue or be continuing until such Event of Default is waived in
accordance with Section 11.4 or is cured in a manner satisfactory to Lender if
such Event of Default is capable of being cured as determined by Lender. Any
accounting term used herein unless otherwise defined in this Agreement shall
have the meanings customarily given to such term in accordance with GAAP. For
purposes of this Agreement, the following terms shall have the respective
meanings given to them below:
1.1 "Affiliate" shall mean, with respect to a specified Person, a
partnership, corporation or any other person which directly or indirectly,
through one or more intermediaries, controls or is controlled by or is under
common control with such Person, and without limiting the generality of the
foregoing, includes (a) any Person which beneficially owns or holds five percent
(5%) or more of any class of voting securities of such Person or other equity
interests in such Person; (b) any Person of which such Person beneficially owns
or hold five percent (5%) or more of any class of voting securities or in which
such Person beneficially owns or holds five percent (5%) or more of the equity
interests; and (c) any director, officer or employee of such Person. For the
purposes of this definition, the term "control" (including with correlative
meanings, the terms "controlled by" and "under common control with"), as used
with respect to any Person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting security or by contact or
otherwise.
<PAGE> 2
1.2 "Applicable Law" shall mean the laws of the State of Illinois (or
any other jurisdiction whose laws are mandatorily applicable notwithstanding the
parties' choice of Illinois law) or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
1.3 "Business Day" shall mean any day other than a Saturday, Sunday or
public holiday or the equivalent for banks in New York City.
1.4 "Collateral" shall have the meaning set forth in Section 4 hereof.
1.5 "EBITDA" shall mean, for any period, the Net Income of the Borrower
and the Guarantors on a combined basis determined before deduction for Interest
Charges and before deduction of income taxes, plus depreciation, depletion and
amortization expenses of Borrower and each Guarantor all as determined in
accordance with GAAP.
1.6 "Eligible New Equipment" shall mean Equipment owned by Borrower
acquired after the date hereof, which Equipment is in good order, repair,
running and marketable condition, and acceptable to Lender in all respects. In
general, Eligible New Equipment shall not include: (a) Equipment subject to a
security interest or lien in favor of any person other than Lender except those
permitted in this Agreement; (b) Equipment which is not located in the
continental United States of America; (c) Equipment which is not subject to the
first priority, valid and perfected security interest of Lender; (d) worn-out
obsolete, damaged or defective Equipment or Equipment not used or usable in the
ordinary course of Borrower's business as presently conducted. Any Equipment
which is not Eligible New Equipment shall nevertheless be part of the
Collateral.
1.7 "Environmental Laws" shall mean all foreign, Federal, State and
local laws (including common law), legislation, rules, codes, licenses, permits
(including any conditions imposed therein), authorizations, binding judicial or
administrative decision, injunction or agreements between Borrower and any
governmental authority, (a) relating to pollution and the protection,
preservation or restoration of the environment (including air, water vapor,
surface water, groundwater, drinking water, drinking water supply, surface land,
subsurface land, plant and animal life or any other nature resource), or to
human health or safety, (b) relating to the exposure to, or the use, storage
recycling, treatment, generation, manufacture, processing, distribution,
transportation, handling, labeling, production, release or disposal, or
threatened release, of Hazardous Materials, or (c) relating to all laws with
regard to recordkeeping, notification, disclosure and reporting requirements
respecting Hazardous Materials. The term "Environmental Laws" includes any
common law or equitable doctrine that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Materials.
1.8 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment including all machinery, tools, rolling stock consisting of
trucks and trailers, drilling rigs (together with engines, hoists, derricks,
pumps, blowout preventers, pipe and any other equipment related thereto) and all
other equipment, together with all improvements, warranties, contracts, parts,
repairs, attachments, appurtenances, substitutions and replacements thereof and
thereto.
1.9 "Equipment Purchase Loans" shall mean the secured term loans
hereafter made by Lender to Borrower as provided for in Section 2.2, such loans
being from time to time referred to herein individually as an "Equipment
Purchase Loan."
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<PAGE> 3
1.10 "Equipment Purchase Loans Limit" shall mean the lower of (i) the
aggregate amount of one hundred percent (100%) of the Hard Costs of all Eligible
New Equipment purchased by Borrower pursuant hereto, or (ii) Ten Million and
No/00 Dollars ($10,000,000).
1.11 "Equipment Purchase Notes" shall mean, collectively, the Equipment
Purchase Notes, in the form attached hereto as Exhibit A, which may at any time
hereafter be issued by Borrower to Lender pursuant to Section 2.2 hereof to
evidence an Equipment Purchase Loan, such notes being from time to time referred
to herein individually as an "Equipment Purchase Note."
1.12 "Event of Default" shall mean any event specified in Section 8 of
this Agreement.
1.13 "Existing Equipment Loan" shall mean the secured term loan made by
Lender to Borrower as provided in Section 2.1 hereof and evidenced by the
Existing Equipment Note.
1.14 "Existing Equipment Note" shall mean the promissory note, in the
form attached hereto as Exhibit B, issued by Borrower to Lender pursuant to
Section 2.1 hereof to evidence the Existing Equipment Loan.
1.15 "Fiscal Year" shall mean the Fiscal Year of Borrower and
Guarantors running from January 1 to December 31.
1.16 "Fixed Charges" shall mean the sum, without duplication, of (a)
Interest paid or payable during such Fisca1 Year, plus (b) all payments of
principal or other sums paid or payable during such Fiscal Year on Long Term
Debt (which shall not include payments of principal on any revolving credit
loans outstanding provided that the revolving loan arrangement is not in
default), plus (c) all debt discount and expense amortized or required to
amortized during such Fiscal Year, plus (d) all obligations of the Borrower or
Guarantor in respect of any interest rate or currency swap, rate cap or similar
transaction paid or required to be paid during such Fiscal Year, plus (e) the
maximum amount of al1 rents and other payments exclusive of property taxes,
property and liability insurance premiums, maintenance costs and residual
payments required by the terminal rental adjustment clause set forth in leases
of tractors and trailers paid or required to be paid by Borrower or any
Guarantor during such Fiscal Year under any lease of personal property in
respect of which Borrower or such Guarantor is obligated as a lessee or user,
plus (f) all dividends and other distributions paid or payable or otherwise
accumulating in cash during such period on any capital stock.
1.17 "Fixed Charge Coverage" shall mean the sum of (i) Borrower's and
Guarantors' EBITDA on a combined basis, plus (ii) the maximum amount of all
rents and other payments (exclusive of property taxes, property and liability
insurance premiums, maintenance costs, and residual payments required by the
terminal rental adjustment clause set forth in leases of tractors and trailers)
paid or required to personal property in respect of which the Borrower or
Guarantor is obligated as a lessee or user, divided by the sum of (a) Fixed
Charges; plus (b) unfinanced cost of Capital Expenditures paid or payable by
Borrower and Guarantors on a combined basis.
1.18 "GAAP" shall mean generally accepted accounting principles in the
United States of America, as in effect from time to time.
1.19 "Hard Costs" shall mean, with respect to the purchase by Borrower
of any item of Eligible New Equipment, the net cash amount actually paid to
acquire title to such item, net of all incentives, discounts and rebates, and
exclusive of freight, delivery charges, installation costs and charges, trade-in
allowances, software costs, charges and fees, warranty costs, taxes, insurance
and other incidental costs or expenses and all indirect costs or expenses of any
kind.
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<PAGE> 4
1.20 "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substances, materials, and wastes, including hydrocarbons (including naturally
occurring or man-made petroleum and hydrocarbons), flammable explosives,
asbestos, radioactive materials, biological substances, and any other kind
and/or type of pollutants or contaminants (including materials which include
hazardous constituents), sewage sludge, industrial slag, solvents and/or any
other similar substances, materials, or wastes and including any other
substances, materials or wastes that are or become regulated under any
Environmental Law (including any that are or become classified ahs hazardous or
toxic under any Environmental Law.
1.21 "LIBOR Rate" shall mean an interest rate per annum equal to the
London Interbank Offered Rate published in the Money Rates section of The Wall
Street Journal as the average of Interbank offered rates for U.S. dollar
deposits for ninety (90) days in the London market based upon quotations from
the majority of banks in the London interbank market effective as to contracts
entered into two days prior to publication by The Wall Street Journal. In the
event the LIBOR Rate as published in The Wall Street Journal ceases to exist or
The Wall Street Journal ceases publishing the LIBOR Rate, the holder hereof will
substitute a comparable index which is outside the control of the holder. In the
event of an error by The Wall Street Journal, the LIBOR Rate will be based upon
the LIBOR Rate as corrected.
1.22 "Loan Documents" shall mean, collectively, this Loan and Security
Agreement, all Notes contemplated hereunder and all other documents, agreements,
certificates, instruments and opinions executed and delivered in connection
herewith and therewith, as the same may be modified, extended, restated or
supplemented from time to time.
1.23 "Loan Parties" shall mean the Borrower and any Guarantor of all
the Obligations.
1.24 "Loan Term" shall mean the date seventy two (72) months after the
date of this Agreement as indicated on the first page of this Agreement, unless
earlier terminated in accordance with this Agreement or the other Loan
Documents.
1.25 "Material Adverse Change" shall mean, with respect to any Person,
a material adverse change in the business, results of operations, assets,
liabilities or condition (financial or otherwise) of such Person taken as a
whole.
1.26 "Material Adverse Effect" shall mean, with respect to any Person,
a material adverse effect on the business, results of operations, assets,
liabilities or condition (financial or otherwise) of such Person taken as a
whole.
1.27 "Maximum Credit" shall mean Sixty Million and No/00 Dollars
($60,000,000), including the amount defined as the Equipment Purchase Loans
Limit.
1.28 "Notes" shall mean the Existing Equipment Note together with the
Equipment Purchase Notes sometimes referred to herein collectively as the
"Note."
1.29 "Obligations" shall mean all indebtedness, obligations and
liabilities of the Borrower under the Note and under this Agreement, whether on
account of principal, interest, indemnities, fees (including, without
limitation, attorneys' fees, remarketing fees, origination fees, collection fees
and all other professionals' fees), costs, expenses, taxes or otherwise.
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<PAGE> 5
1.30 "Person" shall mean any individual, sole proprietorship,
partnership, corporation, limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality or political subdivision thereof.
1.31 "Restructure" shall have the meaning set forth in Section 7.1
hereof.
1.32 "Tangible Net Worth" shall mean, (a) the amount of any capital
stock, paid in capital and similar equity accounts plus (or minus in the case of
deficit) the capital surplus and retained earnings of Borrower or Guarantor and
the amount of any foreign currency translation adjustment account shown as a
capital account of Borrower or Guarantor, less (b) the net book value of all
items of the following character which are included in the assets of Borrower or
Guarantor; (I) goodwill, including without limitation, the excess of cost over
book value of any asset, (ii) organization or experimental expenses, (iii)
unamortized debt discount and expense, (iv) patents, trademarks, trade names and
copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges (vii)
franchises, licenses and permits (excluding amounts prepaid for vehicle licenses
and permits), and (viii) other Intangible Assets as determined in accordance
with GAAP.
1.33 "Total Liabilities" means all current and non-current liabilities
including, without limitation, subordinated indebtedness, in accordance with
GAAP.
SECTION 2. CREDIT FACILITIES
2.1 Existing Equipment Loan. Lender is making an Existing Equipment
Loan to Borrower in the original principal amount of Fifty Million and No/00
Dollars ($50,000,000.00). The Existing Equipment Loan is (a) evidenced by the
Existing Equipment Note, dated the date hereof, in such original principal
amount and duly executed and delivered by Borrower to Lender concurrently
herewith; (b) to be repaid, together with interest and other amounts, in
accordance with this Agreement, the promissory note, and the other Loan
Documents; and (c) secured by all of the Collateral. The Existing Equipment Loan
may be prepaid in full by Borrower at any time without premium or penalty,
subject only to the early termination fee provided for in Section 10.4 hereof.
The principal amount of the Existing Equipment Loan repaid may not be reborrowed
under this Agreement.
2.2 Equipment Purchase Loans.
(a) Subject to and upon the terms and conditions contained
herein, Lender shall make Equipment Purchase Loans to Borrower, from
time to time, at the request of Borrower of up to one hundred percent
(100%) of the Hard Costs of Eligible New Equipment to be purchased by
Borrower after the date hereof with the proceeds of such Equipment
Purchase Loans. Each Equipment Purchase Loan shall be in a minimum
amount equal to the lesser of (i) One Million Dollars ($1,000,000) (and
in integral multiples of $100,000 greater than such amount), or (ii)
the amount equal to the excess, if any, of (A) $10,000,000 over (B) the
aggregate unpaid principal amount of all outstanding Equipment Purchase
Loans. All of the proceeds of each Equipment Purchase Loan shall be
used solely for the payment of the purchase price of the Eligible New
Equipment specified in the notice required to be delivered to Lender
pursuant to Section 2.2(d)(i) below.
(b) The outstanding aggregate principal amount of the
Equipment Purchase Loans shall not exceed, at any time, the Equipment
Purchase Loan Limit. If at any time the outstanding aggregate principal
amount of all Equipment Purchase Loans shall exceed the Equipment
Purchase Loan Limit, Borrower shall, upon demand by Lender, which may
be made at any time and from time to time, repay to Lender the entire
amount of such excess. The principal amounts of Equipment Purchase
Loans repaid may not be reborrowed under this Agreement.
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<PAGE> 6
(c) Each Equipment Purchase Loan shall be (i) evidenced by an
Equipment Purchase Note executed and delivered by Borrower to Lender
concurrently with each Equipment Purchase Loan, (ii) repaid, together
with interest and other amounts payable thereunder, in accordance with
the provision of the applicable Equipment Purchase Note, this Agreement
and the other Loan Documents, and (iii) secured by all of the
Collateral.
(d) In addition to the other conditions precedent set forth in
this Agreement, the making of each Equipment Purchase Loan shall be
subject to the satisfaction of each of the following additional
conditions precedent, as determined by Lender:
(i) Lender shall have received from Borrower not less
than ten (10) Business Days prior written notice of the
proposed Equipment Purchase Loan, which notice shall specify
the following: (A) the proposed date and amount of the
Equipment Purchase Loan, (B) a list and description of the
Eligible New Equipment (by model, make, manufacturer, serial
no. and/or such other identifying information as may be
appropriate, as determined by Lender), (C) the Hard Costs and
the total purchase price of the Eligible New Equipment to be
purchased with the proceeds of such Equipment Purchase Loan
(and the terms of payment of such purchase price), and (D)
such other information and documents as Lender may form time
to time require related thereto;
(ii) Lender shall have a valid and perfected first
security interest in and lien upon the Eligible New Equipment
to be purchased with the proceeds of the Equipment Purchase
Loan and the Eligible New Equipment shall be free and clear of
all other liens, security interests, claims or other
interests, and Borrower shall have delivered to Lender such
evidence thereof, as Lender may from time to time require;
(iii) The amount of the Equipment Purchase Loan shall
not exceed one hundred percent (100%) of the Hard Costs of the
Eligible New Equipment to be purchased by Borrower with the
proceeds of such Equipment Purchase Loan;
(iv) As of the date of such Equipment Purchase Loan
and after giving effect thereto, the aggregate principal
amount of all Equipment Purchase Loans outstanding at such
time shall not exceed $10,000,000;
(v) Lender shall have received copies, or upon
Lender's request, the originals, of all agreements, documents
and instruments relating to the sale of the Eligible New
Equipment to the Borrower, including any purchase orders,
invoices, bills of sale or similar documents;
(vi) Borrower shall duly authorize, execute and
deliver to Lender a single original Equipment Purchase Note,
as completed to reflect the date and amount of each such loan
and with the number of monthly installments of principal
payable thereunder and the amount of each such monthly
installment completed in accordance with Sections 2.2(e) and
2.2(f) below, as the case may be, which Note shall evidence a
valid and legally enforceable indebtedness of Borrower
unconditionally owing to Lender, without offset, defense or
counterclaim of any kind, nature of description whatsoever;
and
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<PAGE> 7
(vii) No Event of Default, or act, condition or event
which with notice or passage of time or both would constitute
an Event of Default, shall exist or have occurred and be
continuing.
(e) The principal amount of each Equipment Purchase Loan
requested hereunder shall by payable (subject to earlier payment to the
extent required hereunder or under each Equipment Purchase Note) in,
consecutive monthly installments of principal, each in an amount
calculated as set forth below, provided, however, no principal amount
shall be due under the Existing Equipment Note or any Equipment
Purchase Note during the first twelve months after the date of this
Agreement. Interest and other amounts as provided herein and in the
Equipment Purchase Note shall accrue commencing on the first day of the
month after the date of the making of an Equipment Purchase Loan, with
the last installment of all amounts due under such Note due and payable
on the date of expiration of the Loan Term. The amount of each monthly
installment of principal in respect of each such Equipment Purchase
Loan (other than the last installment, which shall be due and payable
on the date of expiration of the Loan Term in an amount equal to the
entire unpaid balance of such Equipment Purchase Note) shall equal: (i)
the principal amount of the proposed Equipment Purchase Loan divided by
(ii) the number of months in the period commencing on the due date of
the first principal payment pursuant to an Equipment Purchase Note and
ending on date of expiration of the Loan Term.
SECTION 3. INTEREST, FEES AND PAYMENTS
3.1 Interest.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate of 3.51%
above the LIBOR Rate as determined from time to time. All interest
accruing hereunder on and after the date of any Event of Default or
termination or non-renewal hereof shall be payable on demand.
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall
be calculated on the basis of a three hundred sixty five (365) day year
and actual days elapsed. The interest rate on non-contingent
Obligations shall increase or decrease by an amount equal to each
increase or decrease in the LIBOR Rate effective on the first day of
the month after any change in such LIBOR Rate is announced based on the
LIBOR Rate in effect on the last day of the month in which any such
change occurs. In no event shall charges constituting interest payable
by Borrower to Lender exceed the maximum amount or the rate permitted
under any applicable law or regulation, and if any such part or
provision of this Agreement is in contravention of any such law or
regulation, such part or provision shall be deemed amended to conform
thereto.
3.2 Closing Fee. Borrower shall pay to Lender as a closing fee the
amount of $250,000, which shall be fully earned and payable by Borrower as of
the date hereof.
3.3 Payments. All Obligations shall be payable to Lender as to such
account or place as Lender may designate in writing from time to time. Lender
may apply payments received or collected from Borrower or for the account of
Borrower (including, the monetary proceeds of collection or of realization upon
any Collateral) to such of the Obligations, whether or not then due, in such
order and manner as Lender determines, provided, that, all such payments shall
be applied to Obligations which are then due and payable before being applied to
pay any Obligations which are not then due and payable (and unless and until an
Event of Default occurs and is continuing, such payments shall not be applied to
make prepayments of principal, except as requested by Borrower). Borrower shall
make all payments to Lender on the Obligations free and clear of, and without
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<PAGE> 8
deduction or withholding for or on account of, any setoff, counterclaim,
defense, duties, taxes, levies, imposts, fees, deductions, withholding,
restriction or conditions of any kind. If after receipt of any payment of, or
proceeds of Collateral applied to the payment of, any of the Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds has not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and
hold Lender harmless for, the amount of any payments or proceeds surrendered or
returned. This Section shall remain effective notwithstanding any contrary
action with may be taken by Lender in reliance upon such payment or proceeds.
This Section shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
3.4 Use of Proceeds. Borrower shall use the proceeds of the Existing
Equipment Loan provided by Lender to Borrower hereunder only for: (a) payments
to the Persons listed in the disbursement direction letter furnished by Borrower
to Lender on or about the date hereof and (b) costs, expenses, and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Loan Documents. Equipment Purchase Loans made to
Borrower pursuant to the provisions hereof shall be used by Borrower to acquire
Eligible New Equipment.
SECTION 4. CREATION OF SECURITY INTEREST; COLLATERAL.
4.1 To secure payment and performance of all Obligations, Borrower
hereby assigns and grants to the Lender a continuing general, first priority
lien on and security interest in, all the Borrower's right, title and interest
in and to the Equipment, together with all present and future additions, parts,
accessories, attachments, substitutions, repairs, improvements and replacements
thereof or thereto, and any and all proceeds thereof, including, without
limitation, proceeds of insurance (the "Collateral"). The Borrower's accounts
receivable are expressly excluded from the Collateral hereunder except any
account which is proceeds from the sale or other disposition of Equipment.
SECTION 5. CONDITIONS PRECEDENT
5.1 Conditions Precedent to Initial Advance. Each of the following is a
condition precedent to Lender making the initial advance:
(a) Lender shall have received, in form and substance
satisfactory to Lender, all releases, terminations and such other
documents as Lender may request to evidence and effectuate the
termination by any existing lenders or other creditors to Borrower of
their respective financing arrangements with Borrower and the
termination and release by it or them, as the case may be, of any
interest in and to the Collateral, duly authorized, executed and
delivered by it or each of them, including (i) UCC termination
statements for all UCC financing statements previously filed by it or
any of them or their predecessors, as secured party and Borrower, as
debtor; and (ii) appropriate certificate of title lien releases
acceptable to Lender;
(b) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first
priority security interests in and liens upon the Collateral and any
other property which is intended to be security for the Obligations or
the liability of any obligor in respect thereof;
(c) All requisite corporate action and proceedings in
connection with this Agreement and the other Loan Documents shall be
satisfactory in form and substance to Lender, and Lender shall have
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<PAGE> 9
received all information and copies of all documents, including,
without limitation, records of requisite corporate action and
proceedings which Lender may have requested in connection therewith,
such documents where requested by Lender or its counsel to be certified
by appropriate corporate officers or governmental authorities;
(d) No Material Adverse Change shall have occurred in the
assets, business or financial condition of Borrower since the date of
October 20, 1999 and no change or event shall have occurred which would
impair the ability of Borrower or any obligor to perform its
obligations hereunder or under any of the other Loan Documents to which
it is a party or of Lender to enforce the Obligations or realize upon
the Collateral;
(e) Lender shall have completed a review of any records and
such other information with respect to the Collateral and business of
Borrower as Lender may require (including, without limitation, such
supporting documentation as may be necessary or appropriate, and other
documents and information that will enable Lender to accurately
identify and verify the Collateral), the results of which each case
shall be satisfactory to Lender;
(f) Lender shall have received, in form and substance
satisfactory to Lender, all consents, waivers, acknowledgements and
other agreements from third persons which Lender may deem necessary or
desirable in order to permit, protect and perfect its security
interests in and liens upon the Collateral or to effectuate the
provisions or purposes of this Agreement and the other Loan Documents;
(g) Borrower shall have current liabilities currently paid and
a minimum of Ten Million and No/00 Dollars ($10,000,000) available in
any combination of cash and availability under a line of credit other
than the credit contemplated hereunder;
(h) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Loan
Documents, in form and substance satisfactory to Lender, and
certificates of insurance policies and/or endorsements naming Lender as
loss payee;
(i) Lender shall have received, in form and substance
satisfactory to Lender any subordination and intercreditor agreements,
deemed necessary by Lender with other third parties providing for inter
alia, the subordination of such parties' relative rights with respect
to the Collateral prior to indefeasible payment and satisfaction in
full of the Obligations;
(j) Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel(s) to Borrower
and Guarantors with respect to the Loan Documents and the security
interests and liens of Lender with respect to the Collateral and such
other matters as Lender may request; and
(k) The Loan Documents and all instruments and documents
contemplated or required thereunder shall have been duly executed and
delivered to Lender, in form and substance satisfactory to Lender.
5.2 Conditions Precedent to All Advances. Each of the following is an
additional condition precedent to Lender making advances to Borrower hereunder,
including the initial advances future advances:
(a) All representations and warranties contained herein and in
the other Loan Documents shall be true and correct in all material
respects with the same effect as though such representations and
warranties had been made on and as of the date of the making of each
such advance and after giving
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effect thereto, except to the extent that such representations and
warranties relate solely to an earlier date (in which case such
representations and warranties shall have been true and accurate as of
the earlier date);
(b) No law, regulation, order, judgment or decree of any
governmental authority shall exist, and no action, suit, investigation,
litigation or proceeding shall be pending or threatened in any court or
before any arbitrator or governmental authority, which (i) purports to
enjoin, prohibit, restrain or otherwise affect (A) the making of the
loans or advances, or (B) the consummation of the transactions
contemplated pursuant to the terms hereof or the other Loan Documents;
or (ii) has or could reasonably be expected to have a Material Adverse
Effect on the assets, business or financial condition of Borrower or
any Guarantor or would materially impair the ability of Borrower or any
Guarantor to perform its obligations hereunder or under any of the
other Loan Documents or of Lender to enforce any Obligations or realize
upon any of the Collateral; and
(c) No Event of Default and no act, condition or event which,
with notice or passage of time or both, would constitute an Event of
Default, shall exist or have occurred and be continuing on and as of
the date of the making of such advance and after giving effect thereto.
SECTION 6. BORROWER'S AND GUARANTORS' REPRESENTATIONS AND
WARRANTIES. The Borrower and Guarantors hereby jointly and severally represent
and warrant to Lender the following (which shall survive the execution and
delivery of this Agreement), the truth and accuracy of which are a continuing
condition of the making of advances hereunder by Lender to Borrower:
6.1 Good Standing; Qualified to do Business. Borrower is a corporation,
is duly organized, validly existing and in good standing under the laws of its
State of incorporation or formation and in good standing in all states or other
jurisdictions where the nature and extent of the business transacted by it or
the ownership of assets makes such qualification necessary and where the failure
to so qualify would have a Material Adverse Effect on Borrower's or any
Guarantor's financial condition, results of operation or business or the rights
of Lender hereunder or under any of the other Loan Documents or the rights of
Lender in or to any of the Collateral. Borrower and each Guarantor has the power
and authority to own its properties and assets and to transact the businesses in
which it is presently, or proposes to be, engaged.
6.2 Due Execution. The execution, delivery and performance by the
Borrower and each Guarantor of each of the Loan Documents to which it is a party
are within the powers of the Borrower and each Guarantor, do not contravene the
organizational documents, if any, of the Borrower or each Guarantor, and do not
(i) materially violate any law or regulation, or any order or decree of any
court or governmental authority, (ii) conflict with or result in a breach of, or
constitute a default under, any material indenture, mortgage or deed of trust or
any material lease, agreement or other instrument binding on the Borrower or
Guarantor or any of their respective properties, or (iii) require the consent,
authorization by or approval of or notice to or filing or registration with any
governmental authority or other Person. This Agreement is, and each of the other
Loan Documents to which the Borrower or Guarantor is or will be a party, when
delivered hereunder or thereunder, will be, the legal, valid and binding
obligation of the Borrower or Guarantor enforceable against the Borrower or
Guarantor in accordance with its terms.
6.3 Solvency; No Liens. The Borrower and each Guarantor is solvent, is
paying its debts as they become due and has sufficient capital to conduct its
business; the fair salable value of the Borrower's and each Guarantor's assets
is in excess of the total amount of its liabilities (including contingent
liabilities) as they become absolute and matured; the security interests granted
herein constitute and shall at all times constitute the first and only liens on
the Collateral; and the Borrower is, or will be at the time additional
Collateral is acquired by it, the
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absolute owner of the Collateral with full right to pledge, sell, consign,
transfer and create a security interest therein, free and clear of any and all
claims or liens in favor of any other Person. For purposes of this provision,
the term "Collateral" includes those items of Equipment listed on the attached
Exhibit D with certificates of title currently reflecting Patterson Energy, Inc.
as owner. Borrower and Guarantors represent that Borrower is or should be the
true owner of such equipment and Borrower and Guarantors will do everything
necessary, or will provide reasonable assistance to Lender, in whatever manner
necessary in order to obtain new certificates of title for the equipment listed
on the attached Exhibit D showing the owner of such equipment as Borrower and
the Lender as first lienholder.
6.4 No Judgments, Litigation. No judgments are outstanding against the
Borrower or any Guarantor nor is there now pending or, to the best of the
Borrower's or Guarantor's knowledge after diligent inquiry, threatened any
litigation, contested claim, or governmental proceeding by or against the
Borrower or any Guarantor except judgments and pending or threatened litigation,
contested claims and governmental proceedings which would not, in the aggregate,
have a Material Adverse Effect on the Borrower or any Guarantor on a combined
basis.
6.5 No Defaults. Neither the Borrower nor any Guarantor is in default
under any material contract, lease, or commitment to which it is a party or by
which it is bound. Neither the Borrower nor any Guarantor knows of any dispute
regarding any contract, lease, or commitment which could have a Material Adverse
Effect on the Borrower or any Guarantor on a combined basis.
6.6 Collateral Locations. On the date hereof, the Collateral is located
at the locations specified in Schedule A hereto.
6.7 No Events of Default. No Event of Default has occurred and is
continuing nor has any event occurred which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default.
6.8 No Limitation on Lender's Rights. Except as permitted herein, none
of the Collateral is subject to contractual obligations that may restrict or
inhibit the Lender's rights or abilities to sell or dispose of the Collateral or
any part thereof after the occurrence of an Event of Default.
6.9 Perfection and Priority of Security Interest. This Agreement
creates a valid and, upon completion of all required filings of financing
statements or other applicable lien notices, perfected and, first priority and
exclusive security interest in the Collateral, securing the payment of all the
Obligations.
6.10 Model and Serial Numbers. Schedule A hereto sets forth the model
number and serial number of each item of Equipment listed on Schedule A on the
date of this Agreement. Schedule A is true and correct in all material respects.
6.11 Environmental Compliance.
(a) Neither Borrower nor any Guarantor, or any subsidiary, has
generated, used, stored, treated, transported, manufactured, handled,
produced or disposed of any Hazardous Materials, on or off its premises
(whether or not owned by it) in any manner in material violation of any
applicable Environmental Law or any license, permit, certificate,
approval or similar authorization thereunder the operations of Borrower
and each Guarantor complies in all material respects with all
Environmental Laws and all licenses, permits, certificates, approvals
and similar authorizations thereunder.
(b) There has been no investigation, proceeding, complaint,
order, directive, claim, citation or notice by any governmental agency
or any other Person nor is any pending or to the best of Borrower's
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<PAGE> 12
and each Guarantor's knowledge threatened, with respect to (i) any
non-compliance with or violation of the requirements of any
Environmental Law by Borrower or any Guarantor (or any subsidiary),
(ii) the release, spill or discharge threatened or actual, of any
Hazardous Material or (iii) the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any
Hazardous Materials or any other environmental, health or safety
matter, which, as to each of clauses (i), (ii) or (iii) to the best of
Borrower's or any Guarantor's knowledge, materially affects Borrower or
any Guarantor or their respective businesses, operation, or assets or
any properties at which Borrower or any Guarantor has developed,
transported, stored or disposed of any Hazardous Materials.
(c) Neither Borrower nor any Guarantor has any material
liability (contingent or otherwise) in connection with a release, spill
or discharge, threatened or actual, of any hazardous Materials or the
generation, use, storage, treatment, transportation, manufacture,
handling, production or disposal of any Hazardous Materials.
(d) Borrower and each Guarantor has all material licenses,
permits, certificates, approvals or similar authorizations required to
be obtained or filed in connection with the operation of Borrower and
each Guarantor under any Environmental Law and all of such licenses,
permits, certificates, approvals or similar authorizations are valid
and in full force and effect.
SECTION 7. COVENANTS OF THE BORROWER.
7.1 Existence. Subject to the potential restructuring described in the
November 24, 1999 memorandum drafted by PricewaterhouseCoopers LLP, a copy of
which is attached hereto as Exhibit C (the "Restructure"), the Borrower and each
Guarantor will maintain its existence, its current yearly accounting cycle, and
shall maintain in full force and effect all licenses, bonds, franchises, leases,
trademarks, patents, contracts and other rights necessary or desirable to the
profitable conduct of its business, shall continue in, and limit its operations
to, the same general lines of business as those presently conducted by it and
shall comply with all applicable laws and regulations of any federal, state or
local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower or Guarantor. Patterson Drilling Programs, Inc. ("Drilling
Programs") and Patterson Onshore Drilling Company ("Onshore Drilling"), both
Texas corporations are Affiliates of the Borrower and Guarantors. Neither
Drilling Programs or Onshore Drilling has any material assets. Both entities
will be merged into either the Borrower or another Affiliate of the Borrower
pursuant to the Restructure. If either Drilling Programs or Onshore Drilling are
not merged and/or dissolved or otherwise maintain legal existence, neither
Borrower nor any Guarantor will transfer any assets to Drilling Programs or
Onshore Drilling without prior written notice to Lender.
7.2 Notice to the Lender. As soon as possible, and in any event within
five (5) Business Days after the Borrower learns of the following, the Borrower
will give written notice to the Lender of (i) any proceeding instituted or
threatened to be instituted by or against the Borrower or any Guarantor in any
federal, state, local or foreign court or before any commission or other
regulatory body (federal, state, local or foreign), (ii) the occurrence of any
Material Adverse Change with respect to the Borrower or any Guarantor on a
combined basis and (iii) the occurrence of any Event of Default or event or
condition which, with notice or lapse of time or both, would constitute an Event
of Default, together with a statement of the action which the Borrower has taken
or proposes to take with respect thereto.
7.3 Maintenance of Records and Lender's Right to Inspect. The Borrower
will maintain books and records pertaining to the Collateral in such detail,
form and scope as the Lender shall require in its commercially reasonable
judgment. The Borrower agrees that the Lender or its agents may enter upon the
Borrower's premises or any location where the Collateral may be found at any
time and from time to time during normal business
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hours, and at any time on and after the occurrence of an Event of Default, for
the purpose of inspecting the Collateral and any and all records pertaining
thereto.
7.4 Insurance.
a) The Borrower will maintain insurance on the Collateral under such
policies of insurance, with such insurance companies, in such amounts and
covering such risks as are at all times reasonably satisfactory to the Lender.
All such policies shall be made payable to the Lender, in case of loss, under a
standard non-contributory "lender" or "secured party" clause and are to contain
such other provisions as the Lender may reasonably require to protect the
Lender's interests in the Collateral and to any payments to be made under such
policies. True copies of all original insurance policies are to be delivered to
the Lender, premium prepaid, with the loss payable endorsement in the Lender's
favor, and shall provide for not less than thirty (30) days prior written notice
to the Lender, of any alteration or cancellation of coverage. If the Borrower
fails to maintain such insurance, the Lender may arrange for (at the Borrower's
expense and without any responsibility on the Lender's part for) obtaining the
insurance. Unless the Lender shall otherwise agree with the Borrower in writing,
the Lender shall have the sole right, in the name of the Lender or the Borrower
and Borrower hereby appoints Lender as Borrower's attorney-in-fact to file
claims under any insurance policies, to receive and give acquittance for any
payments that may be payable thereunder, and to execute any endorsements,
receipts, releases, assignments, reassignments or other documents that may be
necessary to effect the collection, compromise or settlement of any claims under
any such insurance policies.
b) Notwithstanding anything in this section 7.4(a) to the contrary,
Borrower may self-insure with respect to fire, theft, comprehensive or collision
risks on the Equipment consisting of trucks and trailers provided that none of
the following (a "Violation") shall occur: (1) any Event of Default (as such
term is defined in the Agreement) shall have occurred under this Agreement or
any other agreement or instrument executed between Lender and Borrower, or (2)
Borrower shall fail to obtain and maintain (during the term and any renewal term
of the Agreement) public liability insurance in form and amount and with
companies satisfactory to Lender. The occurrence of any Violation shall render
immediately null and void the provisions of this section 7.4(b) and Borrower
agrees that it will, immediately thereupon, provide insurance in accordance with
the terms and conditions of section 7.4(a) above. Borrower agrees that at such
time, if ever, that the total loss or damage to Borrower's trucks and trailers
(collectively "Vehicles") exceeds $250,000 (the "Threshold Amount") it will
within 10 Business Days of the occurrence of that event so notify the Lender in
writing. The value of the Vehicles included in the Threshold Amount shall be
computed based on the value of such Vehicles prior to the loss or damage of such
Vehicles. Borrower further agrees to notify Lender of any loss or damage to any
of its Vehicles following reaching the Threshold Amount in each instance where
the damage or loss exceeds $10,000 per vehicle. Such notice shall be give 10
Business Days after Borrower either knew of should have known, through the
exercise of reasonable care and diligence, of such loss or damage. If any such
Vehicle is lost, stolen, or is, in the opinion of Lender, damaged beyond repair,
then Borrower shall either (1) promptly pay to Lender the full amount that would
be payable under a policy of insurance (covering such Vehicle for its full
insurance value), or (2) replace such lost or damaged Vehicle with like
equipment of equal or greater value. If, after incurring damage, a Vehicle is,
in the opinion of Lender, still repairable, Borrower shall repair, at its own
expense and to the satisfaction of Lender, all damage to such Vehicle within 60
days from the date the damage is incurred.
7.5 Taxes. The Borrower will pay, when due, all taxes, assessments,
claims and other charges (herein "taxes") lawfully levied or assessed against
the Borrower or the Collateral other than taxes that are being diligently
contested in good faith by the Borrower by appropriate proceedings promptly
instituted and for which an adequate reserve is being maintained by the Borrower
in accordance with GAAP. If any taxes remain unpaid after the date fixed for the
payment thereof, or if any lien shall be claimed therefor, then, without notice
to the
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Borrower, but on the Borrower's behalf, the Lender may pay such taxes, and the
amount thereof shall be included in the Obligations.
7.6 Borrower to Defend Collateral Against Claims; Fees on Collateral.
The Borrower will defend the Collateral against all claims and demands of all
Persons at any time claiming the same or any interest therein. The Borrower will
not permit any notice creating or otherwise relating to liens on the Collateral
or any portion thereof to exist or be on file in any public office. The Borrower
shall promptly pay, when due, all transportation, storage and warehousing
charges and license fees, registration fees, assessments, charges, permit fees
and taxes (municipal, state and federal) which may now or hereafter be imposed
upon the ownership, leasing, renting, possession, sale or use of the Collateral,
excluding however, all taxes on or measured by the Lender's income.
7.7 No Change of Location, Structure or Identity. The Borrower will not
(i) change the location of its chief executive office; or (ii) move or permit
the movement of any Collateral from the States specified in Schedule A hereto,
except that the Borrower may change its chief executive office and keep
Collateral at other locations within the United States provided that the
Borrower has delivered to the Lender (A) prior written notice thereof and (B)
duly executed financing statements and other agreements and instruments (all in
form and substance reasonably satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof.
7.8 Use and Maintenance of Collateral; Licenses. The Collateral shall
be operated by competent, qualified personnel in connection with the Borrower's
business purposes, in a careful and proper manner, for the purpose for which the
Collateral was designed and in accordance with applicable operating
instructions, laws and government regulations, and shall not permanently
discontinue use of the Equipment. The Borrower shall use every reasonable
precaution to prevent loss or damage to the Collateral from fire and other
hazards. Borrower shall operate, maintain, service and repair the Equipment, and
maintain all records and other materials relating thereto in accordance and
consistent with all maintenance and operating manuals or service agreements, as
applicable, and in conformance with industry standards and manufacturer's
recommendations, or in any event within reasonable standards for comparable
equipment, so as to cause each item of Equipment to remain in good mechanical
condition and running order, and in at least the same condition as on the date
of this Agreement, reasonable wear and tear excepted. The Collateral shall not
be used or operated for personal, family or household purposes. The Borrower
shall procure and maintain in effect all orders, licenses, certificates,
permits, approvals and consents required by federal, state or local laws or by
any governmental body, agency or authority in connection with the delivery,
installation, use and operation of the Collateral. Borrower will replace any
parts of the Equipment which become worn out, lost destroyed, damaged beyond
repair or otherwise permanently rendered unfit for use, by new or reconditioned
parts which are free and clear of all liens, encumbrances or rights of others
and have a value, utility and remaining useful life at lease equal to the parts
replaced. Borrower shall not make any material alterations to the Equipment
without the prior written consent of Lender.
7.9 Further Assurances. The Borrower will, promptly upon request by the
Lender, execute and deliver or use its best efforts to obtain any document
required by the Lender (including mortgagee waivers, landlord disclaimers, or
subordination agreements with respect to the Obligations and the Collateral),
give any notices, execute and file any financing statements, mortgages or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the
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Lender to file one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Collateral without the signature of
the Borrower where permitted by law. A carbon, photographic or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. To the extent required under this Agreement, the
Borrower will pay all costs incurred in connection with any of the foregoing.
7.10 No Disposition of Collateral. The Borrower will not in any way
hypothecate or create or permit to exist any lien, security interest, charge or
encumbrance on or other interest in any of the Collateral, except for the lien
and security interest granted hereby, and the Borrower will not sell, transfer,
assign, pledge, collaterally assign, exchange or otherwise dispose of any of the
Collateral. Notwithstanding the foregoing, during each twelve month period
following the effective date of this Agreement, Borrower may sell, transfer,
exchange or otherwise dispose of items of Collateral (excluding drilling rigs)
with a cumulative value not exceeding Five Hundred Thousand Dollars
($500,000.00). In the event the Collateral, or any part thereof, is sold,
transferred, assigned, exchanged, or otherwise disposed of in violation of these
provisions, the security interest of the Lender shall continue in such
Collateral or part thereof notwithstanding such sale, transfer, assignment,
exchange or other disposition, and the Borrower will hold the proceeds thereof
in a separate account for the benefit of the Lender. Following such a sale, the
Borrower will transfer such proceeds to the Lender in kind within five (5)
Business Days by wire transfer to such bank account of Lender, as Lender may, in
its discretion, designate to Borrower for such purpose.
7.11 No Limitation on Lender's Rights. The Borrower will not enter into
any contractual obligations which may restrict or inhibit the Lender's rights or
ability to sell or otherwise dispose of the Collateral or any part thereof.
7.12 Protection of Collateral. The Lender shall have the right at any
time to make any payments and do any other acts the Lender may deem necessary to
protect its security interests in the Collateral, including, without limitation,
the rights to satisfy, purchase, contest or compromise any encumbrance, charge
or lien which, in the reasonable judgment of the Lender, appears to be prior to
or superior to the security interests granted hereunder, and appear in and
defend any action or proceeding purporting to affect its security interests in,
or the value of, any of the Collateral. The Borrower hereby agrees to reimburse
the Lender for all payments made and expenses incurred under this Agreement
including the reasonable fees, expenses and disbursements of attorneys and
paralegals (including the allocated costs of in-house counsel) acting for the
Lender, including any of the foregoing payments under, or acts taken to protect
its security interests in, any of the Collateral, which amounts shall be secured
under this Agreement, and agrees it shall be bound by any payment made or act
taken by the Lender hereunder absent the Lender's gross negligence or willful
misconduct. The Lender shall have no obligation to make any of the foregoing
payments or perform any of the foregoing acts.
7.13 Delivery of Items. The Borrower will promptly (but in no event
later than ten Business Days) after its receipt thereof, deliver to the Lender
any documents or certificates of title issued with respect to any property
included in the Collateral, and any promissory notes, letters of credit or
instruments related to or otherwise in connection with any property included in
the Collateral, which in any such case come into the possession of the Borrower,
or shall cause the issuer thereof to deliver any of the same directly to the
Lender, in each case with any necessary endorsements in favor of the Lender.
7.14 Merger, Consolidation and other Fundamental Changes. Without the
prior written consent of the Lender, not to be unreasonably withheld, and
subject to the potential restructure described in Exhibit C hereto, neither the
Borrower nor any Guarantor shall merge or consolidate with or into any other
Person, or amend or modify its name, capital structure, status or existence, or
sell or otherwise dispose of all or substantially all of its assets. Upon
Restructure, Borrower and Guarantor agree to the execution of formal assumption
documents and
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other requirements of Lender as follows: (a) assumption agreement; (b) guaranty
agreements from the limited liability companies; (c) amendments to the Notes to
correct the Borrower's name; (d) amendments to the Guaranties correcting the
entity names and ratifying the Guaranties; (e) appropriate amendments to UCC-1
financing statements and/or new UCC-1 financing statements with correct entity
names; (f) confirmation that no assets have been transferred from Guarantors to
non-guarantors, and (g) a supplemental opinion from Borrower's counsel as to
merger, due authorization of assumption and related amendment documents and
continuing enforceability of Loan Documents (subject to the assumptions and
exceptions contained in the opinion of Borrower's counsel delivered in
connection with this Agreement), all of the foregoing in form and substance
satisfactory to Lender. Notwithstanding the foregoing and provided both
immediately before and after giving effect to the merger or consolidation, no
Event of Default or an event which with the passage of time or notice or both
would be an Event of Default has occurred and is continuing, (i) any Guarantor,
with notice to Lender, may merge with Borrower and/or another Guarantor, and
(ii) the Borrower or any Guarantor, with notice to Lender, may merge or
consolidate with any other Person as long as the Borrower or any Guarantor is
the surviving entity.
7.15 Indebtedness. Borrower and each Guarantor shall not incur, create,
assume, become or be liable in any manner with respect to, or permit to exist
any debt obligations, including capitalized lease obligations, excluding,
however, unsecured trade debt; a line of credit secured solely by the Borrower's
or Guarantors' accounts receivable, which Lender acknowledges may also be
unconditionally guaranteed by Patterson Energy, Inc.; and the Obligations
hereunder.
7.16 Loans, Investments, Guarantees, Etc. Borrower and each Guarantor
shall not directly or indirectly, make any loans or advance money or property to
any Person, or invest in (by capital contribution, dividend or otherwise) or
purchase or repurchase the capital stock or indebtedness or all or a substantial
part of the assets or property of any Person, or guarantee, assume endorse, or
otherwise become responsible for (directly or indirectly) the Indebtedness,
performance, obligations or dividends of any Person or form or acquire any
subsidiaries or agree to do any of the foregoing, except, however, as otherwise
provided in this Agreement or in the normal course of business.
7.17 Dividends and Redemptions. Borrower and each Guarantor shall not
make, pay, declare or authorize any dividend, payment or other distribution in
respect of any class of its capital stock or any dividend, payment or
distribution in connection with the redemption, purchase, retirement or other
acquisition, directly or indirectly, of any shares of its capital stock other
than such dividends, payments or other distributions to the extent payable
solely in shares of the capital stock of Borrower or Guarantors, except, the
redemption of 300,000 shares of common stock of Borrower paid to Padre
Industries and callable by Padre Industries at $5.50 per share.
7.18 Financial Statements. Until the payment and satisfaction in full
of all Obligations, the Borrower shall deliver to the Lender the following
financial information:
(a) Annual Financial Statements. As soon as available, but not
later than 120 days after the end of each Fiscal Year of the Borrower
and its consolidated Affiliates, the consolidated balance sheet, income
statement and statements of cash flows and shareholders equity for the
Borrower and its consolidated Affiliates (the "Financial Statements")
for such year, reported on by independent certified public accountants
without an adverse qualification and in accordance with GAAP; and
(b) Quarterly Financial Statements. As soon as available, but
not later than 60 days after the end of each of the first three fiscal
quarters in any Fiscal Year of the Borrower and its consolidated
Affiliates, the Financial Statements for such fiscal quarter, together
with a certification duly executed by
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a responsible officer of the Borrower that such Financial Statements
have been prepared in accordance with GAAP and are fairly stated in all
material respects (subject to normal year-end audit adjustments).
(c) Monthly Financial Statements. As soon as available, but
not later than 30 days after the end of each month, the Financial
Statements for such month, together with a certification duly executed
by a responsible officer of the Borrower that such Financial Statements
have been prepared in accordance with GAAP and are fairly stated in all
material respects (subject to normal year-end audit adjustments).
7.19 Financial Covenants. Borrower and each Guarantor shall furnish,
within 120 days of the end of each Fiscal Year, a Compliance Certificate
acceptable to Lender certified by Borrower's and Guarantor's chief financial
officer, as to the compliance in accordance with its most recent SEC filing,
with the following financial covenants:
(a) Borrower and Guarantors, on a combined basis, shall
maintain Fixed Charge Coverage of not less than 1.20 to 1, determined
on a quarterly basis. The measurement period shall commence with
January 1, 2000 and shall be on a cumulative basis until December 31,
2000. Thereafter, the covenant test shall be measured on a rolling two
(2) historical quarter basis.
(b) Borrower's and Guarantors' combined minimum Tangible Net
Worth at the end of each Fiscal Year shall be not less than Eighty
Million Dollars ($80,000,000).
(c) Borrower's and Guarantors' combined ratio of Total
Liabilities to Tangible Net Worth at the end of each Fiscal Year shall
be not more than 3.0 to 1.
SECTION 8. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
(a) failure of the Borrower to pay any principal or interest
payment hereunder within five (5) Business Days of their respective due
dates, whether at stated maturity, by acceleration, or otherwise;
(b) failure of Borrower or any Guarantor to pay any other
payment Obligations due hereunder or to perform, comply with or observe
any term, covenant or agreement applicable to it contained in any of
the Loan Documents within fifteen (15) Business Days of its receipt of
written notice or demand from Lender;
(c) any representation or warranty made or deemed made by the
Borrower or any Guarantor hereunder, under or in connection with the
Financial Statements, under any other Loan Document or under any other
agreement between the Borrower and any Guarantor and the Lender, or
under any document, instrument or certificate executed by the Borrower
or any Guarantor in favor of the Lender, shall prove to have been false
or incorrect in any material respect when made;
(d) any material provision of any Loan Document to which the
Borrower or any Guarantor is a party shall for any reason cease to be
valid and binding on such Borrower or Guarantor, or the Borrower or any
Guarantor shall so assert in writing;
(e) dissolution, liquidation, winding up or cessation of any
of the Loan Parties' business other than by way of merger or
consolidation permitted under this Agreement, or the failure of any of
the Loan Parties to pay its debts as they mature; or the admission in
writing by any of the Loan Parties of its
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<PAGE> 18
inability to pay its debts as they mature; or the calling of a meeting
of any of the Loan Parties' creditors for purposes of compromising any
of the Loan Parties' debts;
(f) the commencement by or against any of the Loan Parties of
any bankruptcy, insolvency, arrangement, reorganization, receivership
or similar proceedings under any federal or state law and, in the case
of any such involuntary proceeding, such proceeding remains undismissed
or unstayed for forty-five (45) days following the commencement
thereof, or any action by any of the Loan Parties is taken authorizing
any such proceedings;
(g) the Loan Parties, on a combined basis, suffer or sustain a
Material Adverse Change;
(h) an assignment for the benefit of creditors is made by any
of the Loan Parties, whether voluntary or involuntary, or any of the
Loan Parties consents to the appointment of a trustee or receiver, or
if a trustee or receiver is appointed for any of the Loan Parties or
for a substantial part of its property;
(i) any of the Loan Parties shall (A) default in the payment
of principal of or interest on any indebtedness for borrowed money in
an aggregate principal amount exceeding $250,000.00 beyond the period
of grace, if any, provided in the instrument or agreement under which
such indebtedness was created; or (B) default in the observance or
performance of any other agreement or condition relating to any such
indebtedness or contained in any instrument or agreement relating
thereto, or any other event shall occur or condition exist, the effect
of which default or other event or condition is to cause, or to permit
the holder or holders of such indebtedness to cause, with the giving of
notice if required, such indebtedness to become due prior to its stated
maturity;
(j) any material Federal tax lien is filed of record against
any of the Loan Parties and is not bonded or discharged within five
Business Days;
(k) any judgment in excess of $250,000.00 shall be rendered
against any of the Loan Parties which shall not be stayed, vacated,
bonded or discharged within sixty days;
(l) any material covenant, agreement or obligation of any of
the Loan Parties contained in or evidenced by any of the Loan Documents
shall cease to be enforceable, or shall be determined to be
unenforceable, in accordance with its terms; or any liens granted on
any material item or, collectively, items of the Collateral shall be
determined to be void, voidable or invalid, are subordinated or are not
given the priority contemplated by this Agreement;
(m) this Agreement shall for any reason (other than pursuant
to the terms hereof) cease to create a valid and perfected first
priority lien on the Collateral purported to be covered hereby; or
(n) there is a change in the ownership of any equity interests
of the Borrower; or the ownership of any equity interests of the Loan
Parties becomes subject to any contractual, judicial or statutory lien,
charge, security interest or encumbrance.
SECTION 9. REMEDIES. If any Event of Default shall have occurred and be
continuing:
(a) the Lender may, without prejudice to any of its other
rights under any Loan Document or applicable law, declare all
Obligations to be immediately due and payable (except with respect to
any Event of Default set forth in Section 8(f) hereof, in which case
all Obligations shall automatically become
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<PAGE> 19
immediately due and payable without necessity of any declaration)
without presentment, representation, demand of payment or protest,
which are hereby expressly waived;
(b) the Lender may take possession of the Collateral and, for
that purpose may enter, with the aid and assistance of any person or
persons, any premises where the Collateral or any part hereof is, or
may be placed, and remove the same;
(c) the obligation of the Lender, if any, to give additional
(or to continue) financial accommodations of any kind to the Borrower
shall immediately terminate;
(d) the Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any
Loan Document) or otherwise available to it, all the rights and
remedies of a secured party under the Uniform Commercial Code (the
"Code") whether or not the Code applies to the affected Collateral and
also may (i) require the Borrower to, and the Borrower hereby agrees
that it will at its expense and upon request of the Lender forthwith,
assemble all or part of the Collateral as directed by the Lender and
make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) without
notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the
Lender's offices or elsewhere, for cash, on credit or for future
delivery, and upon such other terms as the Lender may deem commercially
reasonable. The Borrower agrees that, to the extent notice of sale
shall be required by law, at least ten days' notice to the Borrower of
the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification.
The Lender shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Lender may adjourn
any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned;
(e) all cash proceeds received by the Lender in respect of any
sale of, collection from, or other realization upon all or any part of
the Collateral may, in the discretion of the Lender, be held by the
Lender as collateral for, or then or at any time thereafter applied in
whole or in part by the Lender against, all or any part of the
Obligations in such order as the Lender shall elect. Any surplus of
such cash or cash proceeds held by the Lender and remaining after the
full and final payment of all the Obligations shall be paid over to the
Borrower or to such other Person to which the Lender may be required
under applicable law, or directed by a court of competent jurisdiction,
to make payment of such surplus.
SECTION 10. TERM
10.1 Expiration Date. This Agreement and the other Loan Documents shall
become effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the date of expiration of
the Loan Term.
10.2 Obligations Due. Upon the effective date of termination, either by
expiration of the term, acceleration, or otherwise, Borrower shall pay Lender,
in full, all outstanding and unpaid Obligations and shall furnish cash
collateral to Lender in such amounts as Lender determines are reasonably
necessary to secure Lender form loss, cost, damage or expense, including
attorneys' fees and legal expenses, in connection with any contingent
Obligations, including checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer to such bank account of Lender, as
Lender may, in its discretion, designate to Borrower for such purpose. Interest
shall be due until and include the next Business Day,
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<PAGE> 20
if the amounts so paid by Borrower to the bank account designated by Lender are
received in such bank account later than 12:00 noon Central Standard Time.
10.3 No Relief from Duties. No termination of this Agreement or the
other Loan Documents shall relieve or discharge Borrower of its respective
duties, obligations and covenants under this Agreement or the other Loan
Documents until all Obligations have been fully and finally discharged and paid,
and Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Loan Documents and applicable law,
shall remain in effect until all such Obligations have been fully and finally
discharged and paid.
10.4 Early Payment. If for any reason, voluntarily or involuntarily,
this Agreement is terminated prior to the end of six years from the date of this
Agreement, or the principal amounts owing hereunder are otherwise paid before
they are due, then in view of the impracticality and extreme difficulty of
ascertaining actual damages and by mutual agreement of the parties as to a
reasonable calculation of Lender's lost profits as a result thereof, Borrower
agrees to pay to Lender, upon the effective date of such termination or early
payment, an early payment fee in the amount set forth below if such termination
or early payment is effective in the period indicated:
<TABLE>
<CAPTION>
Amount Period
------ ------
<S> <C>
(i) 0.5% of first $40,000,000 of Entire term
principal amount owing
(ii) 5.0% of principal balance above From the date hereof to and including
$40,000,000 eighteenth (18th) month hereafter
(iii) 2.0% of the principal balance From the nineteenth (19th) month from
above $40,000,000 the date hereof to and including the
thirtieth (30th) month hereafter
(iv) 1.0% of the principal balance From the thirty first (31st) month
above $40,000,000 from the date hereof to the end of
the Loan Term.
</TABLE>
Such early payment fee shall be presumed to be the amount of damages sustained
by Lender as a result of such early termination or early payment and Borrower
agrees that it is reasonable under the circumstances currently existing.
SECTION 11. MISCELLANEOUS PROVISIONS.
11.1 Notices. Except as otherwise provided herein, all notices,
approvals, consents, correspondence or other communications required or desired
to be given hereunder shall be given in writing and shall be delivered by
overnight courier, hand delivery or certified or registered mail, postage
prepaid, if to the Lender, then to 5080 Spectrum Drive, Suite 1100 West, Dallas,
Texas 75248, Attention: Division Operations Manager, with a copy to the Lender
at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department or such other address as shall be designated
by the Lender to the Borrower. All such notices and correspondence shall be
effective when received.
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<PAGE> 21
11.2 Headings. The headings in this Agreement are for purposes of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
11.3 Assignments and Participation. The Borrower shall not have the
right to assign the Notes or this Agreement or any interest therein, provided,
however, this provision shall not apply to any merger or consolidation
authorized in Paragraph 7.14 of this Agreement. The Lender may assign its rights
and delegate its obligations under the Notes or this Agreement, or may resell
(through syndication, assignment, participation or placements), provided Lender
agrees with Borrower that any such resale would be made in material compliance
with applicable state and federal securities laws, an interest in the Notes,
this Agreement, the Loan Documents and/or the Collateral. Borrower agrees to
confirm in writing receipt of any such notice of assignment, syndication,
participation or placements, as may be reasonably requested by Lender or any
such assignee or participant. Borrower hereby agrees that any assignee or
participant shall have, to the extent of such assignment or participation, the
same rights and benefits as it would have if it were the Lender hereunder,
except as otherwise provided by the terms of such assignment or participation.
Borrower will provide reasonable assistance to Lender, at Lender's expense, in
whatever manner necessary in order to permit Lender to complete any resale,
syndication, assignment, participation or placement of the transaction
contemplated by this Agreement, including the execution and delivery of such
other documents, instruments, notices, opinions, certificates and
acknowledgements, as reasonably may be required by Lender or any Assignee.
11.4 Amendments, Waivers and Consents. Any amendment or waiver of any
provision of this Agreement and any other Loan Document and any consent to any
departure by the Borrower from any provision of this Agreement or other Loan
Document shall be effective only by a writing signed by the Lender and shall
bind and benefit the Borrower and the Lender and their respective successors and
assigns, subject, in the case of the Borrower, to the first sentence of Section
11.3.
11.5 Interpretation of Agreement. Time is of the essence in each
provision of this Agreement of which time is an element. To the extent a term or
provision of this Agreement conflicts with the Note and is not dealt with herein
with more specificity, this Agreement shall control with respect to the subject
matter of such term or provision. Acceptance of or acquiescence in a course of
performance rendered under this Agreement shall not be relevant in determining
the meaning of this Agreement even though the accepting or acquiescing party had
knowledge of the nature of the performance and opportunity for objection.
11.6 Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the indefeasible payment in full of the Obligations, (ii)
be binding upon the Borrower and its successors and assigns and (iii) inure,
together with the rights and remedies of the Lender hereunder, to the benefit of
the Lender and its successors, transferees and assigns.
11.7 Reinstatement. To the extent permitted by law, this Agreement and
the rights and powers granted to the Lender hereunder and under the Loan
Documents shall continue to be effective or be reinstated if at any time any
amount received by the Lender in respect of the Obligations is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or upon the
appointment of any receiver, intervenor, conservator, trustee or similar
official for the Borrower or any substantial part of its assets, or otherwise,
all as though such payments had not been made.
11.8 Survival of Provisions. All representations, warranties and
covenants of the Borrower contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Borrower of the Obligations secured hereby.
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<PAGE> 22
11.9 Indemnification. The Borrower agrees to indemnify and hold
harmless the Lender and its directors, officers, agents, employees and counsel
from and against any and all costs, expenses, claims, or liability incurred by
the Lender or such Person hereunder and under any other Loan Document or in
connection herewith or therewith, unless such claim or liability shall be due to
willful misconduct or gross negligence on the part of the Lender or such Person.
11.10 GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
11.11 Delays; Partial Exercise of Remedies. No delay or omission of the
Lender to exercise any right or remedy hereunder, whether before or after the
happening of any Event of Default, shall impair any such right or shall operate
as a waiver thereof or as a waiver of any such Event of Default. No single or
partial exercise by the Lender of any right or remedy shall preclude any other
or further exercise thereof, or preclude any other right or remedy.
11.12 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
11.13 Entire Agreement. The Borrower and the Lender agree that this
Agreement and the other Loan Documents related thereto are the complete and
exclusive statement and agreement between the parties with respect to the
subject matter hereof, superseding all proposals and prior agreements, oral or
written, and all other communications between the parties with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the undersigned Borrower and each Guarantor has
caused this Agreement to be duly executed and delivered by its proper and duly
authorized officer as of the date first set forth above.
LENDER: BORROWER:
TRANSAMERICA EQUIPMENT PATTERSON DRILLING COMPANY
FINANCIAL SERVICES CORPORATION
By: /s/ RANDY SHUMATE By: /s/ CLOYCE A. TALBOTT
---------------------------------- ----------------------------------
Printed Name: Randy Shumate Printed Name: Cloyce A. Talbott
------------------------ ------------------------
Title: Senior Vice President Title: CEO
------------------------------- -------------------------------
GUARANTORS:
PATTERSON ENERGY, INC.
By: /s/ CLOYCE A. TALBOTT
----------------------------------
Printed Name: Cloyce A. Talbott
------------------------
Title: CEO
-------------------------------
LONE STAR MUD, INC.
By: /s/ CLOYCE A. TALBOTT
----------------------------------
Printed Name: Cloyce A. Talbott
------------------------
Title: CEO
-------------------------------
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<PAGE> 1
EXHIBIT 10.1.1
PROMISSORY NOTE
$50,000,000 Dated: December 21, 1999
FOR VALUE RECEIVED, PATTERSON DRILLING COMPANY, a Delaware corporation
("Debtor") hereby unconditionally promises to pay to TRANSAMERICA EQUIPMENT
FINANCIAL SERVICES CORPORATION, a Delaware Corporation ("Payee") or ORDER at the
offices of Payee at ________________________ or at such other place as the Payee
or any holder may designate in writing, the principal sum of_________________
DOLLARS ($______ ) in consecutive installments (or earlier as hereinafter
provided) on the first day of each month commencing_____________ , 2000, of
which the first____________ (_______ ) installments shall each be in the amount
of________________________ DOLLARS ($________ ), and the last installment due
and payable on__________ , 2005 shall be in the amount of the entire unpaid
balance of this Note.
INTEREST. Debtor further agrees to pay the holder of this Promissory
Note interest on the balance of the principal from time to time unpaid at the
Interest Rate (as defined below). Accrued and unpaid interest will be payable
monthly (whether or not a principal payment is then scheduled as payable) on the
first day of each month commencing______________. The rate of interest hereunder
shall be computed at the option of the holder on the basis of a 365-day year for
the actual number of days elapsed. All payments may at the option of the holder
be applied first to delinquency charges, then to interest, and then to
principal. The acceptance by the holder of any payment which is less than
payment in full of all amounts due and owing at such time shall not constitute a
waiver of the holder's right to receive payment in full at such or at any other
time.
INTEREST RATE. The "INTEREST RATE" shall mean a simple interest per
annum rate equal to the lesser of (i) 3.51% in excess of the LIBOR Rate (as
defined below); or (ii) the lawful maximum, if any, in effect from time to in
the applicable jurisdiction for loans to borrowers of the type, in the amount,
for the purposes, and otherwise of the kind herein contemplated. The Interest
Rate payable hereunder shall increase or decrease by an amount equal to each
increase or decrease, respectively, the LIBOR Rate, effective on the first day
of the month after any change in the LIBOR Rate is announced. The Interest Rate
in effect during any month will be based upon the LIBOR Rate in effect on the
last business day of the immediately preceding month. In no event shall the
interest charged hereunder exceed the maximum permitted under any applicable law
or regulation.
<PAGE> 2
"LIBOR Rate" shall mean an interest rate per annum equal to the London
Interbank Offered Rate published in the Money Rates section of The Wall Street
Journal as the average of Interbank offered rates for U.S. dollar deposits for
ninety (90) days in the London market based upon quotations from the majority of
banks in the London interbank market effective as to contracts entered into two
days prior to publication by The Wall Street Journal. In the event the LIBOR
Rate as published in The Wall Street Journal ceases to exist or The Wall Street
Journal ceases publishing the LIBOR Rate, the holder hereof will substitute a
comparable index which is outside the control of the holder. In the event of an
error by The Wall Street Journal, the LIBOR Rate will be based upon the LIBOR
Rate as corrected.
PAYMENT. All payments may at the option of the holder be applied first
to delinquency charges, then to accrued and unpaid interest or other charges,
and then to principal. The acceptance by the holder of any payment which is less
than payment in full of all amounts due and owing at such time will not
constitute a waiver of the holder's right to receive payment in full at such
time or at any other time.
This Note is issued pursuant to the terms and provisions of the Loan
and Security Agreement and other Loan Documents to evidence the Existing
Equipment Loan by Payee to Debtor. This Note is secured by the Collateral
described in the Loan and Security Agreement and is entitled to all of the
benefits and rights of the Loan and Security Agreement and other Loan Documents.
Unless otherwise defined herein, all capitalized terms used herein shall have
the meaning assigned thereto in the Loan and Security Agreement.
If any installment of this Note is not paid when due hereunder, the
undersigned agrees to pay on demand, in addition to the amount of such
installment, an amount equal to five percent (5%) of such installment, but only
to the extent permitted by applicable law. Furthermore, if any Event of Default
shall occur for any reason, or if the Loan and Security Agreement shall be
terminated for any reason whatsoever, then and in any such event, in addition to
all rights and remedies of Payee under the Loan Documents, applicable law or
otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, Payee may, at its
option, declare any or all of Debtor's Obligations owing to Payee under the Loan
and Security Agreement and the other Loan Documents, including this Note, to be
due and payable, whereupon the then unpaid balance hereof, together with all
interest accrued thereon, shall forthwith become due and payable, together with
interest accruing thereafter at the then applicable Interest Rate stated above
until the indebtedness evidenced by this Note is paid in full, plus the costs
and expenses of collection hereof, including attorney's fees and legal expenses.
The undersigned shall have the right to prepay this Note, in whole or
in part, at any time on 30 days' prior notice to the Payee, provided that on the
date of such prepayment, the undersigned shall pay the principal amount of this
Note being so prepaid (the "Prepayment Amount"), together with all interest,
fees and other amounts payable on the amount so prepaid or in connection
therewith to the date of such prepayment and, if applicable, the early
termination fee set forth in the Loan and Security Agreement.
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<PAGE> 3
Upon the maturity of this Note or the acceleration of the maturity of
this Note in accordance with the terms of the Agreement, the entire unpaid
principal amount on this Note, together with all interest, fees and other
amounts payable hereon or in connection herewith, shall be immediately due and
payable without further notice or demand, with interest on all such amounts at a
rate not to exceed the lawful limit, from the date of such maturity or
acceleration, as the case may be, until all such amounts have been paid.
If any payment on this Note becomes payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the applicable rate during such extension.
The undersigned hereby waives diligence, demand, presentment, protest
and notice of any kind, and assents to extensions of the time of payment,
release, surrender or substitution of security, or forbearance or other
indulgence, without notice. The undersigned agrees to pay all amounts under this
Note without offset, deduction, claim, counterclaim, defense or recoupment, all
of which are hereby waived.
The Payee, the undersigned and any other parties to the Loan Documents
intend to contract in strict compliance with applicable usury law from time to
time in effect. In furtherance thereof such Persons stipulate and agree that
none of the terms and provisions contained in the Loan Documents shall ever be
construed to create a contract to pay, for the use, forbearance or detention of
money, interest in excess of the maximum amount of interest permitted to be
charged by Applicable Law from time to time in effect. Neither the undersigned
nor any present or future guarantors, endorses, or other Persons hereafter
becoming liable for payment of any Obligation shall ever be liable for unearned
interest thereon or shall ever be required to pay interest thereon in excess of
the maximum amount that may be lawfully charged under Applicable Law from time
to time in effect, and the provisions of this paragraph shall control over all
other provisions of the Loan Documents which may be in conflict or apparent
conflict herewith. The Payee expressly disavows any intention to charge or
collect excessive unearned interest or finance charges in the event the maturity
of any Obligation is accelerated. If (a) the maturity of any Obligation is
accelerated for any reason, (b) any Obligation is prepaid and as a result any
amounts held to constitute interest are determined to be in excess of the legal
maximum, or (c) the Payee or any other holder of any or all of the Obligations
shall otherwise collect amounts which are determined to constitute interest
which would otherwise increase the interest on any or all of the Obligations to
an amount in excess of that permitted to be charged by Applicable Law then in
effect, then all sums determined to constitute interest in excess of such legal
limit shall, without penalty, be promptly applied to reduce the then outstanding
principal of the related Obligations or, at the Payee's or such holder's option,
promptly returned to the undersigned upon such determination. In determining
whether or not the interest paid or payable, under any specific circumstance,
exceeds the maximum amount permitted under Applicable Law, the Payee and the
undersigned (and any other payors thereof) shall to the greatest extent
permitted under Applicable Law, (i) characterize any non-principal payment as an
expense, fee or premium rather than as interest, (ii) exclude voluntary
prepayments and the effects thereof, and (iii) amortize, prorate, allocate, and
spread the total amount of interest through the entire contemplated term of this
Note in
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<PAGE> 4
accordance with the amount outstanding from time to time thereunder and the
maximum legal rate of interest from time to time in effect under Applicable Law
in order to lawfully charge the maximum amount of interest permitted under
Applicable Law.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the undersigned and the Payee or any holder
hereof.
The undersigned shall, upon demand, pay to the Payee all costs and
expenses incurred by the Payee (including the fees and disbursements of counsel
and other professionals) in connection with the preparation, execution and
delivery of this Note and all other Loan Documents, and in connection with the
administration, modification and amendment of the Loan Documents, and pay to the
Payee all costs and expenses (including the fees and disbursements of counsel
and other professionals) paid or incurred by the Payee in (A) enforcing or
defending its rights under or in respect of this Note or any of the other Loan
Documents, (B) collecting any of the liabilities by the undersigned to the Payee
or otherwise administering the Loan Documents, (C) foreclosing or otherwise
collecting upon any collateral and (D) obtaining any legal, accounting or other
advice in connection with any of the foregoing.
This Note shall be binding upon the successors and assigns of the
undersigned and inure to the benefit of the Payee and its successors, endorsees
and assigns. If any term or provision of this Note shall be held invalid,
illegal or unenforceable, the validity of all other terms and provisions hereof
shall in no way be affected thereby.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS
OF LAW.
EACH OF THE UNDERSIGNED AND, BY ITS ACCEPTANCE HEREOF, THE PAYEE HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE
ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE SHALL BE
TRIED BEFORE A JUDGE SITTING WITHOUT A JURY.
PATTERSON DRILLING COMPANY
By: /s/ CLOYCE A. TALBOTT
-------------------------------------------
Printed Name: Cloyce A. Talbott
---------------------------------
Title: CEO
----------------------------------------
-4-
<PAGE> 1
EXHIBIT 10.1.2
GUARANTY
GUARANTY, dated as of December 21, 1999, made by LONE STAR MUD, INC., a
corporation organized and existing under the laws of Texas ("Guarantor"), in
favor of TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION ("Lender").
A. Lender and Patterson Drilling Company ("Borrower") have entered into
certain financing arrangements pursuant to which Lender may make loans and
advances to Borrower as set forth in the Loan and Security Agreement, dated of
even date herewith, by and among Lender, Borrower and Guarantor (as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement"), and other agreements, documents,
and instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto, including, but not limited to, this
Guaranty (all of the foregoing, together with the Loan Agreement, as the same
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, being collectively referred to herein as the
"Loan Documents");
B. Due to the close business and financial relationships between
Borrower and the Guarantor, in consideration of the benefits which will accrue
to Guarantor and as an inducement for and in consideration of Lender making
loans and advances and providing other financial accommodations to Borrower
pursuant to the Loan Agreement and the other Loan Documents, the Guarantor
hereby agrees in favor of Lender as follows:
1. Guaranty.
(a) Guarantor absolutely and unconditionally, jointly and severally,
guarantees and agrees to be liable for the full and indefeasible payment and
performance when due of the following (all of which are collectively referred to
herein as the "Guaranteed Obligations"): (i) all obligations, liabilities and
indebtedness of any kind, nature and description of Borrower to Lender and/or
its affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, arising under the Loan Agreement, or any of the other Loan
Documents, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of the Loan Agreement or after
the commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts, which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in any such case and including loans, interest,
fees, charges and expenses related thereto and all other obligations of Borrower
or its successors to Lender arising under the Loan Agreement or any of the other
Loan Documents after the commencement of such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by Lender
and (ii) all expenses (including, without limitation, attorneys' fees and legal
expenses) incurred by Lender in connection with the preparation, execution,
delivery, recording, administration, collection, liquidation, enforcement and
defense of Borrower's
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obligations, liabilities and indebtedness as aforesaid to Lender, the rights of
Lender in any collateral or under this Guaranty and all other Loan Documents or
in any way involving claims by or against Lender directly or indirectly arising
out of or related to the relationships between Borrower, Guarantor or any other
Obligor (as hereinafter defined) and Lender under the Loan Agreement or any of
the other Loan Documents, whether such expenses are incurred before, during or
after the initial or any renewal term of the Loan Agreement and the other Loan
Documents or after the commencement of any case with respect to Borrower or
Guarantor under the United States Bankruptcy Code or any similar statute.
(b) This Guaranty is a guaranty of payment and not of collection.
Guarantor agrees that Lender need not attempt to collect any Guaranteed
Obligations from Borrower, any other guarantor or any other Obligor or to
realize upon any collateral, but may require Guarantor to make immediate payment
of all of the Guaranteed Obligations to Lender when due, whether by maturity,
acceleration or otherwise, or at any time thereafter. Lender may apply any
amounts received in respect of the Guaranteed Obligations to any of the
Guaranteed Obligations, in whole or in part (including attorneys' fees and legal
expenses incurred by Lender with respect thereto or otherwise chargeable to
Borrower or Guarantor) and in such order as Lender may elect.
(c) Payment by Guarantor shall be made to Lender at the office of
Lender from time to time on demand as Guaranteed Obligations become due.
Guarantor shall make all payments to Lender on the Guaranteed Obligations free
and clear of, and without deduction or withholding for or on account of, any
setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. One or more successive or
concurrent actions may be brought hereon against the Guarantor and any other
guarantor either in the same action in which Borrower or any other Obligor is
sued or in separate actions. In the event any claim or action, or action on any
judgment, based on this Guaranty is brought against Guarantor, Guarantor agrees
not to deduct, set-off, or seek any counterclaim for or recoup any amounts which
are or may be owed by Lender to Guarantor.
2. Waivers and Consents.
(a) Notice of acceptance of this Guaranty, the making of loans and
advances and providing other financial accommodations to Borrower and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which Borrower or Guarantor are entitled are hereby
waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i)
any amendment, modification, supplement, extension, renewal, or restatement of
the Loan Agreement and any of the other Loan Documents, including, without
limitation, extensions of time of payment of or increase or decrease in the
amount of any of the Guaranteed Obligations, the interest rate, fees, other
charges, or any collateral, and the guaranty made herein shall apply to the Loan
Agreement and the other Loan Documents and the Guaranteed Obligations as so
amended, modified, supplemented, renewed, restated or extended, increased or
decreased, (ii) the taking, exchange, surrender and releasing of collateral or
guarantees now or at any time held by or available to Lender for the obligations
of Borrower or any other party at any time liable on or in respect of the
Guaranteed Obligations or who is the owner of any property which is security for
the Guaranteed Obligations (individually, an "Obligor" and collectively, the
"Obligors"), including, without limitation, the surrender or release by Lender
of any one of Guarantor hereunder, (iii) the exercise of, or refraining from the
exercise of any rights against Borrower, Guarantor or any other Obligor or any
collateral, (iv) the settlement, compromise or release of, or the waiver of any
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default with respect to, any of the Guaranteed Obligations and (v) any financing
by Lender of Borrower under Section 364 of the United States Bankruptcy Code or
consent to the use of cash collateral by Lender under Section 363 of the United
States Bankruptcy Code. The Guarantor agrees that the amount of the Guaranteed
Obligations shall not be diminished and the liability of Guarantor hereunder
shall not be otherwise impaired or affected by any of the foregoing.
(b) No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations shall affect, impair or be a defense to this
Guaranty, nor shall any other circumstance which might otherwise constitute a
defense available to or legal or equitable discharge of Borrower in respect of
any of the Guaranteed Obligations, or the Guarantor in respect of this Guaranty,
affect, impair or be a defense to this Guaranty. Without limitation of the
foregoing, the liability of Guarantor hereunder shall not be discharged or
impaired in any respect by reason of any failure by Lender to perfect or
continue perfection of any lien or security interest in any collateral or any
delay by Lender in perfecting any such lien or security interest. As to
interest, fees and expenses, whether arising before or after the commencement of
any case with respect to Borrower under the United States Bankruptcy Code or any
similar statute, Guarantor shall be liable therefor, even if Borrower's
liability for such amounts does not, or ceases to, exist by operation of law.
Guarantor acknowledges that Lender has not made any representations to Guarantor
with respect to Borrower, any other Obligor or otherwise in connection with the
execution and delivery by Guarantor of this Guaranty and Guarantor is not in any
respect relying upon Lender or any statements by Lender in connection with this
Guaranty.
(c) Guarantor hereby irrevocably and unconditionally waives and
relinquishes all statutory, contractual, common law, equitable and all other
claims against Borrower, any collateral for the Guaranteed Obligations or other
assets of Borrower or any other Obligor, for subrogation, reimbursement,
exoneration, contribution, indemnification, setoff or other recourse in respect
to sums paid or payable to Lender by Guarantor hereunder and Guarantor hereby
further irrevocably and unconditionally waives and relinquishes any and all
other benefits which Guarantor might otherwise directly or indirectly receive or
be entitled to receive by reason of any amounts paid by or collected or due from
Guarantor, Borrower or any other Obligor upon the Guaranteed Obligations or
realized from their property.
3. Subordination. Payment of all amounts now or hereafter owed to
Guarantor by Borrower or any other Obligor is hereby subordinated in right of
payment to the indefeasible payment in full to Lender of the Guaranteed
Obligations and all such amounts and any security and guarantees therefor are
hereby assigned to Lender as security for the Guaranteed Obligations.
4. Acceleration. Notwithstanding anything to the contrary contained
herein or any of the terms of any of the other Loan Documents, the liability of
Guarantor for the entire Guaranteed Obligations shall mature and become
immediately due and payable, even if the liability of Borrower or any other
Obligor therefor does not, upon the occurrence of any act, condition or event
which constitutes an Event of Default as such term is defined in the Loan
Agreement.
5. Account Stated. The books and records of Lender showing the account
between Lender and Borrower shall be admissible in evidence in any action or
proceeding against or involving Guarantor as prima facie proof of the items
therein set forth, and the monthly statements of Lender rendered to Borrower, to
the extent to which no written objection is made within thirty
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<PAGE> 4
(30) days from the date of sending thereof to Borrower, shall be deemed
conclusively correct and constitute an account stated between Lender and
Borrower and be binding on Guarantor.
6. Termination. This Guaranty is continuing, unlimited, absolute and
unconditional. All Guaranteed Obligations shall be conclusively presumed to have
been created in reliance on this Guaranty. Guarantor shall continue to be liable
hereunder until one of Lender's officers receives a written termination notice
from a Guarantor sent to Lender at its address set forth above by certified
mail, return receipt requested and thereafter as set forth below. Such notice
received by Lender from Guarantor shall not constitute a revocation or
termination of this Guaranty as to any other guarantor. Revocation or
termination hereof by Guarantor shall not affect, in any manner, the rights of
Lender or any obligations or duties of Guarantor (including the Guarantor which
may have sent such notice) under this Guaranty with respect to (a) Guaranteed
Obligations which have been created, contracted, assumed or incurred prior to
the receipt by Lender of such written notice of revocation or termination as
provided herein, including, without limitation, (i) all amendments, extensions,
renewals and modifications of such Guaranteed Obligations (whether or not
evidenced by new or additional agreements, documents or instruments executed on
or after such notice of revocation or termination), (ii) all interest, fees and
similar charges accruing or due on and after revocation or termination, and
(iii) all attorneys' fees and legal expenses, costs and other expenses paid or
incurred on or after such notice of revocation or termination in attempting to
collect or enforce any of the Guaranteed Obligations against Borrower, Guarantor
or any other Obligor (whether or not suit be brought), or (b) Guaranteed
Obligations which have been created, contracted, assumed or incurred after the
receipt by Lender of such written notice of revocation or termination as
provided herein pursuant to any contract entered into by Lender prior to receipt
of such notice. The sole effect of such revocation or termination by Guarantor
shall be to exclude from this Guaranty the liability of such Guarantor for those
Guaranteed Obligations arising after the date of receipt by Lender of such
written notice which are unrelated to Guaranteed Obligations arising or
transactions entered into prior to such date. Without limiting the foregoing,
this Guaranty may not be terminated and shall continue so long as the Loan
Agreement shall be in effect (whether during its original term or any renewal,
substitution or extension thereof).
7. Reinstatement. If after receipt of any payment of, or proceeds of
collateral applied to the payment of, any of the Guaranteed Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Guaranteed Obligations intended to be satisfied by such
payment or proceeds shall be reinstated and continue and this Guaranty shall
continue in full force and effect as if such payment or proceeds had not been
received by Lender. Guarantor shall be liable to pay to Lender, and does
indemnify and hold Lender harmless for the amount of any payments or proceeds
surrendered or returned. This Section 7 shall remain effective notwithstanding
any contrary action which may be taken by Lender in reliance upon such payment
or proceeds. This Section 7 shall survive the termination or revocation of this
Guaranty.
8. Amendments and Waivers. Neither this Guaranty nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to
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or waiver of any such right, power and/or remedy which Lender would otherwise
have on any future occasion, whether similar in kind or otherwise.
9. Corporate Existence, Power and Authority. Guarantor is a corporation
duly organized and in good standing under the laws of the State of Texas and is
duly qualified as a foreign corporation and in good standing in all states or
other jurisdictions where the nature and extent of the business transacted by it
or the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the financial condition, results of operation or businesses of
Guarantor or the rights of Lender hereunder or under any of the other Loan
Documents. The execution, delivery and performance of this Guaranty is within
the corporate powers of Guarantor, have been duly authorized and are not in
contravention of law or the terms of the certificates of incorporation, by-laws,
or other organizational documentation of Guarantor, or any indenture, agreement
or undertaking to which Guarantor is a party or by which Guarantor or its
property are bound. This Guaranty constitutes the legal, valid and binding
obligation of Guarantor enforceable in accordance with its terms.
10. Governing Law and Jury Trial Waiver.
(a) The validity, interpretation and enforcement of this Guaranty and
any dispute arising out of the relationship between Guarantor and Lender,
whether in contract, tort, equity or otherwise, shall be governed by the
internal laws of the State of Illinois (without giving effect to principles of
conflicts of law).
(b) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTY OR ANY OF THE
OTHER LOAN DOCUMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL
TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS GUARANTY OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT,
EQUITY OR OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND THAT GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND
LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
11. Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth in the Loan Agreement
and to Guarantor at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next business day, one (1) business day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing.
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12. Partial Invalidity. If any provision of this Guaranty is held to
be invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guaranty as a whole, but this Guaranty shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
13. Entire Agreement. This Guaranty represents the entire agreement
and understanding of the parties concerning the subject matter hereof, and
supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
14. Successors and Assigns. This Guaranty shall be binding upon
Guarantor and its respective successors and assigns and shall inure to the
benefit of Lender and its successors, endorsees, transferees and assigns. The
liquidation, dissolution or termination of Guarantor shall not terminate this
Guaranty as to such entity or as to any other guarantor.
15. Construction. All references to the term "Guarantor" wherever used
herein shall mean Guarantor and its respective successors and assigns,
individually and collectively, jointly and severally (including, without
limitation, any receiver, trustee or custodian for Guarantor or any of its
respective assets or Guarantor in its capacity as debtor or debtor-in-possession
under the United States Bankruptcy Code). All references to the term "Lender"
wherever used herein shall mean Lender and its successors and assigns and all
references to the term "Borrower" wherever used herein shall mean Borrower and
its successors and assigns (including, without limitation, any receiver, trustee
or custodian for Borrower or any of its assets or Borrower in its capacity as
debtor or debtor-in-possession under the United States Bankruptcy Code). All
references to the term "Person" or "person" wherever used herein shall mean any
individual, sole proprietorship, partnership, corporation (including, without
limitation, any corporation which elects subchapter S status under the Internal
Revenue Code of 1986, as amended), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality of political subdivision thereof All references to the
plural shall also mean the singular and to the singular shall also mean the
plural.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the day and year first above written.
LONE STAR MUD, INC.
By: /s/ Cloyce A. Talbott
-------------------------------------
Printed Name: Cloyce A. Talbott
---------------------------
Title: CEO
----------------------------------
Chief Executive Office:
Midland, Texas 79550
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GUARANTY
GUARANTY, dated as of December 21, 1999, made by PATTERSON ENERGY,
INC., a corporation organized and existing under the laws of Delaware
("Guarantor"), in favor of TRANSAMERICA EQUIPMENT FINANCIAL SERVICES CORPORATION
("Lender").
A. Lender and Patterson Drilling Company ("Borrower") have entered into
certain financing arrangements pursuant to which Lender may make loans and
advances to Borrower as set forth in the Loan and Security Agreement, dated of
even date herewith, by and among Lender, Borrower and Guarantor (as the same now
exists or may hereafter be amended, modified, supplemented, extended, renewed,
restated or replaced, the "Loan Agreement"), and other agreements, documents,
and instruments referred to therein or at any time executed and/or delivered in
connection therewith or related thereto, including, but not limited to, this
Guaranty (all of the foregoing, together with the Loan Agreement, as the same
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced, being collectively referred to herein as the
"Loan Documents");
B. Due to the close business and financial relationships between
Borrower and the Guarantor, in consideration of the benefits which will accrue
to Guarantor and as an inducement for and in consideration of Lender making
loans and advances and providing other financial accommodations to Borrower
pursuant to the Loan Agreement and the other Loan Documents, the Guarantor
hereby agrees in favor of Lender as follows:
1. Guaranty.
(a) Guarantor absolutely and unconditionally, jointly and severally,
guarantees and agrees to be liable for the full and indefeasible payment and
performance when due of the following (all of which are collectively referred to
herein as the "Guaranteed Obligations"): (i) all obligations, liabilities and
indebtedness of any kind, nature and description of Borrower to Lender and/or
its affiliates, including principal, interest, charges, fees, costs and
expenses, however evidenced, whether as principal, surety, endorser, guarantor
or otherwise, arising under the Loan Agreement, or any of the other Loan
Documents, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal term of the Loan Agreement or after
the commencement of any case with respect to Borrower under the United States
Bankruptcy Code or any similar statute (including, without limitation, the
payment of interest and other amounts, which would accrue and become due but for
the commencement of such case, whether or not such amounts are allowed or
allowable in whole or in part in any such case and including loans, interest,
fees, charges and expenses related thereto and all other obligations of Borrower
or its successors to Lender arising under the Loan Agreement or any of the other
Loan Documents after the commencement of such case), whether direct or indirect,
absolute or contingent, joint or several, due or not due, primary or secondary,
liquidated or unliquidated, secured or unsecured, and however acquired by Lender
and (ii) all expenses (including, without limitation, attorneys' fees and legal
expenses) incurred by Lender in connection with the preparation, execution,
delivery, recording, administration, collection, liquidation, enforcement and
defense of Borrower's
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obligations, liabilities and indebtedness as aforesaid to Lender, the rights of
Lender in any collateral or under this Guaranty and all other Loan Documents or
in any way involving claims by or against Lender directly or indirectly arising
out of or related to the relationships between Borrower, Guarantor or any other
Obligor (as hereinafter defined) and Lender under the Loan Agreement or any of
the other Loan Documents, whether such expenses are incurred before, during or
after the initial or any renewal term of the Loan Agreement and the other Loan
Documents or after the commencement of any case with respect to Borrower or
Guarantor under the United States Bankruptcy Code or any similar statute.
(b) This Guaranty is a guaranty of payment and not of collection.
Guarantor agrees that Lender need not attempt to collect any Guaranteed
Obligations from Borrower, any other guarantor or any other Obligor or to
realize upon any collateral, but may require Guarantor to make immediate payment
of all of the Guaranteed Obligations to Lender when due, whether by maturity,
acceleration or otherwise, or at any time thereafter. Lender may apply any
amounts received in respect of the Guaranteed Obligations to any of the
Guaranteed Obligations, in whole or in part (including attorneys' fees and legal
expenses incurred by Lender with respect thereto or otherwise chargeable to
Borrower or Guarantor) and in such order as Lender may elect.
(c) Payment by Guarantor shall be made to Lender at the office of
Lender from time to time on demand as Guaranteed Obligations become due.
Guarantor shall make all payments to Lender on the Guaranteed Obligations free
and clear of, and without deduction or withholding for or on account of, any
setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. One or more successive or
concurrent actions may be brought hereon against the Guarantor and any other
guarantor either in the same action in which Borrower or any other Obligor is
sued or in separate actions. In the event any claim or action, or action on any
judgment, based on this Guaranty is brought against Guarantor, Guarantor agrees
not to deduct, set-off, or seek any counterclaim for or recoup any amounts which
are or may be owed by Lender to Guarantor.
2. Waivers and Consents.
(a) Notice of acceptance of this Guaranty, the making of loans and
advances and providing other financial accommodations to Borrower and
presentment, demand, protest, notice of protest, notice of nonpayment or default
and all other notices to which Borrower or Guarantor are entitled are hereby
waived by Guarantor. Guarantor also waives notice of and hereby consents to, (i)
any amendment, modification, supplement, extension, renewal, or restatement of
the Loan Agreement and any of the other Loan Documents, including, without
limitation, extensions of time of payment of or increase or decrease in the
amount of any of the Guaranteed Obligations, the interest rate, fees, other
charges, or any collateral, and the guaranty made herein shall apply to the Loan
Agreement and the other Loan Documents and the Guaranteed Obligations as so
amended, modified, supplemented, renewed, restated or extended, increased or
decreased, (ii) the taking, exchange, surrender and releasing of collateral or
guarantees now or at any time held by or available to Lender for the obligations
of Borrower or any other party at any time liable on or in respect of the
Guaranteed Obligations or who is the owner of any property which is security for
the Guaranteed Obligations (individually, an "Obligor" and collectively, the
"Obligors"), including, without limitation, the surrender or release by Lender
of any one of Guarantor hereunder, (iii) the exercise of, or refraining from the
exercise of any rights against Borrower, Guarantor or any other Obligor or any
collateral, (iv) the settlement, compromise or release of, or the waiver of any
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<PAGE> 9
default with respect to, any of the Guaranteed Obligations and (v) any financing
by Lender of Borrower under Section 364 of the United States Bankruptcy Code or
consent to the use of cash collateral by Lender under Section 363 of the United
States Bankruptcy Code. The Guarantor agrees that the amount of the Guaranteed
Obligations shall not be diminished and the liability of Guarantor hereunder
shall not be otherwise impaired or affected by any of the foregoing.
(b) No invalidity, irregularity or unenforceability of all or any part
of the Guaranteed Obligations shall affect, impair or be a defense to this
Guaranty, nor shall any other circumstance which might otherwise constitute a
defense available to or legal or equitable discharge of Borrower in respect of
any of the Guaranteed Obligations, or the Guarantor in respect of this Guaranty,
affect, impair or be a defense to this Guaranty. Without limitation of the
foregoing, the liability of Guarantor hereunder shall not be discharged or
impaired in any respect by reason of any failure by Lender to perfect or
continue perfection of any lien or security interest in any collateral or any
delay by Lender in perfecting any such lien or security interest. As to
interest, fees and expenses, whether arising before or after the commencement of
any case with respect to Borrower under the United States Bankruptcy Code or any
similar statute, Guarantor shall be liable therefor, even if Borrower's
liability for such amounts does not, or ceases to, exist by operation of law.
Guarantor acknowledges that Lender has not made any representations to Guarantor
with respect to Borrower, any other Obligor or otherwise in connection with the
execution and delivery by Guarantor of this Guaranty and Guarantor is not in any
respect relying upon Lender or any statements by Lender in connection with this
Guaranty.
(c) Guarantor hereby irrevocably and unconditionally waives and
relinquishes all statutory, contractual, common law, equitable and all other
claims against Borrower, any collateral for the Guaranteed Obligations or other
assets of Borrower or any other Obligor, for subrogation, reimbursement,
exoneration, contribution, indemnification, setoff or other recourse in respect
to sums paid or payable to Lender by Guarantor hereunder and Guarantor hereby
further irrevocably and unconditionally waives and relinquishes any and all
other benefits which Guarantor might otherwise directly or indirectly receive or
be entitled to receive by reason of any amounts paid by or collected or due from
Guarantor, Borrower or any other Obligor upon the Guaranteed Obligations or
realized from their property.
3. Subordination. Payment of all amounts now or hereafter owed to
Guarantor by Borrower or any other Obligor is hereby subordinated in right of
payment to the indefeasible payment in full to Lender of the Guaranteed
Obligations and all such amounts and any security and guarantees therefor are
hereby assigned to Lender as security for the Guaranteed Obligations.
4. Acceleration. Notwithstanding anything to the contrary contained
herein or any of the terms of any of the other Loan Documents, the liability of
Guarantor for the entire Guaranteed Obligations shall mature and become
immediately due and payable, even if the liability of Borrower or any other
Obligor therefor does not, upon the occurrence of any act, condition or event
which constitutes an Event of Default as such term is defined in the Loan
Agreement.
5. Account Stated. The books and records of Lender showing the account
between Lender and Borrower shall be admissible in evidence in any action or
proceeding against or involving Guarantor as prima facie proof of the items
therein set forth, and the monthly statements of Lender rendered to Borrower, to
the extent to which no written objection is made within thirty
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<PAGE> 10
(30) days from the date of sending thereof to Borrower, shall be deemed
conclusively correct and constitute an account stated between Lender and
Borrower and be binding on Guarantor.
6. Termination. This Guaranty is continuing, unlimited, absolute and
unconditional. All Guaranteed Obligations shall be conclusively presumed to have
been created in reliance on this Guaranty. Guarantor shall continue to be liable
hereunder until one of Lender's officers receives a written termination notice
from a Guarantor sent to Lender at its address set forth above by certified
mail, return receipt requested and thereafter as set forth below. Such notice
received by Lender from Guarantor shall not constitute a revocation or
termination of this Guaranty as to any other guarantor. Revocation or
termination hereof by Guarantor shall not affect, in any manner, the rights of
Lender or any obligations or duties of Guarantor (including the Guarantor which
may have sent such notice) under this Guaranty with respect to (a) Guaranteed
Obligations which have been created, contracted, assumed or incurred prior to
the receipt by Lender of such written notice of revocation or termination as
provided herein, including, without limitation, (i) all amendments, extensions,
renewals and modifications of such Guaranteed Obligations (whether or not
evidenced by new or additional agreements, documents or instruments executed on
or after such notice of revocation or termination), (ii) all interest, fees and
similar charges accruing or due on and after revocation or termination, and
(iii) all attorneys' fees and legal expenses, costs and other expenses paid or
incurred on or after such notice of revocation or termination in attempting to
collect or enforce any of the Guaranteed Obligations against Borrower, Guarantor
or any other Obligor (whether or not suit be brought), or (b) Guaranteed
Obligations which have been created, contracted, assumed or incurred after the
receipt by Lender of such written notice of revocation or termination as
provided herein pursuant to any contract entered into by Lender prior to receipt
of such notice. The sole effect of such revocation or termination by Guarantor
shall be to exclude from this Guaranty the liability of such Guarantor for those
Guaranteed Obligations arising after the date of receipt by Lender of such
written notice which are unrelated to Guaranteed Obligations arising or
transactions entered into prior to such date. Without limiting the foregoing,
this Guaranty may not be terminated and shall continue so long as the Loan
Agreement shall be in effect (whether during its original term or any renewal,
substitution or extension thereof).
7. Reinstatement. If after receipt of any payment of, or proceeds of
collateral applied to the payment of, any of the Guaranteed Obligations, Lender
is required to surrender or return such payment or proceeds to any Person for
any reason, then the Guaranteed Obligations intended to be satisfied by such
payment or proceeds shall be reinstated and continue and this Guaranty shall
continue in full force and effect as if such payment or proceeds had not been
received by Lender. Guarantor shall be liable to pay to Lender, and does
indemnify and hold Lender harmless for the amount of any payments or proceeds
surrendered or returned. This Section 7 shall remain effective notwithstanding
any contrary action which may be taken by Lender in reliance upon such payment
or proceeds. This Section 7 shall survive the termination or revocation of this
Guaranty.
8. Amendments and Waivers. Neither this Guaranty nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender. Lender shall not by any act, delay, omission or otherwise be deemed to
have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to
4
<PAGE> 11
or waiver of any such right, power and/or remedy which Lender would otherwise
have on any future occasion, whether similar in kind or otherwise.
9. Corporate Existence, Power and Authority. Guarantor is a corporation
duly organized and in good standing under the laws of the State of Delaware and
is duly qualified as a foreign corporation and in good standing in all states or
other jurisdictions where the nature and extent of the business transacted by it
or the ownership of assets makes such qualification necessary, except for those
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the financial condition, results of operation or businesses of
Guarantor or the rights of Lender hereunder or under any of the other Loan
Documents. The execution, delivery and performance of this Guaranty is within
the corporate powers of Guarantor, have been duly authorized and are not in
contravention of law or the terms of the certificates of incorporation, by-laws,
or other organizational documentation of Guarantor, or any indenture, agreement
or undertaking to which Guarantor is a party or by which Guarantor or its
property are bound. This Guaranty constitutes the legal, valid and binding
obligation of Guarantor enforceable in accordance with its terms.
10. Governing Law and Jury Trial Waiver.
(a) The validity, interpretation and enforcement of this Guaranty and
any dispute arising out of the relationship between Guarantor and Lender,
whether in contract, tort, equity or otherwise, shall be governed by the
internal laws of the State of Illinois (without giving effect to principles of
conflicts of law).
(b) GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS GUARANTY OR ANY OF THE
OTHER LOAN DOCUMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL
TO THE DEALINGS OF GUARANTOR AND LENDER IN RESPECT OF THIS GUARANTY OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH
CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT,
EQUITY OR OTHERWISE. GUARANTOR HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY
AND THAT GUARANTOR OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS
AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF GUARANTOR AND
LENDER TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
11. Notices. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender at its address set forth in the Loan Agreement
and to Guarantor at its chief executive office set forth below, or to such other
address as either party may designate by written notice to the other in
accordance with this provision, and (b) deemed to have been given or made: if
delivered in person, immediately upon delivery; if by telex, telegram or
facsimile transmission, immediately upon sending and upon confirmation of
receipt; if by nationally recognized overnight courier service with instructions
to deliver the next business day, one (1) business day after sending; and if by
certified mail, return receipt requested, five (5) days after mailing.
5
<PAGE> 12
12. Partial Invalidity. If any provision of this Guaranty is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Guaranty as a whole, but this Guaranty shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
13. Entire Agreement. This Guaranty represents the entire agreement and
understanding of the parties concerning the subject matter hereof, and
supersedes all other prior agreements, understandings, negotiations and
discussions, representations, warranties, commitments, proposals, offers and
contracts concerning the subject matter hereof, whether oral or written.
14. Successors and Assigns. This Guaranty shall be binding upon
Guarantor and its respective successors and assigns and shall inure to the
benefit of Lender and its successors, endorsees, transferees and assigns. The
liquidation, dissolution or termination of Guarantor shall not terminate this
Guaranty as to such entity or as to any other guarantor.
15. Construction. All references to the term "Guarantor" wherever used
herein shall mean Guarantor and its respective successors and assigns,
individually and collectively, jointly and severally (including, without
limitation, any receiver, trustee or custodian for Guarantor or any of its
respective assets or Guarantor in its capacity as debtor or debtor-in-possession
under the United States Bankruptcy Code). All references to the term "Lender"
wherever used herein shall mean Lender and its successors and assigns and all
references to the term "Borrower" wherever used herein shall mean Borrower and
its successors and assigns (including, without limitation, any receiver, trustee
or custodian for Borrower or any of its assets or Borrower in its capacity as
debtor or debtor-in-possession under the United States Bankruptcy Code). All
references to the term "Person" or "person" wherever used herein shall mean any
individual, sole proprietorship, partnership, corporation (including, without
limitation, any corporation which elects subchapter S status under the Internal
Revenue Code of 1986, as amended), limited liability company, limited liability
partnership, business trust, unincorporated association, joint stock
corporation, trust, joint venture or other entity or any government or any
agency or instrumentality of political subdivision thereof All references to the
plural shall also mean the singular and to the singular shall also mean the
plural.
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the day and year first above written.
PATTERSON ENERGY, INC.
By: /s/ Cloyce A. Talbott
----------------------------------
Printed Name: Cloyce A. Talbott
------------------------
Title: CEO
-------------------------------
Chief Executive Office:
4510 Lamesa Highway
P.O. Drawer 1416
Snyder, Texas 79550
6
<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 (GP, LLLC) a Delaware limited liability 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, 2000 and terminating on December 31, 2000.
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, 2000.
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, 2000, 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, 1999.
<TABLE>
<S> <C>
LESSOR: LESSEE:
TALBOTT AVIATION, INC. PATTERSON (GP) LLC
/s/ CLOYCE A. TALBOTT /s/ GLENN PATTERSON
- ---------------------------- ----------------------------
CLOYCE A. TALBOTT, PRESIDENT GLENN PATTERSON, PRESIDENT
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Patterson Energy, Inc.
Patterson (GP) LLC
Patterson (LP) LLC
Patterson Drilling Company LP, LLLP
Patterson Petroleum LP, LLLP
Lone Star Mud LP, LLLP
Patterson Petroleum Trading Company LP, LLLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 333-47917, 33-97972, 333-39471, 333-35399 and
333-09243) and the Registration Statements on Form S-3, as amended, (No.'s
333-43739, 333-39537 and 333-89885) of Patterson Energy, Inc. and subsidiaries
of our report dated February 24, 2000 relating to the financial statements,
which appears in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Dallas, Texas
March 29, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
I hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 333-47917, 33-97972, 333-39471, 333-35399 and
333-09243) and the Registration Statements on Form S-3, as amended (No.'s
333-43739, 333-39537 and 333-89885) of Patterson Energy, Inc. and its
subsidiaries of information contained in my summary reserve reports appearing
in the Patterson Energy, Inc. Annual Report on Form 10-K for the year ended
December 31, 1999, relating to the oil and gas reserves as of December 31,
1997, 1998 and 1999.
/s/ M. BRIAN WALLACE, P.E.
Dallas, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,792
<SECURITIES> 0
<RECEIVABLES> 42,374
<ALLOWANCES> 0
<INVENTORY> 1,970
<CURRENT-ASSETS> 58,764
<PP&E> 256,135
<DEPRECIATION> 122,311
<TOTAL-ASSETS> 236,257
<CURRENT-LIABILITIES> 31,716
<BONDS> 0
0
0
<COMMON> 327
<OTHER-SE> 152,461
<TOTAL-LIABILITY-AND-EQUITY> 236,257
<SALES> 0
<TOTAL-REVENUES> 151,536
<CGS> 0
<TOTAL-COSTS> 161,663
<OTHER-EXPENSES> (760)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,101
<INCOME-PRETAX> (13,468)
<INCOME-TAX> (4,341)
<INCOME-CONTINUING> (9,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,127)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
