-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VOGnDJvtgFtURSMud3iFaW6HB6U58AbgTuHP/YH8nUuR9D16leN3PQERETuDIEnL Ilr3TEPN765XDj3HJMPGig== 0000950134-00-002720.txt : 20000331 0000950134-00-002720.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950134-00-002720 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATTERSON ENERGY INC CENTRAL INDEX KEY: 0000889900 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 752504748 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22664 FILM NUMBER: 584794 BUSINESS ADDRESS: STREET 1: 4510 LAMESA HWY STREET 2: P O DRAWER 1416 CITY: SNYDER STATE: TX ZIP: 79549 BUSINESS PHONE: 9155731104 MAIL ADDRESS: STREET 1: P O DRAWER 1416 CITY: SNYDER STATE: TX ZIP: 79550 10-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K --------------------- (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 --------------------- PATTERSON ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2504748 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
P.O. BOX 1416, 4510 LAMESA HIGHWAY, SNYDER, TEXAS 79550 (Zip Code) (Address of principal executive offices) --------------------- Registrant's Telephone Number, Including Area Code: (915) 573-1104 --------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 2 3 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 3 4 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 4 5 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:
YEAR ENDED DECEMBER 31, ------------------ TYPE OF REVENUES 1997 1998 1999 - ---------------- ---- ---- ---- Daywork..................................................... 62% 64% 58% Footage..................................................... 35 24 22 Turnkey..................................................... 3 12 20
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. 5 6 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.
DECEMBER 31, YEAR ENDED -------------------- 1997 1998 1999 ---- ---- ---- 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%
- --------------- (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:
DEPTH RATING (FT.) MECHANICAL DIESEL ELECTRIC - ------------------ ---------- --------------- 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 ==== ==
- --------------- (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. 6 7 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.
AS OF DECEMBER 31, -------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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
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. 7 8 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.
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 1999 ---- ---- ---- 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
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.
PRODUCTIVE WELLS ---------------- GROSS NET ----- --- Oil......................................................... 194 63.83 Gas......................................................... 75 8.54 --- ----- Total............................................. 269 72.37 === =====
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:
DEVELOPED UNDEVELOPED --------------- ---------------- LOCATION GROSS NET GROSS NET -------- ----- --- ----- --- 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 ====== ====== ======= ======
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.
LEASE ACRES EXPIRING --------------------- GROSS NET ----- --- 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 ======= ======
8 9 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.
DEVELOPMENT WELLS EXPLORATORY WELLS ---------------------------- --------------------------- PRODUCTIVE DRY HOLES PRODUCTIVE DRY HOLES YEAR ENDED ------------- ------------ ------------ ------------ DECEMBER 31, GROSS NET GROSS NET GROSS NET GROSS NET ------------ ----- --- ----- --- ----- --- ----- --- 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 == ===== == ==== == ==== == ====
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 9 10 turn influenced primarily by the financial condition of such companies, by general economic conditions, by prices of oil and natural gas and, from time to time, by political considerations and policies. It is impracticable to estimate the number of contract drilling competitors of the Company, some of which have substantially greater resources and longer operating histories than the Company. Also, in recent years, many drilling companies have consolidated or merged with other companies. Although this consolidation has decreased the total number of competitors, management of the Company believes that competition for drilling contracts will continue to be intense for the foreseeable future. OIL AND NATURAL GAS OPERATIONS. There is substantial competition for the acquisition of oil and natural gas leases suitable for exploration and for the hiring of experienced personnel. The Company's competitors in oil and natural gas exploration, development and production include major integrated oil and natural gas companies, numerous independent oil and natural gas companies, drilling and production purchase programs and individual producers and operators. The ability of the Company to increase its holdings of oil and natural gas reserves in the future is directly dependent upon the Company's ability to select, acquire and develop suitable prospects in competition with these companies. Many competitors have financial resources, staffs, facilities and other resources significantly greater than those of the Company. GOVERNMENT REGULATION AND ENVIRONMENTAL The domestic drilling of oil and natural gas wells is subject to numerous state and federal laws, rules and regulations. State statutory provisions relating to oil and natural gas generally include requirements as to well spacing, waste prevention, production limitations, disposal of produced waters, pollution prevention and clean-up, obtaining drilling permits and similar matters. Within the state of Texas, where substantially all of the Company's operations are currently conducted, these regulations are principally enforced by the Texas Railroad Commission. To date, the Company has not been required to expend significant resources in order to satisfy applicable environmental laws and regulations. The Company does not anticipate any material capital expenditures for environmental control facilities or extraordinary expenditures associated with compliance with environmental rules and regulations in the foreseeable future. However, compliance costs under existing laws or under any new requirements could become material and the Company could incur liability for noncompliance. The Company has not been fined or incurred liability for noncompliance, pollution or other environmental damage in connection with its operations and is not currently aware of any environmental hazards which would materially affect its operations. The contract drilling industry is dependent on demand for services from the oil and natural gas exploration industry and, accordingly, is affected by changing tax laws, price controls and other laws relating to the energy business generally. The Company's business is affected generally by political developments and by federal, state, foreign and local laws and regulations, which relate to the oil and natural gas industry. The adoption of laws and regulations affecting the oil and natural gas industry for economic, environmental and other policy reasons could increase costs relating to drilling and production, which could have an adverse effect on the Company's operations. Several state and federal environmental laws and regulations currently apply to the Company's operations and may become more stringent in the future. Although the Company has utilized operating and disposal practices that were or are currently standard in the industry, hydrocarbons and other materials may have been disposed of or released in or under properties currently or formerly owned or operated by the Company or its predecessors in interest. In addition, some of these properties have been operated by third parties over whom the Company has no control as to such entities' treatment of hydrocarbon and other materials an the manner in which such materials may have been disposed of or released. The federal Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (collectively, "CERCLA"), and comparable state statutes impose strict liability on owners and operators of sites and on persons who disposed of or arranged for the disposal of "hazardous substances" found at sites. The federal Resource Conservation and Recover Act ("RCRA") and comparable state statutes govern the disposal of "hazardous wastes." Although CERCLA currently excludes petroleum from the definition of "hazardous substances," and RCRA also excludes certain classes of exploration and production wastes from regulation, such exemptions by Congress under both CERCLA and RCRA may be deleted, limited or modified in the future. If such changes are made to 10 11 CERCLA and/or RCRA, the Company could be required to remove and remediate previously disposed of materials (including materials disposed of or released by prior owners or operators) from properties (including ground water contaminated with hydrocarbons) and to perform removal or remedial actions to prevent future contamination. The Federal Water Pollution Control Act ("FWPCA") and the Oil Pollution Act of 1990 ("OPA") and implementing regulations govern the prevention of discharges, including oil and produced water spills, and liability for damages into waters. The OPA is more comprehensive and stringent than previous oil pollution liability and prevention laws and imposes strict liability for a comprehensive and expansive list of damages from an oil spill into waters from facilities. Liability may be imposed for oil removal costs and a variety of public and private damages. Penalties may also be imposed for violation of federal safety, construction and operating regulations, and for failure to report a spill or to cooperate fully in a clean-up. The OPA also expands the authority and capability of the federal government to direct and manage oil spill clean-up and operations, plus requires operators to prepare oil spill response plans in cases where it can reasonably be expected that substantial harm will be done to the environment by discharges on or into navigable waters. The Company has spill protection control countermeasure (SPCC) plans in place for its oil and natural gas properties in each of the areas in which it operates. Failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party to civil or criminal actions. Although the liability for owners and operators is the same under the FWPCA, the damages recoverable under the OPA are potentially much greater and can include natural resource damages. The operations of the Company are also subject to federal, state and local regulations for the control of air emissions. The federal Clean Air Act ("CAA"), as amended, and various state and local laws impose certain air quality requirements on the Company. Amendments to the CAA revised the definition of "major source" such that emissions from both wellhead and associated equipment involved in oil and gas production may be added to determine if a source is a "major source." As a consequence, more facilities may become major sources and thus would be required to obtain operating permits. This permitting process may require capital expenditures in order to comply with permit limits. RISKS AND INSURANCE The Company's operations are subject to the many hazards inherent in the drilling business, including blow-outs, cratering, fires and explosions. These hazards could cause personal injury or death, suspend drilling operations or seriously damage or destroy the equipment involved and, in addition to environmental damage, could cause substantial damage to producing formations and surrounding areas. Damage to the environment, including property contamination in the form of either soil or ground water contamination, could also result from the Company's operations, particularly through oil or produced water spillage, natural gas leaks and extensive, uncontrolled fires. In addition, the Company could become subject to liability for reservoir damages. The occurrence of a significant event, including pollution or environmental damages, could materially affect the Company's operations and financial condition. As a protection against operating hazards, the Company maintains insurance coverage considered by the Company to be adequate, including all-risk physical damages, employer's liability, commercial general liability and workers compensation insurance. The Company currently has general liability insurance of $2.0 million per occurrence with an aggregate of $2.0 million and excess liability and umbrella coverage's of up to $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 11 12 be encountered in renewing such insurance at reasonable rates, no assurance can be given that the Company will be able to maintain the type and amount of coverage that it considers adequate at reasonable rates or that any particular types of coverage will be available. EMPLOYEES The Company employed approximately 1,546 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. 12 13 ------------------------------ CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is including the following cautionary statement to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement are important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or bases to be reasonable and makes them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, the Company, or its management, expresses an expectation or belief as to the future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking into account the foregoing, the following are identified as important risk factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: 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. 13 14 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. 14 15 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 15 16 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. 16 17 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. 17 18 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. 18 19 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:
HIGH LOW ---- --- 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
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 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.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 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
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 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 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 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 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 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 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 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. 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.
27 28 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.
- --------------- (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 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 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- 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
F-1 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 32 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1998 1999 ---- ---- (IN THOUSANDS, EXCEPT FOR SHARE DATA) 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 33 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 34 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------ ADDITIONAL NUMBER PAID-IN RETAINED OF SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- ------ ---------- -------- ----- (IN THOUSANDS) 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 ====== ==== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 35 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. (continued) F-6 36 PATTERSON ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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
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):
(IN THOUSANDS) Purchase price.............................................. $58,799 Less non-cash items: Common stock issued....................................... (9,946) Debt assumed.............................................. (3,400) ------- Total cash paid................................... $45,453 =======
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):
(IN THOUSANDS) 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 =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 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 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.
LIVES (YEARS) ------------- Drilling rigs and related equipment......................... 2-15 Office furniture............................................ 3-10 Buildings................................................... 5-20 Automotive equipment........................................ 2-7 Other....................................................... 3-7
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 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 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): Net assets acquired......................................... $ 3,069 Goodwill.................................................... 9,911 ------- Total purchase price................................... $12,980 =======
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): Net assets acquired......................................... $31,565 Goodwill.................................................... 10,680 ------- Total purchase price................................... $42,245 =======
F-11 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): Net assets acquired......................................... $ 263 Goodwill.................................................... 2,061 Covenants not to compete.................................... 1,250 ------ Total purchase price................................... $3,574 ======
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): Contract drilling assets.................................... $17,450 Goodwill.................................................... 16,629 Covenants not to compete.................................... 1,273 ------- Total purchase price................................... $35,352 =======
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): Contract drilling assets.................................... $16,541 Goodwill.................................................... 7,269 Covenants not to compete.................................... 401 ------- Total purchase price................................... $24,211 =======
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 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):
1998 1999 ---- ---- 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 ======== =========
5. INTANGIBLE ASSETS Intangible assets consisted of the following at December 31, 1998 and 1999 (in thousands):
1998 1999 ---- ---- 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 ======= =======
6. ACCRUED EXPENSES Accrued expenses consisted of the following at December 31, 1998 and 1999 (in thousands):
1998 1999 ---- ---- 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 ====== ======
F-13 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):
1998 1999 ---- ---- 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 ======= =======
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): 2000........................................................ $ -- 2001........................................................ 9,167 2002........................................................ 10,000 2003........................................................ 10,000 2004........................................................ 10,000 Thereafter.................................................. 10,833 ------- Total............................................. $50,000 =======
F-14 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 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 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 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.
DATE GRANTED OPTIONS GRANTED EXERCISE PRICE/SHARE - ------------ --------------- -------------------- 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 =======
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):
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 ---------- -------------- ---------- -------------- ---------- -------------- 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 ====== ====== ======
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING ------------------------------------------------ WEIGHTED OPTIONS EXERCISABLE AVERAGE ------------------------------ NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE OUTSTANDING CONTRACTED LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICES ----------- --------------- ---------------- ----------- ---------------- $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 ========= ===== ===== ======= ======
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 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:
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 ------------------ ------------------ ------------------- AS PRO AS PRO AS PRO REPORTED FORMA REPORTED FORMA REPORTED FORMA -------- ----- -------- ----- -------- ----- 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) ======= ======= ====== ======= ======= ========
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 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:
WEIGHTED AVERAGE GRANTED SHARES EXERCISE PRICE - ------- ------ ---------------- 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
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):
1997 1998 1999 ---- ---- ---- 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) ======= ======= =======
F-20 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:
1997 1998 1999 ---- ---- ---- 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% ==== ======= ====
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):
JANUARY 1, NET DECEMBER 31, NET DECEMBER 31, NET DECEMBER 31, 1997 CHANGE 1997 CHANGE 1998 CHANGE 1999 ---------- ------ ------------ ------ ------------ ------ ------------ 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) ======= ======= ====== ======= ======== ======= ========
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 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 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.
DECEMBER 31, ------------------------------ 1997 1998 1999 ---- ---- ---- 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 ======== ======== ========
- --------------- (a) Corporate assets primarily include cash on hand managed by the parent corporation and certain deferred Federal income tax assets. F-23 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):
DECEMBER 31, -------------------------- 1997 1998 1999 ---- ---- ---- 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 ======= ====== =======
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):
DECEMBER 31, ------------------- 1998 1999 ---- ---- Proved properties....................................... $ 27,856 $ 32,962 Accumulated depreciation, depletion and amortization.... (21,809) (24,893) -------- -------- Net proved properties................................... $ 6,047 $ 8,069 ======== ========
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):
1998 1999 ---- ---- 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 ======= =======
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 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 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
OIL (BBLS) GAS (MCF) ---------- --------- (IN THOUSANDS) 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 ===== ======
RESULTS OF OPERATIONS FOR OIL AND NATURAL GAS PRODUCING ACTIVITIES
YEAR ENDED DECEMBER 31, -------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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 ======= ======= ======
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS OF PROVED DEVELOPED OIL AND NATURAL GAS RESERVES, DISCOUNTED AT 10% PER ANNUM F-26 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)
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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 ======= ======= =======
- --------------- (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
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 1999 ---- ---- ---- (IN THOUSANDS) 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 ======= ======= =======
F-27 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.
SIGNATURE TITLE --------- ----- /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.
58 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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)
59
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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.
- --------------- (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. 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. EX-10.1 2 LOAN AND SECURITY AGREEMENT DATED 12/21/99 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. 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." -2- 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. -3- 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. -4- 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. -5- 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 -6- 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 -7- 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 -8- 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 -9- 10 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 -10- 11 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 -11- 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 -12- 13 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 -13- 14 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 -14- 15 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 -15- 16 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 -16- 17 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 -17- 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 -18- 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, -19- 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:
Amount Period ------ ------ (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.
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. -20- 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. -21- 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 ------------------------------- -22- EX-10.1.1 3 PROMISSORY NOTE DATED 12/21/99 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. 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. -2- 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 -3- 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- EX-10.1.2 4 CORPORATE GUARANTEES OF LOAN STAR MUD 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 1 2 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 2 3 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 3 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 4 5 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. 5 6 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 6 7 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 1 8 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 2 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 3 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 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 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 EX-10.2 5 AIRCRAFT LEASE DATED 12/20/99 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. LESSOR: LESSEE: TALBOTT AVIATION, INC. PATTERSON (GP) LLC /s/ CLOYCE A. TALBOTT /s/ GLENN PATTERSON - ---------------------------- ---------------------------- CLOYCE A. TALBOTT, PRESIDENT GLENN PATTERSON, PRESIDENT
EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT 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 EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 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 EX-23.2 8 CONSENT OF M. BRIAN WALLACE, P.E. 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 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 8,792 0 42,374 0 1,970 58,764 256,135 122,311 236,257 31,716 0 0 0 327 152,461 236,257 0 151,536 0 161,663 (760) 0 4,101 (13,468) (4,341) (9,127) 0 0 0 (9,127) (0.28) (0.28)
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