-----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, KxKNbupTuSFHaAK7y0wtrWwvSIwcXFZi5clJPgcgUcBlV+fC9aNWFr6QR/x2U0PK o3Pt1/er1V+Imj1BdhNb+g== 0000950134-00-003007.txt : 20000405 0000950134-00-003007.hdr.sgml : 20000405 ACCESSION NUMBER: 0000950134-00-003007 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20000404 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: S-3 SEC ACT: SEC FILE NUMBER: 333-34018 FILM NUMBER: 593536 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 S-3 1 FORM S-3 1 As filed with Securities and Exchange Commission on April 4, 2000 Registration No. 333-_________ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- 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) 4510 Lamesa Highway Snyder, Texas 79549 (915) 573-1104 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) Cloyce A. Talbott 4510 Lamesa Highway Snyder, Texas 79549 (915) 573-1104 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: Thomas H. Maxfield, Esq. Baker & Hostetler LLP 303 East 17th Avenue, Suite 1100 Denver, Colorado 80203-1264 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] 2 CALCULATION OF REGISTRATION FEE
= ================================================================================================================== Proposed Title of each class of Proposed maximum maximum Securities to be Amount to be offering price per aggregate offering Amount of registered registered(1) share(2) price(2) registration fee - --------------------------- --------------- ------------------- ------------------- ---------------- Common Stock, par value $.01 per share 103,000 Shares $31.75 $3,270,250 $864 ==================================================================================================================
(1) Pursuant to Rule 416, this registration statement also covers such indeterminate number of shares of the Registrant's Common Stock as may be issued as a result of stock dividends, stock splits or similar transactions prior to the termination of this registration statement. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of the average of the high and low reported sales prices of the Registrant's Common Stock on March 31, 2000 as reported on the Nasdaq National Market. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- 3 PROSPECTUS 103,000 SHARES PATTERSON ENERGY, INC. COMMON STOCK This prospectus relates to 103,000 shares of Patterson that may be offered for sale or otherwise transferred from time to time by three of our stockholders. See "Selling Stockholders." Of the total 103,000 shares, 53,000 shares are currently outstanding and the remaining 50,000 shares are issuable upon the exercise of a stock option previously granted by Patterson. We have agreed to pay all fees and expenses incident to this offering. The common stock is traded on the Nasdaq National Market under the symbol "PTEN." On March 31, 2000 the closing sales prices of our common stock was $31.75 per share. --------------- Prospective purchasers of the common stock should consider carefully the matters set forth under "Risk Factors" beginning on page 5. --------------- The Securities and Exchange Commission and State Securities regulators have not approved or disapproved these shares, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------------- The selling stockholders may offer these shares from time to time to purchasers directly or through agents, brokers or dealers. The shares may be sold at market prices prevailing at the time of sale or at negotiated prices. The agents, brokers or dealers through whom sales are made may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended, and any amounts received by them in exchange for their services in connection with such sales may be deemed to be underwriting commissions. See "Plan of Distribution." April ___, 2000 4 NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
Page ---- Forward Looking Statements....................................2 Incorporation of Certain Documents by Reference...............3 Patterson.....................................................4 Risk Factors..................................................5 Use of Proceeds..............................................10 Dividend Policy..............................................10 Selling Stockholders.........................................10 Description of Capital Stock.................................10 Plan of Distribution.........................................13 Legal Matters................................................13 Experts......................................................13 Where You Can Find More Information..........................14
FORWARD LOOKING STATEMENTS Some statements contained in this prospectus, any accompanying prospectus supplement, and the documents incorporated by reference are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, without limitation, statements relating to the drilling and completion of wells, well operations, utilization rates of drilling rigs, oil and natural gas prices, reserve estimates (including related future net revenue and present value estimates), business strategies and other plans and objectives of our management for future operations and activities and other such matters. The words "believes," "budgeted," "plan," "plans," "estimates," "expects," "intends," "strategy," "project," "will," "could," "may" and similar expressions identify forward-looking statements. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could cause such a difference include: - Swings in oil and natural gas prices; - Swings in demand for contract drilling services; - Shortages of drill pipe and other drilling equipment; - Shortages of qualified drilling personnel; - Effects of competition from other drilling contractors; - Occurrence of operating hazards and uninsured losses; and - Governmental regulation, among others described under "Risk Factors" below. 2 5 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" information into this prospectus. This means that we can disclose important information to you by referring you to another document filed separately by us with the SEC. The information incorporated by reference is considered to be part of this prospectus, except for any information that is superseded by information that is included directly in this document. This prospectus includes by reference the documents listed below that we have previously filed with the SEC and that are not included in or delivered with this document. They contain important information about our company and its financial condition. (1) Patterson's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the SEC on March 30, 1999; (2) The description of Patterson's common stock contained in the Registration Statement on Form 8-A filed with the SEC on November 2, 1993. We incorporate by reference additional documents that we may file with the SEC under Section 13(a), 15(c), 14 or 14(d) of the Securities Exchange Act of 1934 between the date of this prospectus and the termination of this offering. These documents include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements. You can obtain any of the documents incorporated by reference in this document from us without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit to this prospectus. You can obtain documents incorporated by reference in this prospectus by requesting them in writing or by telephone from us at the following address: Jonathan D. (Jody) Nelson Chief Financial Officer Patterson Energy, Inc. 4510 Lamesa Highway P.O. Box 1416 Snyder, Texas 79550 (915) 573-1104 We have not authorized anyone to give any information or make any representation about us that is different from, or in addition to, that contained in this prospectus or in any of the materials that we have incorporated by reference into this document. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to sell, or solicitations of offers to purchase, the Securities offered by this document is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you. The information contained in this document speaks only as of the date of this document, unless the information specifically indicates that another date applies. 3 6 PATTERSON 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, Patterson conducts operations in Texas, New Mexico, Oklahoma, Louisiana and Utah. We currently have a drilling fleet of 123 rigs, 118 of which are currently operable and have transactions pending to purchase an additional eight drilling rigs. We are also engaged in the development, exploration, acquisition and production of oil and natural gas and provide contract drilling fluid services to other oil and natural gas operators. The Company has established a reputation for reliable, high quality drilling equipment and well-trained crews. We continually seek to modify and upgrade our equipment to maximize the performance and capabilities of our drilling rig fleet, which we believe provides us with a competitive advantage. Additionally, we have the in-house capability to design, manufacture, repair and modify our drilling rigs. Of our 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 1999, we drilled 842 wells for 189 non-affiliated customers maintaining an average utilization rate of 45%. Our oil and natural gas activities are designed to complement our land drilling operations and diversify our overall business strategy. These activities are primarily focused in mature producing regions in the Austin Chalk Trend, the Permian Basin and South Texas. Oil and natural gas operations comprised approximately 6% of our consolidated operating revenues for 1999. At December 31, 1999, our 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. Our drilling fluid services are provided to operators of oil and gas wells located in our areas of operation. Operating revenues derived from these activities constituted approximately 8% of Patterson's consolidated operating revenues for 1999. We believe that these services integrate well with our other core operating activities. The drilling fluid operations were added during 1998 with our acquisition of Lone Star Mud, Inc., during January and Tejas Drilling Fluids, Inc. in September. Our headquarters are located at 4510 Lamesa Highway, Snyder, Texas, and our telephone number at that address is (915) 573-1104. We also have small offices in Austin, Houston, Midland, San Angelo, LaGrange, Kilgore and Corpus Christi, Texas and Oklahoma City, Oklahoma and Hobbs, New Mexico and Vernal, Utah, and 12 yard facilities variously located in our areas of operations. You can obtain additional information about us in the reports and other documents incorporated by reference in this prospectus. See "Incorporation of Certain Documents by Reference" and "Where You Can Find More Information." 4 7 RISK FACTORS Ownership of shares of Patterson common stock involves certain risks. In determining whether to purchase shares, you should carefully consider the following risk factors and other information contained in or incorporated by reference in this prospectus or in any applicable prospectus supplement. RISKS RELATED TO PATTERSON'S BUSINESS GENERALLY 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. 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. Notwithstanding the recent increase in demand for contract drilling services, the Company has not experienced a drill pipe 5 8 shortage, due in part to a long term drill pipe supply contract at a fixed price. This contract expires in November 2000. Severe problems associated with drill pipe shortages could reoccur upon the expiration of the supply contract and/or additional increases in demand for drilling services. Additionally, further increases in demand for drilling services 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 ARE ADVERSELY AFFECTING 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. The return to higher demand levels in the contract drilling industry has reinstated the problems associated with labor shortages. Of particular concern to us is that these problems are more severe than those previously experienced by Patterson and were reinstated at a much lower rig utilization rate than experienced in the past. These labor shortages are adversely effecting Patterson's operations. They are impeding Patterson's ability to place additional drilling rigs into operation and are causing delays in the drilling of new wells for Patterson customers. 6 9 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 $59.4 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. 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. 7 10 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 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. 8 11 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. 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 noteholders 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 143 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. 9 12 USE OF PROCEEDS We will not receive any proceeds from the sale of our common stock by the selling stockholders. DIVIDEND POLICY Patterson has not paid cash dividends on our common stock in the past and does not expect to pay any cash dividends on the common stock in the foreseeable future. We instead intend to retain our earnings to support the operations and growth of our businesses. Any future cash dividends would depend on future earnings, capital requirements, Patterson's financial condition and other factors deemed relevant by our 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. SELLING STOCKHOLDERS The following table sets forth certain information with respect to the selling stockholders and the beneficial ownership of common stock by them before and after the offering being made hereby. The information was provided to Patterson by the selling stockholders for inclusion in this prospectus.
Shares Being Shares Owned Offered in Shares Owned Name Before Offering the Offering After Offering(1) ---- --------------------- ------------ ------------------- Number Percent Number Percent ------ ------- ------ -------- Kenneth Reynolds(2) ................... 47,324(2) * 47,324 -0- -0- Gary Chappell(2) ...................... 5,676(2) * 5,676 -0- -0- Peter Hoffman(3) ...................... 50,000(3) * 50,000 -0- -0- ------- ------- Totals.................. 103,000 103,000 ======= =======
- ------------------ * Less than 1%. (1) Assumes all Shares offered hereby are sold. (2) These shares were issued by Patterson in March 2000 as partial consideration for the acquisition by us of the outstanding capital stock of WEK Drilling Company, Inc., a contract drilling company, based in Roswell, New Mexico. All of WEK's shares were owned by Messrs. Reynolds and Chappell. WEK owned four fully-operable drilling rigs and related equipment at the time of the acquisition. (3) These shares underly an option granted by Patterson to Mr. Hoffman in June 1999 as partial consideration for public relations services being rendered by him to Patterson. None of these shares will be sold in this offering unless the option is first exercised and the related exercise price is paid to Patterson. DESCRIPTION OF CAPITAL STOCK We are authorized by our Restated Certificate of Incorporation, as amended, to issue 50 million shares of common stock and one million shares of preferred stock. As of December 31, 1999, there were 32,675,678 shares of our common stock issued and outstanding and no issued and outstanding shares of our preferred stock. 10 13 COMMON STOCK A summary of the terms and provisions of our common stock is set forth below. Dividends. The holders of our common stock are entitled to receive dividends when, as and if declared by our Board out of funds legally available therefor However, if any shares of our preferred stock are at the time outstanding, the payment of dividends on our common stock or other distributions (including Patterson repurchases of our common stock) will be subject to the declaration and payment of all cumulative dividends on our outstanding shares of preferred stock. Liquidation. In the event of the dissolution, liquidation or winding up of Patterson, holders of common stock will be entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of Patterson's indebtedness, and the payment of the aggregate liquidation preference of the preferred stock. Voting. Our stockholders are entitled to one vote for each share on all matters voted on by our stockholders, including election of directors. Shares of common stock held by Patterson or any entity controlled by Patterson do not have voting rights and are not counted in determining the presence of a quorum. Our directors are elected annually. Holders of our common stock have no cumulative voting rights. No Other Rights. The holders of our common stock do not have any conversion, redemption or preemptive rights. Transfer Agent. The transfer agent for our common stock is Continental Stock Transfer & Trust Company, New York, New York. Listing. Shares of Patterson's outstanding common stock are traded on the Nasdaq National Market. PREFERRED STOCK Our preferred stock may be issued in series from time to time with such designations, relative rights, priorities, preferences, qualifications, limitations and restrictions thereof, to the extent that such are not fixed in Patterson's Restated Certificate of Incorporation, as amended, as our Board determines. The rights, preferences, limitations and restrictions on different series of preferred stock may differ with respect to: - dividend rates, - amounts payable on liquidation, - voting rights, - conversion rights, - redemption provisions, - sinking fund provisions, and - other matters. Our Board may authorize the issuance of preferred stock ranking senior to our common stock with respect to the payment of dividends and the distribution of assets on liquidation. In addition, our Board is authorized to fix the limitations and restrictions, if any, upon the payment of dividends on common stock to be effective while any shares of our preferred stock are outstanding. Our Board, without stockholder approval, can issue preferred stock with voting, conversion and other rights which 11 14 could adversely affect the voting power of the holders of common stock. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Patterson. 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 "-- Stockholder Rights Plan." STOCKHOLDER RIGHTS PLAN In January 1997, our Board adopted a stockholder rights plan under which stockholders of record as of January 17, 1997, received a dividend in the form of preferred share purchase rights (the "Rights"). The Rights permit the holder to purchase one one-hundredth of a share (a unit) of Series A preferred stock at an initial exercise price of $41.50 per share under certain circumstances. The purchase price, the number of units of preferred stock and the type of securities issuable upon exercise of the Rights are subject to adjustment. The Rights expire on January 2, 2007 unless earlier redeemed or exchanged. Until a Right is exercised, the holder thereof has no rights as a stockholder of Patterson, including the right to vote or receive dividends. The Rights become exercisable on the earlier to occur of (i) the acquisition by a person or group of affiliated or associated persons of 15% or more of the outstanding shares of common stock, or (ii) 10 days following the commencement of or announcement of an intention to acquire 15% or more of the outstanding shares of common stock through a tender offer or exchange offer. OTHER PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECT Delaware, like many other states, permits a corporation to adopt a number of measures through amendment of the corporate charter or bylaws or otherwise, which, along with certain provisions of the Delaware General Corporation Law (the "DGCL"), may have the effect of delaying or deterring any unsolicited takeover attempts notwithstanding that a majority of the stockholders might benefit from such a takeover or attempt. Section 203 of the DGCL, which applies to Patterson since the common stock is traded on the Nasdaq National Market, restricts certain "business combinations" with an "interested stockholder" for three years following the date such person becomes an interested stockholder, unless the Board of Directors approves the business combination. "Business combinations" is defined to include mergers, sale of assets and other similar transactions with an "interested stockholder." An "interested stockholder" is defined as a person who, together with affiliates, owns (or, within the prior three years, did own) 15% or more of the corporation's voting stock. By delaying or deterring unsolicited takeover attempts, these provisions could adversely affect prevailing market prices for Patterson's common stock. Patterson's Restated Certificate of Incorporation, as amended, and Bylaws contain certain provisions that could discourage potential takeover attempts and make more difficult attempts by stockholders to change management. The following paragraphs set forth a summary of these provisions: Special Meetings of Stockholders. The Restated Certificate of Incorporation, as amended, provides that special meetings of stockholders may be called only by our Board (or a majority of the members thereof), the Chief Executive Officer, the President or the holders of a majority of the outstanding stock entitled to vote at such special meeting. This provision will make it more difficult for stockholders to call a special meeting. No Stockholder Action by Written Consent. The Restated Certificate of Incorporation, as amended, provides that stockholder action may be taken only at annual or special meetings and not by written consent of the stockholders. Advance Notice Requirements for Stockholder Proposals and Director Nominations. The Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to 12 15 nominate candidates for election as directors at an annual meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of Patterson not less than 30 days nor more than 60 days prior to the meeting as originally scheduled; provided that in the event less than 40 days written notice is given to stockholders, notice by the stockholder to be made timely must be received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed. The Bylaws also specify certain requirements for a stockholders notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual meeting or from making nominations for directors at an annual meeting. Authorized Class of Preferred Stock. See "Description of Capital Stock" for information concerning Patterson's capital stock. PLAN OF DISTRIBUTION The distribution of the shares by the selling stockholders may be effected from time to time in one or more transactions (which may involve block transactions) on the Nasdaq National Market or otherwise, in negotiated transactions, or a combination of such methods of sale, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The selling stockholders may effect such transactions by selling their shares to or through broker dealers, and such broker-dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the selling stockholders or purchasers of the shares for whom they may act as agent (which compensation may be in excess of customary commissions). Such brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales and any commissions received by them may be deemed to be underwriting compensation. In accordance with applicable rules and regulations promulgated under the Exchange Act, any person engaged in the distribution of any of the selling stockholders' shares may not simultaneously engage in market activities with respect to any of the common stock for a period of nine business days prior to the commencement of such distribution. In addition and without limiting the foregoing, the selling stockholders may be subject to applicable provisions of the Exchange Act and the rules and regulations promulgated thereunder, including, without limitation, Regulation M, which provisions may limit the timing of purchases and sales of the shares by the selling stockholders. Patterson and the selling stockholders have agreed to indemnify each other against certain liabilities, including liabilities, under the Securities Act. LEGAL MATTERS The validity of the shares offered hereby will be passed upon for Patterson by Baker & Hostetler LLP, Denver, Colorado. A member of that firms owns 8,200 shares of Patterson's common stock. EXPERTS The consolidated financial statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 1999, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The estimated reserve evaluations and related calculations of Mr. Brian Wallace, P.E., Dallas, Texas, an independent petroleum engineer, incorporated in this Prospectus by reference from Patterson's 13 16 Annual Report on Form 10-K for the year ended December 31, 1999, have been so incorporated in reliance upon the authority of Mr. Wallace as an expert in petroleum engineering. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934. You may read and copy this information at the following locations of the SEC: Judiciary Plaza, Room 10024 Seven World Trade Center 450 Fifth Street, N.W. Suite 1300 Washington, D.C. 20549 New York, New York 10048 Citicorp Center 500 West Madison Street Suite 1400 Chicago, Illinois 60661 You can also obtain copies of this information by mail from the Public Reference Room of the SEC, 450 Fifth Street, N.W., Room 10024, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an internet world wide web site that contains reports, proxy statements and other information about issuers, like Patterson, that file electronically with the SEC. The address of that site is http://www.sec.gov. You can also inspect reports, proxy statements and other information about us at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. We have filed with the SEC a registration statement on Form S-3 that registers the Securities we are offering. The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and our Securities. The rules and regulations of the SEC allow us to omit certain information included in the registration statement from this prospectus. 14 17 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Capitalized terms used but not defined in Part II have the meanings ascribed to them in the Prospectus included as part of this Registration Statement. ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses expected to be incurred in connection with the issuance and distribution of the Securities registered hereby, all of which expenses, except for the SEC registration fee and the NASD filing fee, are estimates:
Description Amount ----------- ------ SEC registration fee................................................. $ 864 Accounting fees and expenses......................................... 2,500 Miscellaneous........................................................ 636 Total...................................................... $4,000 ======
ITEM 15..INDEMNIFICATION OF DIRECTORS AND OFFICERS. The DGCL provides for indemnification by a corporation of costs incurred by directors, employees and agents in connection with an action, suit or proceeding brought by reason of their position as a director, employee or agent. The person being indemnified must have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. The DGCL provides that a corporation may advance payment of expenses. The DGCL further provides that the indemnification and advancement of expenses provisions of the DGCL will not be deemed exclusive of any other rights to which these indemnifications or advancements of expenses may be entitled under bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action under official capacity and as to action in another capacity when holding such office. In addition to the general indemnification section, Delaware law provides further protection for directors under Section 102(b)(7) of the DGCL. This section was enacted in June 1986 and allows a Delaware corporation to include in its certificate of incorporation a provision that eliminates and limits certain personal liability of a director for monetary damages for certain breaches of the director's fiduciary duty of care, provided that any such provision does not (in the words of the statute) do any of the following: [E]liminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of this Title (dealing with willful or negligent violation of the statutory provision concerning dividends and stock purchases and redemptions), or (iv) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. The Board of Directors is empowered to make other indemnification as authorized under any bylaw, agreement, the Certificate of Incorporation, Bylaws or corporate resolution so long as the indemnification is consistent with the DGCL. II-1 18 Patterson's Restated Certificate of Incorporation, as amended, provides that, to the fullest extent permitted by the DGCL, a director of Patterson will not be liable to Patterson or its stockholders for monetary damages for breach of fiduciary duty as a director. Patterson's Bylaws provide that to the extent that a director or officer of Patterson is successful on the merits in the defense of a suit or proceeding brought against him by reason of the fact that he is a director or officer of Patterson, he will be indemnified against expenses (including attorneys' fees) reasonably incurred in connection with such action. In other circumstances, a director or officer of Patterson may be indemnified against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in and not opposed to the best interests of Patterson, and, with respect to a criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; however, in an action or suit by or in the right of Patterson to procure a judgment in its favor, such person will not be indemnified if he has been adjudged to be liable to Patterson unless and only to the extent that the Delaware Court of Chancery or the court in which such actin or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court deems proper. A determination that indemnification of a director or officer is proper will be made by a disinterested majority of Patterson's Board of Directors, by independent legal counsel or by the stockholders of Patterson. Patterson's Bylaws also provide that Patterson may advance the payment of expenses and that the indemnification and advancement of expenses provisions of the Bylaws are nonexclusive. Patterson maintains director and officer liability insurance covering director and officer indemnification. ITEM 16. EXHIBITS. The following exhibits are filed herewith or incorporated by reference herein:
Item 601 Exhibit Cross Number Reference Document as Form S-3 Exhibit ------- --------- ---------------------------- 2.1 2 Agreement and Plan of Merger, dated as of April 12, 1996, among Patterson Energy, Inc., Patterson Drilling Company and Tucker Drilling Company, Inc. and amendment thereto, dated May 16, 1996 (1) 4.1 4 Excerpt from Restated Certificate of Incorporation , as amended, of Patterson Energy, Inc. regarding authorized Common Stock and Preferred Stock(2) 5.1 5 Opinion of Baker & Hostetler LLP regarding the legality of the shares to be offered 10.1 10 Stock Purchase Agreement, dated March 31, 2000 among Patterson Energy, Inc., Patterson Drilling Company LP, LLLP and WEK Drilling Company, Inc. 23.1 23 Consent of PricewaterhouseCoopers LLP 23.2 23 Consent of M. Brian Wallace, independent petroleum engineer 23.3 23 Consent of Baker & Hostetler LLP (included in Exhibit 5.1) 24.1 24 Power of Attorney (included on the signature page hereto)
II-2 19 - --------- (1) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated April 22, 1996, and filed with the SEC on April 30, 1996. (2) Incorporated by reference to Item 16, "Exhibits" to Form S-3 dated December 18, 1996 and filed with the SEC on December 18, 1996. ITEM 17. UNDERTAKINGS. 1. The Company hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, unless the information required to be included in such post-effective amendment is contained in a periodic report filed by the Company pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 and incorporated herein by reference; (ii) to reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement, unless the information required to be included in such post-effective amendment is contained in a periodic report filed by the Company pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 and incorporated herein by reference; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; Provided, however, that paragraphs (1)(a)(i) and (1)(a)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Company pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this Registration Statement. (b) That, for the purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 20 2. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Patterson certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Snyder, State of Texas, on the 4th day of April, 2000. PATTERSON ENERGY, INC. By: /s/ A. GLENN PATTERSON ------------------------- A. Glenn Patterson President II-4 21 Each of the undersigned officers and directors of Patterson Energy, Inc. hereby appoints Cloyce A. Talbott and A. Glenn Patterson as attorneys and agents for the undersigned, with full power of substitution, for and in the name, place and stead of the undersigned, to sign and file with the SEC under the Securities Act of 1933 any and all amendments (including post-effective amendments) and exhibits to this Registration Statement and any and all applications, instruments or documents to be filed with the SEC pertaining to the registration of the Securities covered hereby, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary or desirable. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed as of April 4, 2000, by the following persons in the capacities indicated: /s/ CLOYCE A. TALBOTT Chairman of the Board, Director and Chief - ------------------------------- Executive Officer Cloyce A. Talbott Principal Executive Officer /s/ A. GLENN PATTERSON President, Chief Operating Officer and Director - ------------------------------- A. Glenn Patterson /s/ ROBERT C. GIST Director - ------------------------------- Robert C. Gist /s/ VINCENT A. ROSSI, JR. Director - ------------------------------- Vincent A. Rossi, Jr. /s/ SPENCER D. ARMOUR, III Director - ------------------------------- Spencer D. Armour, III /s/ JONATHAN D. NELSON Vice President--Finance, Secretary and Treasurer and - ------------------------------- Chief Financial Officer Jonathan D. Nelson Principal Accounting Officer
II-5 22 EXHIBIT INDEX
Item 601 Exhibit Cross Number Reference Document as Form S-3 Exhibit ------- --------- ---------------------------- 2.1 2 Agreement and Plan of Merger, dated as of April 12, 1996, among Patterson Energy, Inc., Patterson Drilling Company and Tucker Drilling Company, Inc. and amendment thereto, dated May 16, 1996 (1) 4.1 4 Excerpt from Restated Certificate of Incorporation , as amended, of Patterson Energy, Inc. regarding authorized Common Stock and Preferred Stock(2) 5.1 5 Opinion of Baker & Hostetler LLP regarding the legality of the shares to be offered 10.1 10 Stock Purchase Agreement, dated March 31, 2000 among Patterson Energy, Inc., Patterson Drilling Company LP, LLLP and WEK Drilling Company, Inc. 23.1 23 Consent of PricewaterhouseCoopers LLP 23.2 23 Consent of M. Brian Wallace, independent petroleum engineer 23.3 23 Consent of Baker & Hostetler LLP (included in Exhibit 5.1) 24.1 24 Power of Attorney (included on the signature page hereto)
- --------- (1) Incorporated by reference to Item 7, "Financial Statements and Exhibits" to Form 8-K dated April 22, 1996, and filed with the SEC on April 30, 1996. (2) Incorporated by reference to Item 16, "Exhibits" to Form S-3 dated December 18, 1996 and filed with the SEC on December 18, 1996. EX-5.1 2 OPINION/CONSENT OF BAKER & HOSTETLER LLP 1 EXHIBIT 5.1 [B&H letterhead] April 4, 2000 Patterson Energy, Inc. 4510 Lamesa Highway P.O. Box 1416 Snyder, Texas 79550 Gentlemen: We have acted as counsel for Patterson Energy, Inc. (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "1933 Act") on Form S-3 of a total of 103,000 shares (the "Shares") of the Company's issued and outstanding Common Stock, $0.01 par value, to be sold by certain stockholders of the Company. The Registration Statement on Form S-3 and exhibits thereto filed with the Securities and Exchange Commission under the Act are referred to herein as the "Registration Statement." We have examined the Restated Certificate of Incorporation, as amended, of the Company, the Bylaws of the Company, the Minutes of the Board of Directors and stockholders of the Company, the applicable laws of the State of Delaware and a copy of the Registration Statement. Based on the foregoing and having regard for such legal considerations as we deem relevant, we are of the opinion that the Shares stated in the Registration Statement as owned by Kenneth Reynolds and Gary Chappell have been validly issued and are fully paid and nonassessable, and the 50,000 Shares underlying the stock option stated in the Registration Statement as owned by Peter Hoffman will be, upon issuance pursuant to the terms of the option, validly issued, fully paid and nonassessable. We hereby consent to the use of this opinion as part of the Registration Statement. Very truly yours, BAKER & HOSTETLER LLP EX-10.1 3 STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.1 STOCK PURCHASE AGREEMENT AMONG PATTERSON ENERGY, INC. PATTERSON DRILLING COMPANY LP, LLLP AND KENNETH REYNOLDS AND GARY CHAPPELL 2 TABLE OF CONTENTS
Page ---- ARTICLE I - THE STOCK PURCHASE SECTION 1.1 The Stock Purchase.......................................................................1 SECTION 1.2 Purchase Consideration...................................................................1 SECTION 1.3 Adjustments for Closing Date Working Capital.............................................2 SECTION 1.4 Closing..................................................................................2 ARTICLE II - REPRESENTATIONS AND WARRANTIES OF PEC AND PDC SECTION 2.1 Organization, Standing and Power.........................................................3 SECTION 2.2 Authority; Non-Contravention.............................................................3 SECTION 2.3 Capital Structure........................................................................4 SECTION 2.4 SEC Documents............................................................................4 SECTION 2.5 Brokers..................................................................................4 ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS SECTION 3.1 Organization, Standing and Power.........................................................5 SECTION 3.2 Capital Structure........................................................................5 SECTION 3.3 Ownership of Company Stock...............................................................5 SECTION 3.4 Authority; Non-Contravention.............................................................6 SECTION 3.5 Financial Statements.....................................................................6 SECTION 3.6 Absence of Material Adverse Change.......................................................7 SECTION 3.7 Taxes....................................................................................7 SECTION 3.8 Real and Personal Property; Title Thereto................................................7 SECTION 3.9 Accounts Receivable......................................................................8 SECTION 3.10 Liabilities..............................................................................8 SECTION 3.11 Insurance................................................................................8 SECTION 3.12 Contracts and Other Agreements...........................................................8 SECTION 3.13 Records..................................................................................8 SECTION 3.14 Transactions with Affiliates.............................................................8 SECTION 3.15 Employee Benefit Plans; Employment Agreements............................................9 SECTION 3.16 Labor Matters............................................................................9 SECTION 3.17 Environmental Matters....................................................................9 SECTION 3.18 Litigation..............................................................................11 SECTION 3.19 Governmental Licenses and Permits; Compliance with Law..................................11 SECTION 3.20 Brokers.................................................................................11 SECTION 3.21 Bank Accounts...........................................................................11 SECTION 3.22 Distributions to Stockholders of the Company............................................12 SECTION 3.23 Workers' Compensation Claims............................................................12 SECTION 3.24 Loans or Advances to Stockholders.......................................................12
i 3 ARTICLE IV - ADDITIONAL AGREEMENTS SECTION 4.1 Fees and Expenses.......................................................................12 SECTION 4.2 Reasonable Efforts......................................................................12 SECTION 4.3 Public Announcements....................................................................12 SECTION 4.4 Stockholders Indemnification............................................................13 SECTION 4.5 Repayment of Bank Debt..................................................................13 SECTION 4.6 Repayment of Stockholders Indebtedness to the Company...................................13 SECTION 4.7 Certain Tax Matters.....................................................................13 ARTICLE V - CONDITIONS PRECEDENT TO THE STOCK PURCHASE SECTION 5.1 Conditions to Each Party's Obligation to Effect the Stock Purchase......................14 SECTION 5.2 Conditions to Obligation of the Stockholders to Effect the Stock Purchase......................................................................15 SECTION 5.3 Conditions to Obligations of PEC and PDC to Effect the Stock Purchase...................15 ARTICLE VI - POST CLOSING COVENANTS SECTION 6.1 Sale of Assets to Stockholders..........................................................17 SECTION 6.2 Registration Statement..................................................................18 ARTICLE VII - GENERAL PROVISIONS SECTION 7.1 Notices.................................................................................18 SECTION 7.2 Interpretation..........................................................................19 SECTION 7.3 Counterparts............................................................................19 SECTION 7.4 Entire Agreement; No Third-Party Beneficiaries..........................................19 SECTION 7.5 Governing Law...........................................................................19 SECTION 7.6 Assignment..............................................................................19 SECTION 7.7 Severability............................................................................20 SECTION 7.8 Enforcement of This Agreement...........................................................20 Annex A Asset Purchase Agreement Annex B Registration Rights Agreement Annex C Investment Representation Letter Annex D-1 Non-Competition Agreement - K Reynolds Annex D-2 Non-Competition Agreement - G Chappell Annex E-1 Selling Stockholder Questionnaire - K Reynolds Annex E-2 Selling Stockholder Questionnaire - G Chappell
ii 4 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of March 31, 2000 (this "Agreement"), among PATTERSON ENERGY, INC., a Delaware corporation ("PEC"), PATTERSON DRILLING COMPANY LP, LLLP ("PDC"), a Delaware registered limited liability limited partnership and a wholly-owned indirect subsidiary of PEC, Kenneth Reynolds ("K Reynolds"), and Gary Chappell ("G Chappell"), each of whom is an individual residing in the State of Texas (K Reynolds and G Chappell are collectively referred to herein as the "Stockholders"). WITNESSETH: WHEREAS, the Stockholders beneficially own all of the outstanding common stock, no par value ("WEK Stock"), of WEK Drilling Company, Inc., a New Mexico corporation ("WEK"); WHEREAS, PDC desires to purchase, and the Stockholders desire to sell, all of the outstanding WEK Stock (the "Stock Purchase") for the consideration set forth and provided for herein; and WHEREAS, PEC and PDC, on the one hand, and the Stockholders, on the other, desire to make certain representations, warranties and agreements in connection with the Stock Purchase. NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties agree as follows: ARTICLE I THE STOCK PURCHASE SECTION 1.1 The Stock Purchase. Upon the terms and subject to the conditions of this Agreement, at the Closing (as defined in Section 1.4 below) provided herein, PDC shall purchase from the stockholders of WEK, and the Stockholders shall sell, or cause to be sold, to PDC, all of the outstanding shares of WEK Stock. SECTION 1.2 Purchase Consideration. As consideration for all of the outstanding shares of WEK Stock, PDC agrees to pay or deliver to the Stockholders at the Closing a combination of cash and shares of common stock of PEC (the "PEC Shares") to be paid as follows: a total of $5,660,000 cash (the "Cash Portion") and $1,540,000 in PEC Shares, with the number of such shares to be equal to the quotient of the average of the closing price of Patterson's common stock over the five business day period ending on the last business day next preceding the Closing (as defined below) divided into $1,540,000. For example, if the average price is $20, the number of PEC Shares would be 150,000 shares, or if the average price is $10, the number of PEC Shares would be 300,000 shares (the "Stock Portion," and collectively with the Cash Portion, the "Purchase Consideration"). The Purchase Consideration comprised of PEC Shares shall be issued to the Stockholders at Closing in the following amounts: 47,324 PEC Shares to K Reynolds and 5,676 PEC Shares to G Chappell. The Cash 5 Portion of the Purchase Consideration shall be paid to the Stockholders at the Closing in the following amounts: $4,745,000 to K Reynolds and $915,000 to G Chappell. SECTION 1.3 Adjustments for Closing Date Working Capital. (a) Not less than three business days prior to the Closing, WEK will deliver to PEC an estimate of the components of its working capital as of the Closing, determined on an accrual basis in accordance with generally accepted accounting principles (including provisions for current and deferred income tax) consistently applied ("GAAP") (the "Estimated Closing Date Working Capital"). To the extent that the Estimated Closing Date Working Capital is less than $1,150,000, such difference (the "Estimated Closing Date Working Capital Deficiency") shall be deducted from the Cash Portion of the Purchase Consideration to be paid to the Stockholders pursuant to Section 1.2. (b) As promptly as practicable (but in no event later than 30 business days after the Closing Date), the Stockholders shall deliver to PDC (i) a balance sheet of WEK dated as of the close of business on the Closing Date (the "Closing Date Balance Sheet") prepared in accordance with GAAP, and (ii) an accompanying closing statement (the "Closing Statement") reasonably detailing the Stockholders' determination of WEK's aggregate net worth as of the Closing Date (the "Closing Date Working Capital"). PDC must, within 30 business days after PDC's receipt of the Closing Date Balance Sheet and the Closing Statement, give written notice (the "Notice") to Stockholders specifying in reasonable detail PDC's objections, if any, with respect thereto, including, without limitation, any objections relating to the Stockholders' determination of the Closing Date Balance Sheet and the Closing Date Working Capital. With respect to any disputed amounts, the parties shall meet in person and negotiate in good faith during the 10 business day period (the "Resolution Period") after the date of the Stockholders' receipt of the Notice to resolve any such disputes. If the parties are unable to resolve all such disputes within the Resolution Period, then within five business days after the expiration of the Resolution Period, all unresolved disputes shall be submitted to a mutually agreed upon independent accountant (the "Independent Accountant") who shall be engaged to provide a final and conclusive resolution of all unresolved disputes within 15 business days after such engagement. The determination of the Independent Accountant shall be final, binding and conclusive on the parties hereto, and the fees and expenses of the Independent Accountant shall be borne by the party that the Independent Accountant determines is the non-prevailing party. (c) To the extent the Closing Date Working Capital is less than $1,150,000, the Stockholders, jointly and severally, agree to pay such deficiency (together with interest at the rate of nine percent (9%) per annum from the Closing Date until paid) to PDC within five business days after its final determination pursuant to this Section 1.3. SECTION 1.4 Closing. The closing of the Stock Purchase (the "Closing") shall take place at 9:00 a.m., local time, on the date of this Agreement at the offices of WEK in Roswell, New Mexico, or at such other time and place as PDC and the Stockholders shall agree. The date on which the Closing occurs is sometimes referred to herein as the "Closing Date." 2 6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF PEC AND PDC PDC represents and warrants to the Stockholders as follows: SECTION 2.1 Organization, Standing and Power. PEC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and PDC is a registered limited liability limited partnership duly organized, validly existing and in good standing in the State of Delaware. Each of PEC and PDC has the requisite corporate or limited partnership (as the case may be) power and authority to carry on its business as now being conducted, and is in good standing in each jurisdiction where the character of its business owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not individually or in the aggregate, have a Material Adverse Effect on PEC. "Material Adverse Change" or "Material Adverse Effect" means, when used with respect to PEC, PDC or WEK, as the case may be, any change or effect that is or, so far as can reasonably be determined, is likely to be materially adverse to the assets, properties, condition (financial or otherwise), business or results of operations of PEC, PDC and the subsidiaries of PEC taken as a whole or WEK, as the case may be. SECTION 2.2 Authority; Non-Contravention. Each of PEC and PDC has all requisite power and authority to enter into this Agreement and to consummate the Stock Purchase. The execution and delivery by each of PEC and PDC of this Agreement and the consummation by each of PEC and PDC of the Stock Purchase have been duly authorized by all necessary corporate action on the part of PEC and PDC, as the case may be. This Agreement has been duly executed and delivered by PEC and PDC and (assuming the valid authorization, execution and delivery of this Agreement by WEK) constitutes a valid and binding obligation of PEC and PDC enforceable against PEC and PDC in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). The execution and delivery of this Agreement do not or will not, as the case may be, and the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of PEC or PDC under, any provision of (i) the Certificate of Incorporation or Bylaws of PEC and the Certificate of Limited Partnership or the Amended and Restated Agreement of Limited Partnership of PDC, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to PDC or PEC, or (iii) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to PEC or any of their respective properties or assets, other than, in the case of clauses (ii) or (iii), any such conflicts, violations, defaults, rig, losses, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on PEC or PDC, materially impair the ability of PEC or PDC to perform its obligations hereunder or prevent the consummation of any 3 7 of the transactions contemplated hereby or thereby. No filing or registration with, or authorization, consent or approval of, any domestic (federal and state), foreign or supranational court, commission, governmental body, regulatory agency, authority or tribunal (a "Governmental Agency") is required by or with respect to PEC or PDC in connection with the execution and delivery of this Agreement by PEC or PDC or is necessary for the consummation by PEC or PDC of the Stock Purchase, except for (i) in connection or in compliance, with the provisions of the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934 (the "Exchange Act"), (ii) such consents and approvals, orders, registrations, authorizations, declarations and filings as may be required under the "Blue Sky" laws of the State of Texas, and (iii) such other consents, orders, authorizations, registrations, declarations and filings, the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on either PEC or PDC, materially impair the ability of PEC or PDC to perform its obligations hereunder or prevent the consummation of the transaction contemplated hereby. SECTION 2.3 Capital Structure. As of the date hereof, the authorized capital stock of PEC consists of 50,000,000 shares of common stock, par value $0.01 per share ("PEC Common Stock") and 1,000,000 shares of preferred stock, par value $0.01 per share ("PEC Preferred Stock"). At the close of business on December 31, 1999, (i) 32,675,678 shares of PEC Common Stock were validly issued and outstanding, fully paid and nonassessable and free of preemptive rights, and (ii) no shares of PEC Preferred Stock are issued and outstanding. The PEC Common Stock is designated as a national market security on an inter-dealer quotation system by the National Association of Securities Dealers, Inc. All shares of PEC Common Stock issuable pursuant to the Stock Purchase in accordance with this Agreement, will be, when so issued, duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights. SECTION 2.4 SEC Documents. PEC has filed all required documents with the Securities and Exchange Commission ("SEC") since January 1, 1998 (the "PEC/SEC Documents"). As of their respective dates, the PEC/SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and none of the PEC/SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of PEC included in the PEC/SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles (except, in the case of the unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly present the consolidated financial position of PEC and its consolidated subsidiaries, including PDC) as at the dates thereof and the consolidated results of their operations and statements of cash flows for the periods then ended (subject, in the case of the unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein). SECTION 2.5 Brokers. No broker, investment banker or other person is entitled to any broker's, finder's or similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of PEC or PDC. 4 8 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS The Stockholders jointly and severally represent and warrant to PEC and PDC as follows: SECTION 3.1 Organization, Standing and Power. WEK is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New Mexico and has the requisite corporate power and authority to carry on its business as now being conducted. WEK has no subsidiaries. WEK is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary. SECTION 3.2 Capital Structure. The authorized capital stock of WEK consists of 10,000 shares of WEK Stock, of which 2,500 shares are issued and outstanding. All outstanding shares of WEK Stock are validly issued, fully paid and nonassessable and have not been issued in violation of any preemptive rights. There are no options, warrants, rights, commitments, agreements, arrangements or undertakings of any kind to which WEK is a party or by which it is bound obligating WEK to issue, additional shares of capital stock of WEK. SECTION 3.3 Ownership of WEK Stock. Section 3.3 of the disclosure schedule of the Stockholders dated as of the date of this Agreement, previously delivered to PDC (the "Stockholders Disclosure Schedule") sets forth a true and correct list of the ownership of WEK Stock by the Stockholders. Each of the Stockholders is the record and beneficial owner of the shares listed as owned by him in Section 3.3 of the Stockholders Disclosure Schedule and holds such WEK Stock free and clear of any restrictions on transfer (other than restrictions under the Securities Act of 1933 and state securities laws), taxes, Liens (as defined below in this Section), options, warrants, purchase rights, contracts, commitments, equities, claims and demands. Neither of the stockholders of WEK is a party to (i) any option, warrant, purchase right, or other contract or commitment that could require him/her to sell, transfer, or otherwise dispose of any WEK Stock (other than pursuant to this Agreement) or (ii) any voting trust, proxy, or other agreement or understanding with respect to WEK Stock. For purposes of this Agreement "Liens" means liens, mortgages, pledges, security interests, encumbrances, claims or charges of any kind. SECTION 3.4 Authority; Non-Contravention. Each of the Stockholders has all requisite power and authority to enter into this Agreement and to consummate the Stock Purchase. This Agreement has been duly executed and delivered by the Stockholders and (assuming the valid authorization, execution and delivery of this Agreement by PEC and PDC) constitutes a valid and binding obligation of each of the Stockholders enforceable against him/her in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). The execution and delivery of this Agreement do not, and the consummation of the Stock Purchase and compliance with the provisions hereof will not, conflict with, or result in any violation of, or default (with or without notice of lapse of time, or both) 5 9 under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any lien, security interest, charges or encumbrances upon any of the properties or assets of WEK under, any provision of (i) the Articles of Incorporation or By-laws of WEK (true and complete copies of which as of the date hereof have been delivered to PDC), (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to WEK or (iii) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to WEK or any of its respective properties or assets, other than, in the case of clauses (ii) or (iii), any such conflicts, violations, defaults, rights, liens, losses, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on WEK, materially impair the ability of WEK to perform its obligations hereunder or prevent the consummation of the Stock Purchase. Except as set forth on Section 3.4 of the Stockholders Disclosure Schedule, no filing or registration with, or authorization, consent or approval of, any Governmental Entity is required by or with respect to any of the Stockholders or WEK in connection with the execution and delivery of this Agreement by the Stockholders or is necessary for the consummation by the Stockholders of the Stock Purchase or any other transaction contemplated by this Agreement. For purposes of this Agreement, "Material Adverse Change" or "Material Adverse Effect" means any change or effect that is or, as far as can reasonably be determined, is likely to be materially adverse to the assets, properties, condition (financial or otherwise), business or results of operations of WEK. SECTION 3.5 Financial Statements. Included in Section 3.5 of the Stockholders Disclosure Schedule are the following unaudited financial statements (collectively, the "WEK Financial Statements") of WEK: (i) balance sheets as of March 31, 1999 and February 29, 2000; and (ii) statements of income for (x) each of the four years in the period ended March 31, 1999, and (y) the 11-month and one-month periods ended February 29, 2000, respectively. Except as may be set forth in Section 3.5 of the Stockholders Disclosure Schedule, the WEK Financial Statements (a) are complete and correct in all material respects, (b) have been prepared in conformity with accrual tax basis accounting consistently applied, and (c) present fairly the financial condition of WEK at the dates presented and the results of operations of WEK for the periods covered. There does not, and there will not be at Closing, exist any fact, event, condition or claim known to any of the Stockholders which would cause a Material Adverse Change in the WEK Financial Statements as presented other than as set forth therein. SECTION 3.6 Absence of Material Adverse Change. Except as otherwise set forth in Section 3.6 of the Stockholders Disclosure Schedule, there has not been any Material Adverse Change with respect to WEK since December 31, 1999. SECTION 3.7 Taxes. Except as otherwise set forth in Section 3.7 of the Stockholders Disclosure Schedule: (i) all Tax Returns required to be filed by WEK have been filed or extensions have been validly obtained; (ii) Tax Returns referred to in clause (i) are true and correct in all material respects and have been completed in all material respects in accordance with applicable law; (iii) all Taxes shown to be due on the Tax Returns referred to in clause (i) have been timely paid or extensions have been duly obtained or such taxes have been adequately provided for on WEK's balance sheet or are being timely and properly contested; (iv) WEK has not waived any statute of limitations in respect of Taxes of WEK; (v) none of the Tax Returns 6 10 referred to in clause (i) have been examined by the Internal Revenue Service or the appropriate state taxing authority; (vi) no issues regarding any of the Tax Returns referred to in clause (i) have been raised in writing by the relevant taxing authority; (vii) no deficiencies have been asserted or assessments made with regard to any of the Tax Returns referred to in clause (i) by a taxing authority; (viii) WEK has made available to PDC correct and complete copies of all federal and state income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by WEK; (ix) WEK is not currently, and has not been for at least the past 12 years, an S corporation pursuant to Section 1362(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of this Agreement, (a) "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or added minimum, ad valorem, transfer, severance or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any governmental authority, and (b) "Tax Return" means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including, without limitation, any information return, claim for refund, amended return or declaration of estimated Tax. SECTION 3.8 Real and Personal Property; Title Thereto. Set forth in Section 3.8 of the Stockholders Disclosure Schedule is a complete and accurate schedule of all real and personal property owned or leased by WEK having an individual fair market value in excess of $10,000, and other than the real and personal property to be resold to Kenneth Reynolds immediately following the Closing Date as provided in Section 6.1 of this Agreement. Except as set forth in Section 3.8 of the Stockholders Disclosure Schedule, WEK has good and, with respect to real property, indefeasible title to all of such real property and personal property, subject to no Liens except for (i) Liens for taxes not yet delinquent or the validity of which is being contested in good faith, and (ii) any Liens arising by operation of law securing obligations not yet overdue. Any real or personal property held by WEK under lease are held under valid and enforceable leases which will continue in full force and effect immediately after the Closing Date; WEK is not in default with respect to any such lease. SECTION 3.9 Accounts Receivable. Set forth in Section 3.9 of the Stockholders Disclosure Schedule is a complete and accurate schedule of the accounts receivable of WEK as of December 31, 1999, as reflected in the balance sheet as of that date included in WEK Financial Statements, together with an accurate aging of those accounts. To the best knowledge of the Stockholders, the accounts described in Section 3.9 have been collected in full, or are collectible at their full amounts. SECTION 3.10 Liabilities. There are no liabilities of WEK of any kind, whether contingent or fixed, other than (i) liabilities disclosed or provided for in the balance sheet of WEK as of March 31, 1999 included in the WEK Financial Statements or disclosed in Section 3.10 of the Stockholders Disclosure Schedule, or (ii) liabilities incurred in the ordinary course of business since March 31, 1999, none of which, either individually or in the aggregate, may be reasonably expected to be materially adverse to the business, assets, condition (financial or otherwise) or results of operations of WEK. 7 11 Section 3.11 Insurance. Set forth in Section 3.11 of the Stockholders Disclosure Schedule is an accurate and complete list and brief description of all policies of fire and extended coverage, liability, worker compensation and other forms of similar insurance or indemnity bonds held by WEK. WEK is not in default in any material respect with respect to any provisions of any such policy or indemnity bond and has not failed to give any notice or present any claim thereunder in due and timely fashion, which failure would materially adversely affect the condition (financial or otherwise), results of operations, assets, liabilities or business of WEK. Section 3.12 Contracts and Other Agreements. Except as disclosed on Section 3.12 of the Stockholders Disclosure Schedule, WEK is not a party to or bound by any written or oral (i) employment, agency, consulting or similar contract which cannot be terminated upon 30 days' notice without liability to WEK, (ii) lease, whether as lessor or lessee, with respect to any real or personal property, (iii) contract or commitment involving more than $10,000 a year; (iv) credit agreements; (v) guarantee, suretyship, indemnification or contribution agreement, (vi) drilling contracts or purchase orders, or (vii) other contracts not made in the ordinary course of business. Section 3.13 Records. The stock record books and minute books of WEK are complete and correct in all material respects, and record all transactions required to be set forth concerning all proceedings, consents, actions and meetings of the stockholders and the Board of Directors of WEK. Section 3.14 Transactions with Affiliates. Except as otherwise set forth in 3.14 of the Stockholders Disclosure Schedule, no Affiliate (as hereinafter defined) has any direct or indirect interest in or owns directly or indirectly any asset or right owned by or used in the conduct of the contract drilling business of WEK or is party to any contract, lease, agreement, arrangement or commitment used in such business. "Affiliate" as used in this Section 3.14 means a person which directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under, control with WEK. For purposes of this definition, the officers, directors and stockholders of WEK shall be deemed Affiliates. Section 3.15 Employee Benefit Plans; Employment Agreements. WEK has no employee benefit plans, programs, employment agreements or severance agreements or other arrangements of any kind for the benefit of any current or former employee, officer or director of WEK other than a group medical plan ("Group Plan") under which WEK pays 60% and employees pay 40%. The Group Plan: (i) is not a multi-employer plan within the meaning of ERISA; (ii) does not promise or provide retiree medical or life insurance benefits to any person, except as otherwise required by law; (iii) does not require qualification under Section 401(a) of the Code; (iv) is not subject to Title IV of ERISA; and (v) has been operated in all respects in accordance with its terms and the requirements of applicable law. Section 3.16 Labor Matters. (i) WEK is not a party to any collective bargaining agreement or other material contract or agreement with any labor organization or other representative of employees nor is any such contract being negotiated; (ii) there is no material 8 12 unfair labor practice charge or complaint pending nor, to the knowledge of any of the Stockholders, threatened, with regard to employees of WEK; (iii) there is no labor strike, material slowdown, material work stoppage or other material labor controversy in effect, or, to the knowledge of any of the Stockholders, threatened against WEK; (iv) as of the date hereof, no representation question exists, nor to the knowledge of any of the Stockholders are there any campaigns being conducted to solicit cards from the employees of WEK to authorize representation by a labor organization; (v) WEK is not party to, or is not otherwise bound by, any consent decree with any governmental authority relating to employees or employment practices of WEK; (vi) WEK has not incurred any liability under, and has complied in all respects with, the Worker Adjustment Retraining Notification Act, and no fact or event exists that could give rise to liability under such Act; and (vii) except as disclosed in Section 3.16 of the Stockholders Disclosure Schedule, WEK is in compliance with all applicable agreements, contracts and policies relating to employment, employment practices, wages, hours and terms and conditions of employment of the employees, except where the failure to be in compliance with each such agreement, contract and policy would not, either singly or in the aggregate, have a Material Adverse Effect on WEK. Section 3.17 Environmental Matters. (a) Except with respect to oil and gas wells in which WEK currently owns an interest (as to which the Stockholders make no representation or warranty under this Section 3.17), and except to the extent that the inaccuracy of any of the following, individually or in the aggregate, would not have a Material Adverse Effect on WEK, to the actual knowledge of the Stockholders: (i) WEK holds, and is in compliance with and has been in compliance with for the last three years, all Environmental Permits, and is otherwise in substantial compliance and has been in substantial compliance for the last three years with, all applicable Environmental Laws and there is no condition that is reasonably likely to prevent or materially interfere prior to the Effective Time with compliance by WEK with Environmental Laws; (ii) no modification, revocation, reissuance, alteration, transfer or amendment of any Environmental Permit, or any review by, or approval of, any third party of any Environmental Permit is required in connection with the execution or delivery of this Agreement or the consummation by WEK of the transactions contemplated hereby or the operation of the business of WEK on the date of the Closing; (iii) WEK has not received any Environmental Claim, nor has any Environmental Claim been threatened against WEK; (iv) WEK has not entered into, agreed to or is not subject to any outstanding judgment, decree, order or consent arrangement with any governmental authority under any Environmental Laws, including without limitation those relating to compliance with any Environmental Laws or to the investigation, cleanup, remediation or removal of Hazardous Materials; 9 13 (v) there are no circumstances that are reasonably likely to give rise to liability under any agreements with any person pursuant to which WEK would be required to defend, indemnify, hold harmless, or otherwise be responsible for any violation by or other liability or expense of such person, or alleged violation by or other liability or expense of such person, arising out of any Environmental Law; and (vi) there are no other circumstances or conditions that are reasonably likely to give rise to liability of WEK under any Environmental Laws. (b) For purposes of this Agreement, the terms below shall have the following meanings: "Environmental Claim" means any written complaint, notice, claim, demand, action, suit or judicial, administrative or arbitral proceeding by any person to WEK asserting liability or potential liability (including without limitation, liability or potential liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damage, personal injury, fines or penalties) arising out of, relating to, based on or resulting from (i) the presence, discharge, emission, release or threatened release of any Hazardous Materials at any location, (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Laws or Environmental Permits, or (iii) otherwise relating to obligations or liabilities of WEK under any Environmental Law. "Environmental Permits" means all permits, licenses, registrations, exemptions and other governmental authorizations required under Environmental Laws for WEK to conduct its operations as presently conducted. "Environmental Laws" means all applicable foreign, federal, state and local statutes, rules, regulations, ordinances, orders, decrees and common law relating in any manner to pollution or protection of the environment, to the extent and in the form that such exist at the date hereof. "Hazardous Materials" means all hazardous or toxic substances, wastes, materials or chemicals, petroleum (including crude oil or any fraction thereof) and petroleum products, asbestos and asbestos-containing materials, pollutants, contaminants and all other materials and substances, including but not limited to radioactive materials, regulated pursuant to any Environmental Laws. Section 3.18 Litigation. Except as set forth in Section 3.18 of the Stockholders Disclosure Schedule, there is no suit, action, investigation or proceeding pending or, to the knowledge of the Stockholders, threatened against WEK at law or in equity before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, that would have a Material Adverse Effect on WEK or, with respect to such matters that are pending or threatened as of the date hereof, materially impair the ability of WEK to perform its obligations hereunder or to consummate the Stock Purchase, and there is no judgment, decree, injunction, rule or order 10 14 of any court, governmental department, commission, board, bureau, agency, instrumentality or arbitrator to which WEK is subject that would have a Material Adverse Effect on WEK or, with respect to such items that are outstanding and applicable as of the date hereof, materially impair the ability of WEK to perform its obligations hereunder or to consummate the Stock Purchase. Section 3.19 Governmental Licenses and Permits; Compliance with Law. WEK has not received notice of any revocation or modification of any federal, state, local or foreign governmental license, certification, tariff, permit, authorization or approval, the revocation or modification of which would have a Material Adverse Effect on WEK. The conduct of the business of WEK complies with all statutes, laws, regulations, ordinances, rules, judgments, orders, decrees or arbitration awards applicable thereto, except for violations or failures to comply, if any, that, individually or in the aggregate, would not have a Material Adverse Effect on WEK. Section 3.20 Brokers. No broker, investment banker or other person is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of WEK. Section 3.21 Bank Accounts. A complete list of each bank account maintained by WEK, including safe deposit boxes maintained by WEK, the account balances and the names of the persons authorized to draw down upon or have access thereto is set forth in Section 3.21 of the Stockholders Disclosure Schedule. Section 3.22 Distributions to Stockholders of WEK. WEK, since December 31, 1999, has not declared, set aside or paid any dividends on, or made any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise made any payments to any of the stockholders of WEK other than regular monthly salaries in amounts consistent with past practice and a $70,000 bonus in the ordinary course of business. Section 3.23 Workers' Compensation Claims. Except as set forth in Section 3.18 of the Stockholders Disclosure Schedule, there are no workers' compensation claims pending or, to the knowledge of the Stockholders, threatened against WEK. Section 3.24 Loans or Advances to Stockholders. There are no outstanding loans or advances from WEK to any persons, other than $160,000 of advances to Kenneth Reynolds. ARTICLE IV ADDITIONAL AGREEMENTS Section 4.1 Fees and Expenses. All costs and expenses incurred by PEC and PDC in connection with this Agreement and the transactions contemplated hereby shall be paid by PEC and PDC; such costs and expenses (including legal and accounting fees) incurred by the Stockholders or WEK not to exceed a total of $30,000 shall be paid by WEK. Section 4.2 Reasonable Efforts. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to 11 15 be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Stock Purchase and the other transactions contemplated by this Agreement and the prompt satisfaction of the conditions hereto. Section 4.3 Public Announcements. Before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, PEC and PDC, on the one hand, and the Stockholders, on the other, will consult with each other, and will undertake reasonable efforts to agree upon the terms of such press release, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law or by obligations pursuant to any listing agreement with the Nasdaq National Market. Section 4.4 Stockholders Indemnification. (a) After the Closing Date, the Stockholders shall jointly and severally indemnify and hold PEC and PDC harmless against and in respect of all actions, suits, demands, judgments, costs and expenses (including reasonably attorneys' fees of PEC or PDC), but after giving effect to insurance recoveries, if any, relating to any misrepresentation, breach of any representation or warranty or non-fulfillment of any agreement on the part of the Stockholders under this Agreement. Any written notice of claim for indemnification shall be given to K Reynolds, as representative of the Stockholders, by PEC or PDC within 30 days after it has knowledge of any misrepresentation or breach of warranty or non-fulfillment of any agreement on the part of the Stockholders, which may give rise to a claim for indemnification. This indemnification provided for in this Section 4.4(a) shall terminate and be of no further force and effect two years from the Closing Date, except (i) as to any representation or warranty as to which a written notice of claim for indemnification has been given to K Reynolds, as representative of the Stockholders, prior to the expiration of such two-year period; and (ii) for a claim for indemnification for unpaid or undisclosed federal income tax liability given to K Reynolds, as representative of the Stockholders, prior to the expiration of the applicable period of limitations. (b) After the Closing Date, and, in addition to, but separate from, the indemnification contained in Section 4.4(a), K Reynolds shall indemnify and hold PEC and PDC harmless against and in respect of all actions, suits, demands, judgments, costs and expenses (including reasonable attorneys' fees of PEC and/or PDC), but after giving effect to insurance recoveries, if any, relating in any way to any of the real and personal properties to be sold to K Reynolds pursuant to the Asset Purchase Agreement referred to in Section 6.1. Section 4.5 Repayment of Bank Debt. Prior to the Closing Date, the Stockholders shall cause WEK to repay all indebtedness of WEK for borrowed money including, but not limited to, the loan from Valley Bank of Commerce, and shall cause WEK to file all UCC-1 Termination Statements relating to any security interests held by lenders with regard to such indebtedness. 12 16 Section 4.6 Repayment of Stockholders Indebtedness to WEK. On or prior to the Closing Date, the Stockholders shall pay to WEK all principal and interest on monies borrowed by, or advanced to, them (total principal and interest balance of $160,000 as of the date of this Agreement). Section 4.7 Certain Tax Matters. (a) For each taxable period of WEK that ends before the Closing Date, the Stockholders shall cause, at their expense, to be timely prepared and filed with the appropriate authorities all tax returns of WEK and shall cause to be paid by the parties responsible therefor all taxes when due. PEC shall cause, at its expense, to be prepared and filed all tax returns for WEK for tax periods not described in the immediately foregoing sentence, and WEK or PEC shall pay all taxes required to be paid for such periods. (b) The Stockholders, WEK, PEC and PDC reasonably and in good faith shall cooperate with each other in preparing and filing all tax returns, including maintaining and making available to each other all records necessary in connection with the preparation and filing of such tax returns. (c) The Stockholders shall be responsible at their expense for causing to be filed any amended tax returns of WEK for taxable periods ending prior to the Closing Date which are required as a result of an examination or adjustments made by taxing authorities, and for causing to be paid by the parties responsible therefor when due any taxes resulting therefrom. Any such amended returns shall be furnished to PEC for approval (which approval shall not be unreasonably withheld), signature and filing at least ten (10) business days prior to the due date for the filing of such amended returns. (d) If a claim is made by any taxing authority: (i) For any taxable period ending on or before the Closing Date, the Stockholders shall control the proceedings taken in connection with such claim; and (ii) For any taxable period ending after the Closing Date, PEC shall control the proceedings taken in connection with such claim. Subject to the immediately foregoing clauses (i) and (ii), the parties reasonably and in good faith shall cooperate with each other in the contesting of any tax claim, and shall keep each other fully apprised of the status of such claims. Notwithstanding any of the foregoing to the contrary, WEK and PEC shall not without the prior written approval of the Stockholders (1) agree to an extension of the statute of limitations with respect to any taxable period of WEK ending before the Closing Date or (2) amend any tax return of WEK for any taxable period of WEK ending before the Closing Date. 13 17 ARTICLE V CONDITIONS PRECEDENT TO THE STOCK PURCHASE Section 5.1 Conditions to Each Party's Obligation to Effect the Stock Purchase. The respective obligations of each party to effect the Stock Purchase shall be subject to the fulfillment or waiver (where permissible) at or prior to the Closing Date of the following condition: (a) No Order. No Governmental Entity or court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of prohibiting the Stock Purchase or any of the other transactions contemplated hereby; provided that, in the case of any such decree, injunction or other order, each of the parties shall have used reasonable best efforts to prevent the entry of any such injunction or other order and to appeal as promptly as practicable any decree, injunction or other order that may be entered. (b) Registration Rights Agreement. The Registration Rights Agreement in the form attached hereto as Annex B shall have been executed and delivered by the Stockholders and PEC. Section 5.2 Conditions to Obligation of the Stockholders to Effect the Stock Purchase. The obligation of the Stockholders to effect the Stock Purchase shall be subject to the fulfillment at or prior to the Closing Date of the following additional conditions; provided that the Stockholders may waive any of such conditions in their sole discretion: (a) Performance of Obligations; Representations and Warranties. PEC and PDC shall have performed in all material respects each of its agreements contained in this Agreement required to be performed on or prior to the Closing Date, each of the representations and warranties of PEC and PDC contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Closing Date and each of the representations and warranties that is not so qualified shall be true and correct in all material respects on and as of the Closing Date. (b) Officers' Certificate. PEC and PDC shall have furnished to the Stockholders a certificate, dated the Closing Date, signed by the appropriate officers of PEC and PDC, certifying to the effect that to the best of the knowledge and belief of PEC and PDC, the conditions set forth in Section 5.1 and this Section 5.2(a) have been satisfied in full. (c) Payment of Purchase Price. PDC shall have made delivery of the Purchase Consideration as provided in Section 1.2 of this Agreement. Section 5.3 Conditions to Obligations of PEC and PDC to Effect the Stock Purchase. The obligations of PEC and PDC to effect the Stock Purchase shall be subject to the 14 18 fulfillment at or prior to the Closing Date of the following additional conditions, provided that PDC may waive any such conditions in its sole discretion: (a) Performance of Obligations; Representations and Warranties. The Stockholders shall have performed in all material respects each of their agreements contained in this Agreement required to be performed on or prior to the Closing Date, each of the representations and warranties of the Stockholders contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Closing Date and each of the representations and warranties that is not so qualified shall be true in all material respects on and as of the Closing Date. (b) Officers' Certificate. The Stockholders shall have furnished to PEC and PDC a certificate, dated the Closing Date, certifying to the effect that to the best of the knowledge and belief of each of them, the conditions set forth in Section 5.1 and this Section 5.3(a) have been satisfied. (c) Opinion of J.W. Neal, Esquire. PEC and PDC shall have received an opinion of counsel from J.W. Neal, Esquire, counsel to WEK and the Stockholders, dated the Closing Date, substantially to the effect that: (i) The incorporation, existence, good standing and capitalization of WEK are as stated in this Agreement; the authorized shares of WEK Stock are as stated in this Agreement; all outstanding shares of WEK Stock are duly and validly authorized and issued, fully paid and non-assessable and have not been issued in violation of any preemptive right of stockholders; and, to the knowledge of such counsel, there is no existing option, warrant, right, call, subscription or other agreement or commitment obligating WEK to issue or sell, or to purchase or redeem, any shares of its capital stock other than as stated in this Agreement. (ii) This Agreement and the respective Non-Competition Agreements have been duly authorized, executed and delivered by each of the Stockholders, and (assuming the due and valid authorization, execution and delivery by PDC) constitutes the legal, valid and binding agreements of them enforceable against them in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). (iii) The execution and performance by the Stockholders of this Agreement will not violate the Articles of Incorporation or By-laws of WEK and will not violate, result in a breach of, or constitute a default under, any material lease, mortgage, contract, agreement, instrument, law, rule, regulation, judgment, order or decree known to such counsel to which WEK or any of the Stockholders is a party or to which they or any of their properties or assets may be bound. 15 19 (iv) To the knowledge of such counsel, there are no actions, suits or proceedings, pending or threatened against or affecting WEK or any of the Stockholders by any Governmental Entity which seek to restrain, prohibit or invalidate the transactions contemplated by this Agreement. (v) To the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental agency or body which has not been obtained is required on behalf of WEK or any of the Stockholders for consummation of the transactions contemplated by this Agreement. (vi) Each Non-Competition Agreement between PDC and each of K Reynolds and G Chappell constitutes the legal, valid and binding agreement of him enforceable against him in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws of general applicability relating to or affecting the enforcement of creditors' rights and by the effect of general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). In rendering such opinion, counsel for WEK and the Stockholders may rely as to matters of fact upon the representations of officers of WEK and of the Stockholders contained in any certificate delivered to such counsel and certificates of public officials. Such opinion shall be limited to the laws of the United States of America and the State of New Mexico. (d) Officer and Director Resignation Letters. PDC shall have received a resignation letter dated the Closing Date from each of the directors and officers of WEK. (e) WEK Stock Certificates. PEC shall have received all of the WEK Stock certificates from the stockholders of WEK duly endorsed to PEC. (f) Investment Representation Letter. Each of the Stockholders shall have executed and delivered the investment representation letter in the form attached hereto as Annex C. (g) Non-Competition Agreement. Each of the Stockholders shall have executed and delivered a Non-Competition in the form attached hereto as Annex D-1 and Annex D-2, respectively. (h) Selling Stockholder Questionnaire. Each of the Stockholders shall have completed, executed and delivered a Selling Stockholder Questionnaire in the form attached hereto as Annex E-1 and Annex E-2, respectively. 16 20 ARTICLE VI POST CLOSING COVENANTS Section 6.1 Sale of Assets to Stockholders. PEC and PDC and the Stockholders covenant and agree that, immediately following the Closing Date, they will cause the execution, delivery and performance of the Asset Purchase Agreement in the form attached hereto as Annex A to this Agreement. Section 6.2 Registration Statement. Promptly following the Closing, but in no event later than two business days following the Closing Date, PEC shall execute and file a Registration Statement on Form S-3 with the SEC relating to resale of the PEC Shares. ARTICLE VII GENERAL PROVISIONS Section 7.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, sent by overnight courier or telecopied (with a confirmatory copy sent by overnight courier) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to PEC or PDC, to Patterson Energy, Inc. 4510 Lamesa Highway P.O. Drawer 1416 Snyder, Texas 79549 Attention: Cloyce A. Talbott Chairman and Chief Executive Officer with copies to: Thomas H. Maxfield, Esq. Baker & Hostetler LLP 303 East 17th Avenue, Suite 1100 Denver, Colorado 80203-1264 (c) if to the Stockholders, to Ken Reynolds 13 Hawthorn Midland, Texas 79705 with copies to: Ken Reynolds Box 2055 Roswell, New Mexico 88202 17 21 and Gary Chappell 4305 Lehigh Midland, Texas 79707 with copies to: J.W. Neal, Esq. 214 W. Cain Hobbs, New Mexico 88241 Section 7.2 Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated, and the words "hereof", "herein" and "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision of this Agreement, unless the context otherwise requires. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." Section 7.3 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. Section 7.4 Entire Agreement; No Third-Party Beneficiaries. This Agreement, including the documents and instruments referred to herein, (a) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) is not intended to confer upon any person other than the parties any rights or remedies hereunder; provided, however, that legal counsel for the Stockholders and WEK hereto may rely upon the representations and warranties of the Stockholders contained herein and in the certificates delivered pursuant to Sections 5.3(b) and (c). Section 7.5 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New Mexico, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 7.6 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. Section 7.7 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any party. Upon such determination that any term or other 18 22 provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions be consummated as originally contemplated to the fullest extent possible. Section 7.8 Enforcement of This Agreement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any District Court in Chavez or Eddy County, New Mexico. IN WITNESS WHEREOF, PEC and PDC and each of the Stockholders have executed this Agreement as of the date first written above. PEC: PATTERSON ENERGY, INC. By: /s/ CLOYCE A. TALBOTT -------------------------------------- Attest: Cloyce A. Talbott Chief Executive Officer /s/ JONATHAN D. NELSON - ---------------------------------- Jonathan D. Nelson, Secretary PDC: PATTERSON DRILLING COMPANY LP, LLLP By: /s/ A. GLENN PATTERSON -------------------------------------- Attest: A. Glenn Patterson President /s/ JONATHAN D. NELSON - ---------------------------------- Jonathan D. Nelson, Secretary STOCKHOLDERS: K REYNOLDS /s/ KENNETH REYNOLDS ----------------------------------------- Kenneth Reynolds G CHAPPELL /s/ GARY CHAPPELL ----------------------------------------- Gary Chappell 19 23 ANNEX A ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT ("Agreement") is made and entered into this 31st day of March, 2000, by and between Kenneth Reynolds, an individual residing in the State of Texas ("Buyer"), and WEK Drilling Company, Inc., a New Mexico corporation ("WEK" or the "Seller"). RECITALS A. Patterson Drilling Company LP, LLLP, a Delaware registered limited liability limited partnership ("PDC"), and the former stockholders of Seller are parties to the Stock Purchase Agreement dated as of March 31, 2000 ("Stock Purchase Agreement") pursuant to which PDC purchased on this date all of the outstanding shares of capital stock of Seller. B. Pursuant to the Stock Purchase Agreement, immediately following the Stock Purchase, Seller has agreed to sell, and Buyer has agreed to purchase certain specified assets of Seller which assets were owned by Seller prior to the Stock Purchase (the "Assets"). C. Buyer desires to purchase and Seller desires to sell the Assets (as defined herein). AGREEMENTS In consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. Purchase of Assets. Subject to the terms and conditions of this Agreement, Seller shall sell, convey, transfer, assign and deliver AS IS to Buyer, and Buyer shall purchase and accept from Seller, AS IS, the assets set forth on Schedule I attached hereto (collectively, the "Assets"). 2. Assumption of Liabilities. Buyer shall assume all fixed or contingent liabilities or obligations arising out of or connected in any way with the Assets. 3. Purchase Price. As consideration for the Assets, Buyer shall pay to Seller the sum of $1 million ("Purchase Price"), all of which shall be due and payable at Closing (as defined below). The Purchase Price shall be allocated as set forth above on Schedule I with such allocation to be used by the parties in reporting the transaction contemplated hereby for federal, state, county and local tax purposes. 4. Sales or Transfer Taxes. Buyer agrees that, promptly following written notice from Seller, he will reimburse WEK for any and all state or local sales, transfer or use taxes incurred by Seller in connection with the sale of the Assets pursuant to this Agreement. AX A-1 24 5. Real Estate Taxes. Seller and Buyer hereby agree to pro rate all state and local real estate taxes payable with respect to the sale of the Assets pursuant to this Agreement with K Reynolds paying three-fourths of all such taxes and WEK paying the remaining one-fourth. 6. Closing. (a) Time and Place. The Closing shall take place at 10:00 a.m. (CST) on March 31, 2000, at the former offices of Seller in Roswell, New Mexico, or at such other time or location as the parties may mutually agree. (b) Seller's Deliveries. At Closing, Seller shall deliver to Buyer the following: (1) A Bill of Sale in substantially the form attached hereto as Exhibit A, duly executed by Seller. (2) Deeds without Warranty for the real property and improvements set forth on Schedule I in substantially the form attached hereto as Exhibit C in the case of the New Mexico property and Exhibit B in the case of the Texas property, duly executed by Seller. (3) Certificates of Title for each of the boats and trailers and for the motor vehicles listed in Schedule I. (c) Buyer's Deliveries. At Closing, Buyer shall deliver the Purchase Price to Seller. 7. Disclaimer of Warranties. SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND WITH RESPECT TO THE ASSETS, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Seller transfers to Buyer, and Buyer accepts from Seller, the Assets AS IS without any warranties or representations thereon. 8. Miscellaneous. (a) Severability. In the event any provision of this Agreement is held to be invalid or unenforceable, the remaining provisions of this Agreement will remain in full force and effect. (b) Notices. Unless otherwise specified in this Agreement all notices, including change of address notices, required to be sent hereunder shall be in writing and shall be deemed to have been given when mailed as follows: Buyer: Kenneth Reynolds Box 2055 Roswell, New Mexico 88202 Telephone: (505) 623-5070 AX A-2 25 Seller: WEK Drilling Company, Inc. 4510 Lamesa Highway P.O. Drawer 1416 Synder, Texas 79549 Telephone: (915) 573-1104 (c) Binding Arbitration. Any controversy, dispute, or claim arising out of, in connection with, or in relation to, the interpretation, performance, or breach of this Agreement, including, without limitation, the validity, scope, and enforceability of this Section, may at the election of Buyer or Seller be solely and finally settled by binding arbitration conducted in Artesia, New Mexico, or if arbitration cannot be conducted in such location, then at such other location as the parties may mutually agree, by and in accordance with the then existing rules for commercial arbitration of the American Arbitration Association ("AAA"), or any successor organization. Judgment upon any award rendered by the arbitrator(s) may be entered by the State or Federal Court having jurisdiction thereof. Either of the parties may demand arbitration by written notice to the other and to the AAA ("Demand for Arbitration"). The arbitrator(s) shall conduct the arbitration in a manner in accordance with the Federal Arbitration Act U.S.C. Section 1 et seq. and the rules of the AAA. The parties intend that this agreement to arbitrate be valid, enforceable, and irrevocable. (d) Choice of Law. This Agreement shall be construed and interpreted in accordance with the laws of the State of New Mexico, without regard to the conflict of laws principles of such State. (e) Risk of Loss. All risk of loss to the Assets shall be borne by Buyer, whether prior to or after the Closing. (f) Waiver. The waiver by either party of any default or breach of this Agreement will not constitute a waiver of any other or subsequent default or breach. (g) Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute but one and the same instrument. (h) Entirety. This Agreement embodies the entire understanding and agreement between the parties relative to its subject matter, and there are no understandings, agreements, conditions, or representations, oral or written, express or implied, with reference to such subject matter that are not merged in or superseded by this Agreement. This Agreement may be modified only by a writing signed by both parties. (i) Headings. The headings to Sections of this Agreement are for convenience of reference only and do not form a part of this Agreement, and shall not in any way affect the interpretation of this Agreement. AX A-3 26 (j) No Brokers. Neither party has utilized any brokers in connection with this transaction. (k) Further Assurances. Each party shall cooperate fully with the other and execute such further instruments, documents, and agreements and give such further written assurances, as may be reasonably requested by the other to better evidence and reflect the transactions described herein and contemplated hereby, and to carry into effect the intents and purposes of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. SELLER: WEK DRILLING COMPANY, INC. By: -------------------------------------- Cloyce A. Talbott, President BUYER: ----------------------------------------- Kenneth Reynolds AX A-4 27 SCHEDULE I ALLOCATION OF PURCHASE PRICE Account Receivable - K Reynolds $ 160,000 Cash Value - Life Insurance 173,719 Investment in Pecos Air 44,480 Building: Leasehold Improvements 28,183 Heat Pumps 7,821 Land - Midland 25,000 Carport 10,044 Carport 13,711 Building - Midland 230,000 Building - Artesia: Building 48,637 Land 7,000 ---------- Subtotal $ 752,595 Office Equipment 73,179 Computer Equipment 18,656 ---------- Subtotal $ 844,430 Automobiles: 167 1994 Dodge Pickup 2,200 163 1992 Dodge Pickup 10 136 1989 Ford F-350 Pickup (Welder) 10 152 1995 Chevrolet Blazer 14,400 165 1998 Mercedes ML320 30,400 142 1999 Mercedes CLK430 44,700 172 1999 Mercedes CLK320 36,400 124 Boat, Motor and Trailer 10 125 Boat, Motor and Trailer 10 112 Ford Tractor 10 145 1983 Suburban 10 133 1981 Aztec Trailer 10 175 2000 Ford Expedition 27,400 ---------- Totals $1,000,000 ==========
SCH-1 28 EXHIBIT A BILL OF SALE Pursuant to that certain Stock Purchase Agreement dated March 31, 2000, by and between Kenneth Reynolds ("Buyer") and WEK Drilling Company, Inc., a New Mexico corporation ("Seller"), Seller, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, does hereby transfer, convey, sell, assign and deliver AS IS to Buyer, the following assets: Office Equipment and Computer Equipment 167 1994 Dodge Pickup 163 1992 Dodge Pickup 136 1989 Ford F-350 Pickup (Welder) 152 1995 Chevrolet Blazer 165 1998 Mercedes ML320 142 1999 Mercedes CLK430 172 1999 Mercedes CLK320 124 Boat, Motor and Trailer 125 Boat, Motor and Trailer 112 Ford Tractor 145 1983 Suburban 133 1981 Aztec Trailer 175 2000 Ford Expedition IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be duly executed on March 31, 2000. SELLER WEK DRILLING COMPANY, INC. By: -------------------------------------- Cloyce A. Talbott, President EXH A-1 29 EXHIBIT B DEED WITHOUT WARRANTY Date: March 31, 2000 Grantor (including address): WEK Drilling Company, Inc. 4510 Lamesa Highway P.O. Drawer 1416 Snyder, Texas 79549 Grantee (including address): Kenneth Reynolds Box 2055 Roswell, New Mexico 88202 Consideration: $10 and other consideration Property: Being Lot Seven (7), Block Eight (8), Saddle Club Estates, an addition to the City of Midland, Midland County, Texas, according to the map or plat thereof of record in Plat Cabinet C/44, Plat Records of Midland County, Texas Reservations From and Exceptions to Conveyance: This deed is without any warranties, express or implied, and is subject to any and all matters of record, including, without limitation, any and all parties in possession, restrictions, covenants, and/or outstanding mineral reservations, rights and/or royalties, and any and all zoning laws, regulations, or ordinances of any municipal and/or other governmental authority, if any. Grantor, for the consideration and subject to the reservations from and exceptions to conveyance, conveys to Grantee the property, together with all and singular the rights and appurtenances thereto in any wise belonging, to have and to hold it to Grantee, Grantee's heirs, successors or assigns forever, without express or implied warranty; and all warranties that might arise by common law and the warranties in Section 5.023 of the Texas Property Code (or its successor) are excluded. When the context requires, singular nouns and pronouns include the plural. EXH B-1 30 IN WITNESS WHEREOF Grantor has executed this deed on the date set forth above. WEK DRILLING COMPANY, INC. By: -------------------------------------- Cloyce A. Talbott, President STATE OF NEW MEXICO COUNTY OF EDDY This instrument was acknowledged before me on the ______ day of March, 2000, by Cloyce A. Talbott, President of WEK Drilling Company, Inc., a New Mexico corporation, on behalf of said corporation. ----------------------------------------- Notary Public, State of New Mexico Notary's commission expires: ------------- AFTER RECORDING RETURN TO: Kenneth Reynolds Box 2055 Roswell, New Mexico 88202 EXH B-2 31 EXHIBIT C DEED WITHOUT WARRANTY Date: March 31, 2000 Grantor (including address): WEK Drilling Company, Inc. 4510 Lamesa Highway P.O. Drawer 1416 Snyder, Texas 79549 Grantee (including address): Kenneth Reynolds Box 2055 Roswell, New Mexico 88202 Consideration: $10 and other consideration Property: Lots 6, 7 and 8 of Artesia View Subdivision of part of the SE1/4 of Section 17, Township 17 South, Range 27 East, N.M.P.M., as the same appear on the official plat on file in the County Clerks office, Eddy County, New Mexico, EXCEPTING all oil, gas and other mineral in and under said land. Reservations From and Exceptions to Conveyance: This deed is without any warranties, express or implied, and is subject to any and all matters of record, including, without limitation, any and all parties in possession, restrictions, covenants, and/or outstanding mineral reservations, rights and/or royalties, and any and all zoning laws, regulations, or ordinances of any municipal and/or other governmental authority, if any. Grantor, for the consideration and subject to the reservations from and exceptions to conveyance, conveys to Grantee the property, together with all and singular the rights and appurtenances thereto in any wise belonging, to have and to hold it to Grantee, Grantee's heirs, successors or assigns forever, without express or implied warranty; and all warranties that might arise by common law are excluded. When the context requires, singular nouns and pronouns include the plural. EXH C-1 32 IN WITNESS WHEREOF Grantor has executed this deed on the date set forth above. WEK DRILLING COMPANY, INC. By: -------------------------------------- Cloyce A. Talbott, President STATE OF NEW MEXICO COUNTY OF EDDY This instrument was acknowledged before me on the ______ day of March, 2000, by Cloyce A. Talbott, President of WEK Drilling Company, Inc., a New Mexico corporation, on behalf of said corporation. ----------------------------------------- Notary Public, State of New Mexico Notary's commission expires: ------------- AFTER RECORDING RETURN TO: Kenneth Reynolds Box 2055 Roswell, New Mexico 88202 EXH C-2 33 ANNEX B REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("Agreement") is made and entered into this 31st day of March, 2000, by and among PATTERSON ENERGY, INC., a Delaware corporation ("PEC"), and KENNETH REYNOLDS and GARY CHAPPELL (collectively, the "Stockholders"). A. Pursuant to that certain Stock Purchase Agreement dated of even date herewith ("Purchase Agreement") by and among PEC, Patterson Drilling Company LP, LLLP, a Delaware registered limited liability limited partnership and a wholly-owned indirect subsidiary of PEC ("PDC"), and the Stockholders, PEC has agreed to issue a total of __________ shares ("Restricted Shares") of PEC's Common Stock, $0.01 par value (the "Common Stock") as partial consideration for the purchase by PDC of the outstanding capital stock of WEK Drilling Company, Inc., all of which stock is owned by the Stockholders. B. This Agreement is being entered into in connection with and as a condition to the parties closing the transactions contemplated under the Stock Purchase Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement the following terms shall have the following respective meanings: "Commission" shall mean the United States Securities and Exchange Commission and any successor federal agency having similar powers. "Holders" shall mean the Stockholders. "Person" shall mean an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incident to PEC's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws and all reasonable printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for PEC and all independent certified public accountants, underwriters (excluding discounts and commissions) and other persons retained by PEC (all such expenses being herein called "Registration Expenses"), will be borne as provided in this Agreement, except that PEC will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees AX B-1 34 performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by PEC are then listed or on the NASD automated quotation system. "Restricted Shares" shall include Common Stock issued or issuable with respect to the Restricted Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Restricted Shares, such shares will cease to be Restricted Shares when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force). "Securities Act" shall mean the Securities Act of 1933, or any successor thereto, as the same shall be amended from time to time. 2. Restrictions on Transfer. The Restricted Shares were acquired by the respective Stockholders from PEC for investment for their own account and not as a nominee or agent and not with a present view to the resale or distribution of any part thereof, except in compliance with the Securities Act. Each of the Stockholders acknowledges that the Restricted Shares are "restricted securities" within the meaning of the Securities Act. 3. Restricted Shares - Registration Under Securities Act, etc. 3.1 Registration. (a) Filing. Promptly following the execution of this Agreement and the contemporaneous closing of the transaction contemplated by the Purchase Agreement, but in no event later than two business days following the date of this Agreement, PEC shall file a Registration Statement on Form S-3 (the "Form S-3") with the Commission covering the distribution of the Restricted Shares. PEC agrees to use its best efforts to have the Form S-3 declared effective. (b) Expenses. PEC shall pay all Registration Expenses in connection with the Form S-3. 3.2 Registration Procedures. Following the effective date of the Form S-3, PEC will promptly: (a) prepare and file with the Commission such amendments and supplements to the Form S-3 and the prospectus used in connection therewith as may be necessary to keep the Form S-3 effective and to comply with the provisions of the Securities Act with respect to the disposition of the Restricted Shares until the earlier of (i) such time as all of such Restricted Shares have been disposed of in accordance with the intended methods of disposition by the Stockholders, or (ii) the expiration of twelve (12) months after such effective date and furnish to each of the Stockholders prior to the filing thereof a copy of any amendment or supplement to the Form S-3 or prospectus and shall not file any such amendment or supplement to which either of the Stockholders shall have reasonably objected on the grounds that such amendment or AX B-2 35 supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (b) furnish to each of the Stockholders one originally executed Form S-3, with all amendments, supplements and additional documentation; such number of conformed copies of such Form S-3 and of each such amendment and supplement thereto (in each case including all exhibits) as either or both of the Stockholders may reasonably request; such number of copies of the prospectus included in the Form S-3 (including each preliminary prospectus and any summary prospectus) as required by the Securities Act as such Stockholders may reasonably request; such documents, if any, incorporated by reference in the Form S-3 or prospectus; and such other documents as either or both of the Stockholders may reasonably request; (c) use its best efforts to register or qualify the Restricted Shares and other securities covered by the Form S-3 under such other securities or blue sky laws of such jurisdictions as either or both of the Stockholders shall reasonably request, to keep such registration or qualification in effect for so long as the Form S-3 remains in effect, and do any and all other acts and things which may be necessary or advisable to enable the Stockholders to consummate the disposition in such jurisdictions of the Restricted Shares covered by the Form S-3, except that PEC shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (c) be obligated to be so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (d) immediately notify the Stockholders at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in the Form S-3, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, or if it is necessary to amend or supplement such prospectus or Form S-3 to comply with law, and at the request of the Stockholders, prepare and furnish to the Stockholders a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Restricted Shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein not misleading in light of the circumstances then existing and shall otherwise comply in all material respects with the law and so that such prospectus or Form S-3, as amended or supplemented, will comply with law; (e) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securities holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first month of the first fiscal quarter after the effective date of the Form S-3, if such earnings statement is necessary to satisfy the provisions of Section 11(a) of the Securities Act. AX B-3 36 4. Indemnification. 4.1 Indemnification by PEC. PEC will, and hereby does, indemnify and hold harmless each of the Stockholders against any losses, claims, damages, liabilities or expenses, joint or several (including, without limitation, the costs and expenses of investigating, preparing for and defending any legal proceeding, including reasonable attorney's fees), to which the respective Stockholders may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and PEC will reimburse the respective Stockholders for any legal or any other expenses incurred by them in connection with investigating or defending or settling any such loss, claim, liability, action or proceeding; provided that PEC shall not be liable in any such case to the extent that any loss, claim, damage, liability or expense (or action or proceeding in respect thereof) arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with information furnished to PEC by either or both of the Stockholders for use in preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Stockholders and shall survive the transfer of such securities by either or both of the Stockholders. PEC will make provision for contribution in lieu of any such indemnity that may be disallowed as shall be reasonably requested by either or both of the Stockholders. 4.2 Indemnification by the Stockholders. In the event of any registration of any securities of PEC under the Securities Act (pursuant to which either or both of the Stockholders sells Restricted Shares covered by such registration statement), the Stockholders will, and each of them hereby does, severally indemnify and hold harmless PEC, each director of PEC, each officer of PEC who shall sign such registration statement and each other person, if any, who controls PEC within the meaning of the Securities Act from and against losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of material fact contained in such registration statement, any preliminary prospectus, final prospectus or summary prospectus included therein, or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished to PEC for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement up to the net proceeds received by the Stockholders. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of PEC or any such director, officer or controlling person and shall survive the transfer of such securities by either or both of the Stockholders. 4.3 Notice of Claims, etc. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which AX B-4 37 indemnity may be sought pursuant to this Section 4, such person (hereinafter called the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (hereinafter called the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any other party the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for the settlement of any proceeding effected without its written consent, but if settled with such consent or if there is a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. 4.4 Indemnification Unavailable. If the indemnification provided for in this Section 4 is unavailable as a matter of law to an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under any such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by such indemnified party on the one hand and the indemnifying parties on the other or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of such indemnified party on the one hand and the indemnifying parties on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of such indemnified party and the indemnifying parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by such parties and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omissions. The parties agree that it would not be just and equitable if contribution pursuant to this Section 4.4 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending or settling any such action or claim. Notwithstanding the foregoing, the liability of the respective Stockholders under this Section 4.4 shall be limited to the net proceeds received by each such Stockholder. 4.5 No Settlement, etc. No indemnifying party shall, except with the written consent of the indemnified party, consent to entry of any judgment or entry into settlement that AX B-5 38 does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or action. 4.6 Indemnity Operative and in Full Force. The indemnity and contribution agreements contained in this Section 4 shall remain operative and in full force and effect regardless of any termination of this Agreement. 5. Amendments and Waivers. This Agreement may be amended, and PEC may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if PEC shall have obtained the written consent to such amendment, action or omissions to act of the holder or holders of at least 51% or more of the Restricted Shares. 6. Notices. Notices and other communications under this Agreement shall be in writing and shall be sent by registered mail, postage prepaid, or courier addressed to: 6.1 if to the respective Stockholders, at the address shown on stock transfer books of PEC or such other address as either of the Stockholders has advised PEC in writing, and 6.2 if to PEC, at 4510 Lamesa Highway, P.O. Drawer 1416, Snyder, Texas 79550 to the attention of its President or to such other address as PEC shall have furnished to the Stockholders. 7. Miscellaneous. This Agreement embodies the entire agreement and understanding between PEC and the respective Stockholders with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas. The headings in this Agreement are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in counterparts, each of which shall be an original, but both of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. PEC: PATTERSON ENERGY, INC. By: -------------------------------------- Cloyce A. Talbott Chief Executive Officer STOCKHOLDERS: ----------------------------------------- Kenneth Reynolds ----------------------------------------- Gary Chappell AX B-6 39 ANNEX C INVESTMENT REPRESENTATION LETTER March 31, 2000 Patterson Energy, Inc. 4510 Lamesa Highway Snyder, Texas 79549 This letter is being submitted to Patterson Energy, Inc. ("PEC") in connection with and as a condition to PEC's closing of the transaction contemplated by the Stock Purchase Agreement among PEC, Patterson Drilling Company LP, LLLP ("PDC") and Kenneth Reynolds and Gary Chappell (collectively, the "Stockholders"). Capitalized terms not defined herein shall have the meaning given them in the Memorandum (as defined below). 1. Representations and Warranties. Each of the undersigned hereby represents and warrants to PEC that the following statements are true: a. Each of the undersigned has been furnished a copy of the Memorandum, dated March 29, 2000 (the "Memorandum") containing a copy of PEC's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, and all other reports filed by PEC with the Securities and Exchange Commission since January 1, 2000 (collectively, the "Reports") and has carefully reviewed the Memorandum and the Reports, including, but not limited to, (i) the statements in the Memorandum relating to taxation of the Stock Purchase and lack of free transferability of the PEC Common Stock to be issued by PEC as consideration for the Stock Purchase, and (ii) the section entitled "Disclosure Concerning Forward-Looking Statements," setting forth certain Cautionary Statements or risk factors relating to PEC and its businesses and operations. b. Each of the undersigned has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in PEC vis-a-vis the PEC Common Stock to be issued by PEC as partial consideration for the Stock Purchase. c. Each of the undersigned has had an opportunity to ask questions of PEC and its management concerning PEC and PDC, the businesses of PEC and PDC and the PEC Common Stock and, if asked, all such questions have been answered to the full satisfaction of the undersigned. d. Each of the undersigned understands that PEC has not registered the offer or sale of the PEC Common Stock under the Securities Act of 1933, as amended (the "Act"), in reliance upon an exemption therefrom under Section 4(2) of the Act and the provisions of Regulation D promulgated thereunder. Each of the undersigned therefore acknowledges that in AX C-1 40 no event may it sell or otherwise transfer the PEC Common Stock without registration under the Act (see paragraph (g) below). e. Each of the undersigned represents that he will acquire the PEC Common Stock for his own account, with no intention to distribute or offer to distribute the same to others without registration under the Act, and understands that the issuance by PEC of the PEC Common Stock will be predicated upon the undersigned's lack of such intention. f. Each of the undersigned understands that neither the Securities and Exchange Commission nor the securities commissioner of any state has received or reviewed any documents relative to an investment in PEC, or has made any finding or determination relating to the fairness of an investment in PEC. g. Each of the undersigned acknowledges that stop transfer instructions will be placed with PEC's transfer agent to restrict the resale, pledge, hypothecation or other transfer of the PEC Common Stock. h. Each of the undersigned acknowledges that, except as provided in the Registration Rights Agreement attached as Annex B to the Stock Purchase Agreement, PEC is under no obligation to register the PEC Common Stock for sale under the Act or to assist the undersigned in complying with any exemption from registration under the Act, or any state securities laws. i. If other than a natural person, each of the undersigned was not organized for the specific purpose of acquiring the PEC Common Stock. j. Each of the undersigned understands and acknowledges that the foregoing representations and warranties will be relied upon by PEC in connection with the issuance of the PEC Common Stock. k. Each of the undersigned has an individual net worth, or joint net worth with the undersigned's spouse in excess of $1 million. 2. Indemnification. Each of the undersigned agrees to indemnify and hold harmless PEC and PDC, or either of them, the officers, directors and affiliates of either of them and each other person, if any, who controls either of them, within the meaning of Section 15 of the Act, against any and all loss, liability, claim, damage and expense whatsoever (including, but not limited to, any and all expenses reasonably incurred in investigating, preparing or defending against any litigation commenced or threatened or any claim whatsoever) arising out of or based upon any false representation or warranty or failure by the undersigned to comply with any covenant or agreement made by each of the undersigned herein. AX C-2 41 3. Survival. All representations, warranties and covenants contained in this letter shall survive the closing of the Stock Purchase. Very truly yours, ----------------------------------------- Kenneth Reynolds ----------------------------------------- Gary Chappell AX C-3 42 ANNEX D-1 PATTERSON DRILLING COMPANY LP, LLLP NON-COMPETITION AGREEMENT THIS NON-COMPETITION AGREEMENT is made and entered into this 31st day of March, 2000 (this "Agreement"), by and between PATTERSON DRILLING COMPANY LP, LLLP, a Delaware registered limited liability limited partnership ("PDC"), and Kenneth Reynolds, an individual residing in Roswell, New Mexico ("K Reynolds"). RECITALS: A. Simultaneously with the execution of this Agreement, PDC has entered into that certain Stock Purchase Agreement (the "Stock Purchase Agreement"), among PEC, PDC, Gary Chappell and K Reynolds, providing for, among other things, the purchase by PDC of all of the outstanding shares of capital stock of WEK Drilling Company, Inc., a New Mexico corporation. B. The execution and delivery of this Agreement is a condition to the consummation of the Stock Purchase contemplated by the Stock Purchase Agreement, and the parties are entering into this Agreement in order to fulfill such condition. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: 1. Period of Agreement. The period of this Agreement shall commence on the date hereof and remain in effect through March 31, 2005, unless sooner terminated as the result of the death of K Reynolds (the "Non-Compete Period"). 2. Covenant Not to Compete. (a) K Reynolds covenants and agrees that during the Non-Compete Period, K Reynolds shall not, without the prior written consent of PDC, directly or indirectly, and whether as a principal or as an agent, officer, director, employee, consultant, or otherwise, alone or in association with any other person, carry on, be engaged, concerned, or take part in, render services to, or own, share in the earnings of, or invest in the stock, bonds, or other securities of, any person which is engaged in, the contract oil and gas well drilling business within the Permian Basin of West Texas and Southeastern New Mexico (the "Competitive Business"); provided, however, that K Reynolds may invest in stock, bonds, or other securities of any Competitive Business (but without otherwise participating in the Competitive Business) if: (A) such stock, bonds, or other securities are listed on any national securities exchange or are AX D-1-1 43 registered under Section 12(g) of the Securities Exchange Act of 1934, as amended; (B) the investment does not exceed, in the case of any class of capital stock of any one issuer, two percent (2%) of the issued and outstanding shares, or, in the case of bonds or other securities of any one issuer, two percent (2%) of the aggregate principal amount thereof issued and outstanding; and (C) such investment would not prevent, directly or indirectly, the transaction of business by PDC or any affiliate of PDC with any state, district, territory, or possession of the United States or any governmental subdivision, agency, or instrumentality thereof by virtue of any statute, law, regulation or administrative practice. The period of time during which K Reynolds is prohibited from engaging in certain activities by this Section shall be extended by the length of time during which K Reynolds is in breach of the terms of this section. (b) It is understood by and between the parties hereto that the foregoing covenant by K Reynolds not to enter into competition with PDC as set forth in Section 3(a) hereof is an essential element of this Agreement and the Stock Purchase Agreement and that, but for the agreement of K Reynolds to comply with such covenant, PDC would not have agreed to enter into this Agreement or the Stock Purchase Agreement. PDC and K Reynolds have independently consulted with their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenant, with specific regard to the nature of the business conducted by PDC and its affiliates. K Reynolds agrees that such covenant is reasonable in scope, geographic area, and duration, and that compliance with such covenant would not impose economic or professional hardship on K Reynolds. (c) Notwithstanding the terms and provisions of Section 2(a) above, it is expressly understood that K Reynolds shall be free to participate, own, manage and operate an existing drilling company known as "Rod Ric Corp". Such company is presently operating in Texas and New Mexico with five drilling rigs capable of drilling shallow oil and gas wells to a depth of 7,500 feet and occasionally to a depth of 9,000 feet. The participation by K Reynolds shall not be a violation of this agreement and PDC specially consents to such association by K Reynolds with such drilling company. 3. Restrictions on Soliciting Business of PDC. K Reynolds further covenants and agrees that during the Non-Compete Period, K Reynolds will not, either for himself or for any other person or entity, directly or indirectly, engage in any of the following activities in a Competitive Business without the express prior written consent of PDC: (a) Solicit or hire any of the employees of PDC or solicit or take away any of PDC's customers, lessors, or suppliers or attempt any of the foregoing; (b) Acquire or attempt to acquire rights providing any product or service in a Competitive Business within the territory described in Section 3 hereof; or (c) Engage in any act which would interfere with or harm any business relationship PDC has with any customer, lessor, employee, principal or supplier. AX D-1-2 44 4. Specific Performance. Without intending to limit the remedies available to PDC, K Reynolds acknowledges that PDC will have no adequate remedies at law if K Reynolds violates the terms of Section 3 or 4, hereof. In such event, K Reynolds agrees that PDC shall have the right, in addition to any other rights it may have, to obtain in any court of competent jurisdiction specific performance of such Sections of this Agreement or injunctive relief to restrain any breach or threatened breach thereof. Nothing herein shall be construed as prohibiting PDC from pursuing any other remedies available to PDC (whether at law or in equity) for such breach or threatened breach, including, without limitation, the recovery of monetary damages from K Reynolds. The provisions of this Section 5 shall survive the expiration, termination or cancellation of this Agreement. 5. Attorneys Fees and Costs. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys fees, costs and necessary expenses in addition to any other relief to which that party may be entitled. This provision is applicable to this entire Agreement. 6. Representations and Warranties of PDC and K Reynolds. (a) Representations and Warranties of PDC. PDC hereby represents and warrants to K Reynolds that: (i) it has all requisite power to enter into and perform its obligations under this Agreement; (ii) this Agreement has been duly and validly authorized by all necessary corporate action on the part of PDC; (iii) the execution of this Agreement by PDC and performance of PDC's obligations hereunder do not require the consent or approval of any other party; and (iv) this Agreement is a valid and binding obligation of PDC. (b) Representations and Warranties of K Reynolds. K Reynolds hereby represents and warrants to PDC that: (i) K Reynolds has the capacity and power to enter into and perform obligations of K Reynolds under this Agreement; (ii) K Reynolds has duly and validly executed this Agreement; (iii) the execution of this Agreement and performance of obligations of K Reynolds hereunder do not require the consent or approval of any other party; and (iv) this Agreement constitutes a valid and binding obligation of K Reynolds. 7. General Provisions. (a) Compliance with Laws. The parties agree that they will comply with all applicable laws and regulations of government bodies or agencies in their respective performance of their obligations under this Agreement. (b) Governing Law and Construction. This Agreement will be governed by and construed in accordance with the laws of the State of New Mexico without reference to its conflict-of-laws principles. This Agreement's final form resulted from review and negotiations AX D-1-3 45 among the parties and their attorneys, and no part of this Agreement should be construed against any party on the basis of authorship. (c) Forum for Dispute Resolution. If any dispute arises among the parties concerning the interpretation or performance of any portion of this Agreement which the parties are unable to resolve themselves, and any party brings an action against any other party seeking a declaratory order, specific performance, damages, or any other legal or equitable relief based on this Agreement, the parties agree that the forum for any such action shall be the District Court in Eddy or Chavez County, New Mexico, agree that venue will be proper in such courts, and waive any objections based on inconvenience of the forum, and further agree that the prevailing party in any such action, as determined by the court, shall be awarded its reasonable attorneys' fees and costs in addition to any relief or judgment the court awards. (d) Entire Agreement; Amendment. This Agreement constitutes the entire agreement between the parties with respect to the subject matter contained herein and supersedes any previous oral or written communications, representations, understandings or agreements with respect thereto. The terms of this Agreement may be modified only in a writing, signed by authorized representatives of both parties. (e) Assignability. This Agreement will be binding upon the parties' respective successors and permitted assigns. Neither party may assign this Agreement and/or any of its rights and/or obligations hereunder without the prior written consent of the other party, and any such attempted assignment will be void; provided, however, that PDC may assign this Agreement to a subsidiary or affiliate without the prior written consent of K Reynolds, and provided further that a transfer by PDC as a result of a merger or sale of all or substantially all of the assets of PDC with or to a third party that assumes PDC's obligations hereunder by operation of law or otherwise shall not constitute a prohibited assignment under this Section 7(e). (f) Waiver. A waiver of a breach or default under this Agreement will not constitute a waiver of any other breach or default. Failure or delay by either party to enforce compliance with any term or condition of this Agreement will not constitute a waiver of such term or condition. (g) Severability. If any provision of this Agreement is declared to be invalid, the parties agree that such invalidity will not affect the validity of the remaining provisions of this Agreement, and further agree, to the extent possible, to substitute for the invalid provision a valid provision that approximates the intent and economic effect of the invalid provision as closely as possible. (h) Headings. The titles of the Sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. (i) Notice. Any notice, request, consent, demand or other communication required to be given under this Agreement will be in writing and will be given personally, by facsimile or by mailing the same, first-class, postage prepaid to the appropriate address and facsimile number set forth below or to such other person or at such other address as may AX D-1-4 46 hereafter be designated by like notice. Notices by mail will be considered delivered and become effective three days after the mailing thereof. All notices by facsimile will be considered delivered and become effective immediately upon the confirmed (by answer back or other tangible printed verification or successful receipt) sending thereof. To PDC: Patterson Drilling Company LP, LLLP 4510 Lamesa Highway P.O. Drawer 1410 Snyder, Texas 79550 Facsimile: (915) 573-0281 Attention: Cloyce A. Talbott Chairman and Chief Executive Officer To K Reynolds: Box 2055 Roswell, New Mexico 88202 Facsimile: --------------- with copies to: J. W. Neal, Esq. Box 278 Hobbs, New Mexico 88241 Facsimile: (505) 397-7405 (j) Counterparts. This Agreement may be executed in counterparts and by the parties hereto in separate counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective representatives as of the day and year first above written. PATTERSON DRILLING COMPANY LP, LLLP By: -------------------------------------- Cloyce A. Talbott Chief Executive Officer K REYNOLDS ----------------------------------------- Kenneth Reynolds AX D-1-5 47 ANNEX D-2 PATTERSON DRILLING COMPANY LP, LLLP NON-COMPETITION AGREEMENT THIS NON-COMPETITION AGREEMENT is made and entered into this 31st day of March, 2000 (this "Agreement"), by and between PATTERSON DRILLING COMPANY LP, LLLP, a Delaware registered limited liability limited partnership ("PDC"), and Gary Chappell, an individual residing in Midland, Texas ("G Chappell"). RECITALS: A. Simultaneously with the execution of this Agreement, PDC has entered into that certain Stock Purchase Agreement (the "Stock Purchase Agreement"), among PEC, PDC, Kenneth Reynolds and G Chappell, providing for, among other things, the purchase by PDC of all of the outstanding shares of capital stock of WEK Drilling Company, Inc., a New Mexico corporation. B. The execution and delivery of this Agreement is a condition to the consummation of the Stock Purchase contemplated by the Stock Purchase Agreement, and the parties are entering into this Agreement in order to fulfill such condition. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, hereby agree as follows: 1. Period of Agreement. The period of this Agreement shall commence on the date hereof and remain in effect through March 31, 2005, unless sooner terminated as the result of the death of G Chappell (the "Non-Compete Period"). 2. Covenant Not to Compete. (a) G Chappell covenants and agrees that during the Non-Compete Period, G Chappell shall not, without the prior written consent of PDC, directly or indirectly, and whether as a principal or as an agent, officer, director, employee, consultant, or otherwise, alone or in association with any other person, carry on, be engaged, concerned, or take part in, render services to, or own, share in the earnings of, or invest in the stock, bonds, or other securities of, any person which is engaged in, the contract oil and gas well drilling business within the Permian Basin of West Texas and Southeastern New Mexico (the "Competitive Business"); provided, however, that G Chappell may invest in stock, bonds, or other securities of any Competitive Business (but without otherwise participating in the Competitive Business) if: AX D-2-1 48 (A) such stock, bonds, or other securities are listed on any national securities exchange or are registered under Section 12(g) of the Securities Exchange Act of 1934, as amended; (B) the investment does not exceed, in the case of any class of capital stock of any one issuer, two percent (2%) of the issued and outstanding shares, or, in the case of bonds or other securities of any one issuer, two percent (2%) of the aggregate principal amount thereof issued and outstanding; and (C) such investment would not prevent, directly or indirectly, the transaction of business by PDC or any affiliate of PDC with any state, district, territory, or possession of the United States or any governmental subdivision, agency, or instrumentality thereof by virtue of any statute, law, regulation or administrative practice. The period of time during which G Chappell is prohibited from engaging in certain activities by this Section shall be extended by the length of time during which G Chappell is in breach of the terms of this section. (b) It is understood by and between the parties hereto that the foregoing covenant by G Chappell not to enter into competition with PDC as set forth in Section 3(a) hereof is an essential element of this Agreement and the Stock Purchase Agreement and that, but for the agreement of G Chappell to comply with such covenant, PDC would not have agreed to enter into this Agreement or the Stock Purchase Agreement. PDC and G Chappell have independently consulted with their respective counsel and have been advised in all respects concerning the reasonableness and propriety of such covenant, with specific regard to the nature of the business conducted by PDC and its affiliates. G Chappell agrees that such covenant is reasonable in scope, geographic area, and duration, and that compliance with such covenant would not impose economic or professional hardship on G Chappell. (c) Notwithstanding the terms and provisions of Section 2(a) above, it is expressly understood that G Chappell shall be free to participate, own, manage and operate an existing drilling company known as "Rod Ric Corp". Such company is presently operating in Texas and New Mexico with five drilling rigs capable of drilling shallow oil and gas wells to a depth of 7,500 feet and occasionally to a depth of 9,000 feet. The participation by G Chappell shall not be a violation of this agreement and PDC specially consents to such association by G Chappell with such drilling company. 3. Restrictions on Soliciting Business of PDC. G Chappell further covenants and agrees that during the Non-Compete Period, G Chappell will not, either for himself or for any other person or entity, directly or indirectly, engage in any of the following activities in a Competitive Business without the express prior written consent of PDC: (a) Solicit or hire any of the employees of PDC or solicit or take away any of PDC's customers, lessors, or suppliers or attempt any of the foregoing; (b) Acquire or attempt to acquire rights providing any product or service in a Competitive Business within the territory described in Section 3 hereof; or (c) Engage in any act which would interfere with or harm any business relationship PDC has with any customer, lessor, employee, principal or supplier. AX D-2-2 49 4. Specific Performance. Without intending to limit the remedies available to PDC, G Chappell acknowledges that PDC will have no adequate remedies at law if G Chappell violates the terms of Section 3 or 4, hereof. In such event, G Chappell agrees that PDC shall have the right, in addition to any other rights it may have, to obtain in any court of competent jurisdiction specific performance of such Sections of this Agreement or injunctive relief to restrain any breach or threatened breach thereof. Nothing herein shall be construed as prohibiting PDC from pursuing any other remedies available to PDC (whether at law or in equity) for such breach or threatened breach, including, without limitation, the recovery of monetary damages from G Chappell. The provisions of this Section 5 shall survive the expiration, termination or cancellation of this Agreement. 5. Attorneys Fees and Costs. If an action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys fees, costs and necessary expenses in addition to any other relief to which that party may be entitled. This provision is applicable to this entire Agreement. 6. Representations and Warranties of PDC and G Chappell. (a) Representations and Warranties of PDC. PDC hereby represents and warrants to G Chappell that: (i) it has all requisite power to enter into and perform its obligations under this Agreement; (ii) this Agreement has been duly and validly authorized by all necessary corporate action on the part of PDC; (iii) the execution of this Agreement by PDC and performance of PDC's obligations hereunder do not require the consent or approval of any other party; and (iv) this Agreement is a valid and binding obligation of PDC. (b) Representations and Warranties of G Chappell. G Chappell hereby represents and warrants to PDC that: (i) G Chappell has the capacity and power to enter into and perform obligations of G Chappell under this Agreement; (ii) G Chappell has duly and validly executed this Agreement; (iii) the execution of this Agreement and performance of obligations of G Chappell hereunder do not require the consent or approval of any other party; and (iv) this Agreement constitutes a valid and binding obligation of G Chappell. 7. General Provisions. (a) Compliance with Laws. The parties agree that they will comply with all applicable laws and regulations of government bodies or agencies in their respective performance of their obligations under this Agreement. (b) Governing Law and Construction. This Agreement will be governed by and construed in accordance with the laws of the State of New Mexico without reference to its conflict-of-laws principles. This Agreement's final form resulted from review and negotiations AX D-2-3 50 among the parties and their attorneys, and no part of this Agreement should be construed against any party on the basis of authorship. (c) Forum for Dispute Resolution. If any dispute arises among the parties concerning the interpretation or performance of any portion of this Agreement which the parties are unable to resolve themselves, and any party brings an action against any other party seeking a declaratory order, specific performance, damages, or any other legal or equitable relief based on this Agreement, the parties agree that the forum for any such action shall be the District Court in Eddy or Chavez County, New Mexico, agree that venue will be proper in such courts, and waive any objections based on inconvenience of the forum, and further agree that the prevailing party in any such action, as determined by the court, shall be awarded its reasonable attorneys' fees and costs in addition to any relief or judgment the court awards. (d) Entire Agreement; Amendment. This Agreement constitutes the entire agreement between the parties with respect to the subject matter contained herein and supersedes any previous oral or written communications, representations, understandings or agreements with respect thereto. The terms of this Agreement may be modified only in a writing, signed by authorized representatives of both parties. (e) Assignability. This Agreement will be binding upon the parties' respective successors and permitted assigns. Neither party may assign this Agreement and/or any of its rights and/or obligations hereunder without the prior written consent of the other party, and any such attempted assignment will be void; provided, however, that PDC may assign this Agreement to a subsidiary or affiliate without the prior written consent of G Chappell, and provided further that a transfer by PDC as a result of a merger or sale of all or substantially all of the assets of PDC with or to a third party that assumes PDC's obligations hereunder by operation of law or otherwise shall not constitute a prohibited assignment under this Section 7(e). (f) Waiver. A waiver of a breach or default under this Agreement will not constitute a waiver of any other breach or default. Failure or delay by either party to enforce compliance with any term or condition of this Agreement will not constitute a waiver of such term or condition. (g) Severability. If any provision of this Agreement is declared to be invalid, the parties agree that such invalidity will not affect the validity of the remaining provisions of this Agreement, and further agree, to the extent possible, to substitute for the invalid provision a valid provision that approximates the intent and economic effect of the invalid provision as closely as possible. (h) Headings. The titles of the Sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. (i) Notice. Any notice, request, consent, demand or other communication required to be given under this Agreement will be in writing and will be given personally, by facsimile or by mailing the same, first-class, postage prepaid to the appropriate address and facsimile number set forth below or to such other person or at such other address as may AX D-2-4 51 hereafter be designated by like notice. Notices by mail will be considered delivered and become effective three days after the mailing thereof. All notices by facsimile will be considered delivered and become effective immediately upon the confirmed (by answer back or other tangible printed verification or successful receipt) sending thereof. To PDC: Patterson Drilling Company LP, LLLP 4510 Lamesa Highway P.O. Drawer 1410 Snyder, Texas 79550 Facsimile: (915) 573-0281 Attention: Cloyce A. Talbott Chairman and Chief Executive Officer To G Chappell: 4305 Lehigh Midland, Texas 79707 Facsimile: --------------- with copies to: J. W. Neal, Esq. Box 278 Hobbs, New Mexico 88241 Facsimile: (505) 397-7405 (j) Counterparts. This Agreement may be executed in counterparts and by the parties hereto in separate counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective representatives as of the day and year first above written. PATTERSON DRILLING COMPANY LP, LLLP By: -------------------------------------- Cloyce A. Talbott Chief Executive Officer G CHAPPELL ----------------------------------------- Gary Chappell AX D-2-5 EX-23.1 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report dated February 24, 2000 relating to the financial statements, which appears in Patterson Energy Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999. We also consent to the reference to our firm under the heading "Experts." PRICEWATERHOUSECOOPERS LLP Dallas, Texas April 4, 2000 EX-23.2 5 CONSENT OF M. BRIAN WALLACE 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PETROLEUM ENGINEERS I hereby consent to the incorporation by reference in this registration statement of Patterson Energy, Inc. on Form S-3 of certain information contained in Patterson Energy, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, which information is contained in my summary reserve report dated February 22, 2000, relating to the oil and natural gas reserves and revenues as of December 31, 1997, 1998 and 1999 of certain properties owned by Patterson Energy, Inc. as of December 31, 1999. M. BRIAN WALLACE, P.E. Dallas, Texas April 4, 2000 -----END PRIVACY-ENHANCED MESSAGE-----