UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2003 | ||
or | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission File Number 0-22664
Patterson-UTI Energy, Inc.
Delaware
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75-2504748 | |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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4510 Lamesa Highway, Snyder, Texas
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79549 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code:
Securities Registered Pursuant to 12(b) of the Act: None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, the last business day of the registrants most recently completed second fiscal quarter was $2,441,241,719, calculated by reference to the closing price of $32.37 for the common stock on the Nasdaq National Market on that date.
As of February 2, 2004, the registrant had outstanding 81,055,467 shares of common stock, $.01 par value, its only class of voting stock.
Documents incorporated by reference:
Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders (Part III)
This Report on Form 10-K (including documents incorporated by reference herein) contains statements with respect to our expectations and beliefs as to future events. These types of statements are forward-looking and subject to uncertainties. Readers are cautioned that such forward-looking statements should be read in conjunction with our disclosures under the heading: Forward Looking Statements and Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 beginning on page 15.
This Report on Form 10-K, along with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available through our Internet website (www.patenergy.com) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
PART I
Items 1 and 2. Business and Properties.
Overview
Based on publicly available information, we believe we are the second largest owner of land-based drilling rigs in North America. The Company was formed in 1978 and reincorporated in 1993 as a Delaware corporation. Our contract drilling business operates primarily in:
| Texas, | |
| New Mexico, | |
| Oklahoma, | |
| Louisiana, | |
| Mississippi, | |
| Colorado, | |
| Utah, | |
| Wyoming, and | |
| Western Canada (Alberta, British Columbia and Saskatchewan). |
As of December 31, 2003, we had a drilling fleet of 343 drilling rigs. A drilling rig includes the structure, power source, and machinery necessary to cause a drill bit to penetrate earth to a depth desired by the customer.
We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. These services consist primarily of well stimulation and cementing for completion of new wells and remedial work on existing wells. We provide drilling fluids, completion fluids, and related services to oil and natural gas operators in West Texas, Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf Coast regions of Texas and Louisiana, and the Gulf of Mexico. Drilling and completion fluids are used by oil and natural gas operators during the drilling process to control pressure when drilling oil and natural gas wells. We are also engaged in the development, exploration, acquisition and production of oil and natural gas. Our oil and natural gas operations are focused primarily in producing regions in West Texas, Southeast New Mexico, South Texas and Mississippi.
Patterson/UTI Merger
Patterson Energy, Inc. and UTI Energy Corp. consummated a merger on May 8, 2001. The transaction was treated as a reorganization within the meaning of Section 368 (a) of the Internal Revenue Code of 1986, as amended, and accounted for as a pooling of interests for financial accounting purposes. Historical financial
1
Industry Segments
Our revenues, operating profits/(losses) and identifiable operating assets are attributable to four industry segments:
| contract drilling, | |
| pressure pumping services, | |
| drilling and completion fluids services, and | |
| oil and natural gas development, exploration, acquisition and production. |
With respect to these four segments:
| the contract drilling segment had operating profits in 2003, 2002 and 2001, | |
| the pressure pumping segment had operating profits in 2003, 2002 and 2001, | |
| the drilling and completion fluids segment had operating losses in 2003 and 2002 and an operating profit in 2001, and | |
| the oil and natural gas segment had operating profits in 2003, 2002 and 2001. |
See Managements Discussion and Analysis of Financial Condition and Results of Operations and Note 16 of Notes to Consolidated Financial Statements included as a part of Items 7 and 8, respectively, of this Report for financial information pertaining to these industry segments.
Contract Drilling Operations
General We market our contract drilling services to major and independent oil and natural gas operators. As of December 31, 2003, we owned 343 drilling rigs which are based in the following regions:
| 143 in West Texas and New Mexico, | |
| 56 in South Texas, | |
| 42 in the Ark-La-Tex region and Mississippi, | |
| 70 in the Mid-Continent region (Oklahoma and North Central Texas), | |
| 16 in the Rocky Mountain region (Colorado, Utah and Wyoming), and | |
| 16 in Western Canada (Alberta, British Columbia and Saskatchewan). |
Of our drilling rigs, 39 are SCR electric rigs and 304 are mechanical rigs. An electric rig differs from a mechanical rig in that the electric rig converts the diesel power (the sole energy source for a mechanical rig) into electricity to power the rig. Our drilling rigs have rated maximum depth capabilities ranging from 4,000 feet to 30,000 feet.
Drilling rigs are typically equipped with:
| engines, | |
| drawworks or hoists, | |
| derricks or masts, | |
| pumps to circulate the drilling fluid, | |
| blowout preventers, |
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| drill string (pipe), and | |
| other related equipment. |
Over time, many of the components on a drilling rig are replaced or rebuilt. We spend significant funds each year on an ongoing program of modifying and upgrading our drilling rigs to ensure that our drilling equipment is well maintained and competitive. During fiscal years 2003, 2002, and 2001, we spent approximately $95 million, $69 million, and $151 million, respectively, on capital improvements to modify and upgrade our drilling rigs.
Depth of the well and drill site conditions are the principal factors in determining the size of drilling rig used for a particular job. Our drilling rigs are utilized for both developmental and exploratory drilling and can be used for either vertical or horizontal drilling.
Our contract drilling operations depend on the availability of:
| drill pipe, | |
| bits, | |
| replacement parts and other related rig equipment, | |
| fuel, and | |
| qualified personnel, |
some of which have been in short supply from time to time.
Drilling Contracts Most of our drilling contracts are with established customers and are obtained on a competitive bid or negotiated basis. Typically, the contracts are entered into for short-term periods and cover the drilling of a single well or a series of wells.
The drilling contracts obligate us to provide and operate a drilling rig and to pay certain operating expenses, including wages of drilling personnel and necessary maintenance expenses. The contracts are subject to termination by the customer on short notice. We generally indemnify our customers against claims by our employees and claims arising from surface pollution caused by spills of fuel, lubricants, and other solvents within our control. The customers generally indemnify us against claims arising from other surface and subsurface pollution, except claims arising from our gross negligence.
The contracts provide for payment on a daywork, footage, or turnkey basis, or a combination thereof. In each case we provide the rig and crews. Our bids for each contract depend upon:
| the location, depth, and anticipated complexity of the well, | |
| the on-site drilling conditions, | |
| the equipment to be used, | |
| our estimate of the risks involved, | |
| the estimated duration of the work to be performed, | |
| the availability of drilling rigs, and | |
| other factors particular to each proposed well. |
Daywork Contracts
Under daywork contracts, we provide the drilling rig and crew to the customer. The customer supervises the drilling of the well. Our compensation is based on a contracted rate per day during the period the drilling rig is utilized. We generally receive a lower rate when the drilling rig is moving, or when drilling operations are interrupted or restricted by conditions beyond our control. In addition, daywork contracts typically provide separately for mobilization of the drilling rig.
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Footage Contracts
Under footage contracts, we contract to drill a well to a certain depth under specified conditions for a fixed price per foot. The customer provides drilling fluids, casing, cementing, and well design expertise. These contracts require us to bear the cost of services and supplies that we provide until the well has been drilled to the agreed depth. If we drill the well in less time than estimated, we have the opportunity to improve our margins over those that would be attainable under a daywork contract. Margins are reduced and losses may be incurred if the well requires more days to drill to the contracted depth than estimated. Footage contracts generally contain greater risks for a drilling contractor than daywork contracts. Under footage contracts, the drilling contractor assumes certain risks associated with loss of the well from fire, blowouts, and other risks.
Turnkey Contracts
Under turnkey contracts, we contract to drill a well to a certain depth under specified conditions for a fixed fee. In a turnkey arrangement, we are required to bear the costs of services, supplies, and equipment beyond those typically provided under a footage contract. In addition to the drilling rig and crew, we are required to provide the drilling and completion fluids, casing, cementing, and the technical well design and engineering services during the drilling process. We also assume certain risks associated with drilling the well such as fires, blowouts, cratering of the well bore, and other such risks. Compensation occurs only when the agreed scope of the work has been completed which requires us to make larger up-front working capital commitments prior to receiving payments under a turnkey drilling contract. Under a turnkey contract we have the opportunity to improve our margins if the drilling process goes as expected and there are no complications or time delays. However, given the increased exposure we have under a turnkey contract, margins can be significantly reduced and losses incurred if complications or delays occur during the drilling process. Turnkey contracts generally involve the highest degree of risk among the three different types of drilling contracts: daywork, footage, and turnkey.
The following table sets forth the approximate
percentage of our drilling revenues attributable to daywork,
footage, and turnkey contracts for each of the last three years:
Years Ended December 31,
Type of Revenues
2003
2002
2001
83
%
82
%
93
%
7
11
3
10
7
4
Contract Drilling
Activity
The following
table sets forth certain information regarding our contract
drilling activity for each of the last three years:
Years Ended December 31,
2003
2002
2001
336
323
302
188
126
211
56
%
39
%
70
%
226
230
287
3,017
2,012
2,869
(1) | A rig is operating when it is drilling, being moved, assembled, or dismantled under contract. |
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Drilling Rigs and Related
Equipment
The following
table provides certain information about our drilling rigs as of
December 31, 2003:
Depth Rating (ft.)
Mechanical
Electric
60
68
2
119
6
57
31
304
39
At December 31, 2003, we owned 261 trucks and 316 trailers used to rig down, transport, and rig up our drilling rigs. This reduces our dependency upon third parties for these services and enhances the efficiency of our contract drilling operations particularly in periods of high drilling rig utilization.
Most repair and overhaul work to our drilling rig equipment is performed at our yard facilities located in Texas, New Mexico, Oklahoma, and Western Canada.
Pressure Pumping Operations
General We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. Pressure pumping services consist primarily of well stimulation and cementing for the completion of new wells and remedial work on existing wells. Most wells drilled in the Appalachian Basin require some form of fracturing or other stimulation to enhance the flow of oil and natural gas which is accomplished by pumping fluids under pressure into the well bore. Generally, Appalachian Basin wells require cementing services before production commences. Cementing is the process of inserting material between the wall of the well bore and the casing to center and stabilize the casing.
Equipment As of December 31, 2003, we operated the following pressure pumping equipment:
| 21 cement pumper trucks, | |
| 24 fracturing pumper trucks, | |
| 20 nitrogen pumper trucks, | |
| 11 blender trucks, | |
| 11 bulk acid trucks, | |
| 25 bulk cement trucks, | |
| 6 bulk nitrogen trucks, | |
| 31 bulk sand trucks, and | |
| 11 connection trucks. |
Drilling and Completion Fluids Operations
General We provide drilling fluids, completion fluids, and related services to oil and natural gas operators in West Texas, Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf Coast regions of Texas and Louisiana, and the Gulf of Mexico. We serve our offshore customers through seven stockpoints located along the Gulf of Mexico in Texas and Louisiana and our land-based customers through seven stockpoints in Texas, Louisiana, Oklahoma, and New Mexico.
Drilling Fluids Drilling fluid products and systems are used to cool and lubricate the bit during drilling operations, contain formation pressures (thereby minimizing blowout risk), suspend and remove rock cuttings from the hole, and maintain the stability of the wellbore. Technical services are provided to ensure that the products and systems are applied effectively to optimize drilling operations.
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Completion Fluids After a well is drilled it undergoes the completion process wherein the well casing is set and cemented into place. At that point, the drilling fluid services are complete, and the drilling fluids are circulated out of the well and replaced with completion fluids. Completion fluids, also known as clear brine fluids, are solids-free, clear salt solutions that have high specific gravities. Combined with a range of specialty chemicals, these fluids are used by operators to control bottom-hole pressures and to meet a wells specific corrosion, inhibition, viscosity, and fluid loss requirements during the completion and workover phases.
Raw
Materials
Our drilling and
completion fluids operations depend on the availability of the
following raw materials:
Drilling
Completion
calcium chloride
calcium bromide
zinc bromide
We obtain these raw materials through purchases made on the spot market and supply contracts with producers of these raw materials.
Barite Grinding Facility We own and operate a barite grinding facility equipped with two barite grinding mills located in Houma, Louisiana. This facility allows us to grind raw barite into the powder additive used in drilling fluids. We believe the ability to process our own barite is critical to being competitive on the Gulf Coast and in the Gulf of Mexico.
Other Equipment We own 20 trucks and 75 trailers and lease another 22 trucks which are used to transport drilling and completion fluids and related equipment.
Oil and Natural Gas Operations
General We are engaged in the development, exploration, acquisition, and production of oil and natural gas. Our oil and natural gas business operates primarily in producing regions of West Texas, Southeast New Mexico, South Texas, and Mississippi. Our strategy for our oil and natural gas operations is to increase our reserve base primarily through developmental drilling, as well as selected acquisitions of leasehold acreage and producing properties.
Oil and Natural Gas Reserves The following table sets forth estimates, derived from reserve reports provided by M. Brian Wallace, an independent petroleum engineer, of our proved developed reserves and estimated future net revenues from our proved developed reserves as of December 31, 2003, 2002, and 2001. The estimates were based upon production histories, current market prices for oil and natural gas, and other geologic, ownership, and engineering data provided by us. The present values (discounted at 10% before income taxes) of estimated future net revenues shown in the table are not intended to represent the current market value of the estimated oil and natural gas reserves. For further information concerning the present value of estimated future net revenues from these proved developed reserves, see also Note 20 of Notes to Consolidated Financial Statements included as a part of Item 8 of this Report.
Proved oil and natural gas reserves are the estimated quantities of oil and natural gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. Reserves are considered proved if economical productibility is supported by either actual production or conclusive formation tests. Proved developed oil and
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As of December 31, | |||||||||||||
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2003 | 2002 | 2001 | |||||||||||
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(In thousands) | |||||||||||||
Proved Developed Reserves:
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Oil (Bbls)
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1,147 | 1,227 | 1,047 | ||||||||||
Gas (Mcf)
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5,267 | 6,240 | 4,634 | ||||||||||
Total (BOE)
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2,025 | 2,267 | 1,819 | ||||||||||
Estimated future net revenues before income taxes
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$ | 47,873 | $ | 46,016 | $ | 19,597 | |||||||
Present value of estimated future net revenues
before income taxes, discounted at 10%
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$ | 34,371 | $ | 32,308 | $ | 14,492 | |||||||
Standardized measure of discounted future net
cash flows(1)
|
$ | 23,950 | $ | 21,100 | $ | 10,714 |
(1) | For the calculation of standardized measure of discounted future net cash flows, see Note 20 of Notes to Consolidated Financial Statements included as a part of Item 8 of this Report. |
A barrel (Bbl) of oil is 42 U.S. gallons and represents the basic unit for measuring production of crude oil and condensate.
An Mcf of natural gas refers to a volume of 1,000 cubic feet under prescribed conditions of pressure and temperature and represents the basic unit for measuring volumes of produced natural gas. A barrel of equivalent (BOE) in reference to natural gas equivalents is determined using the rate of six Mcf of natural gas to one Bbl of crude oil or condensate.
Production
At December 31, 2003, we held a working interest in
315 productive wells, of which 150 were considered oil and
165 were considered natural gas. A productive well is a well
producing oil or natural gas in commercial quantities. A working
interest is the operating interest under an oil or natural gas
lease which gives the owner the right to explore for and produce
oil or natural gas from the lease. We were the operator of 172
of these wells at December 31, 2003. The following table
sets forth our net oil and natural gas production, average sales
price, and average production costs. Production costs are costs
incurred to operate and maintain our wells and related equipment
and include costs of labor, well service and repair, utilities,
field supervision, property taxes, production, and severance
taxes and related charges.
Years ended December 31,
2003
2002
2001
788
794
739
5,656
5,109
4,654
1,731
1,646
1,515
$
30.54
$
25.02
$
24.88
4.97
2.91
4.12
$
5.51
$
5.11
$
5.32
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Productive
Wells
The following table
sets forth information regarding the number of productive wells
in which we held a working interest as of December 31,
2003. One or more completions in the same well bore are
reflected as one well.
Productive Wells
Gross
Net
150
29.49
165
22.22
315
51.71
Developed and Undeveloped
Acreage
The following
table sets forth the developed and undeveloped acreage in which
we owned a working interest at December 31, 2003:
Developed Acreage
Undeveloped Acreage
Location
Gross
Net
Gross
Net
61,055
10,758
45,438
9,406
320
45
640
32
160
131
7,919
1,027
1,881
301
2,400
469
8,000
1,760
880
129
73,374
12,591
55,319
11,467
Undeveloped acreage is leased acres on which wells have not been drilled to a point that would permit production of commercial quantities of oil and natural gas. Developed acreage is leased acres that have been assigned to productive wells. Our gross acreage is the total number of acres, developed or undeveloped, in which we own a working interest, regardless of the size of our working interest in the acreage. Our net acreage is the gross acreage proportionally reduced to our working interest in the acreage.
Many of our leases summarized in the table above
as undeveloped acreage will expire at the end of their
respective primary terms unless production has been obtained
from the acreage prior to that date. If production is obtained,
the lease will remain in effect until the cessation of
production. The following table sets forth the gross and net
acreage subject to leases summarized in the table of undeveloped
acreage that will expire:
Lease Acres Expiring
Gross
Net
5,019
1,339
2,419
587
47,881
9,541
55,319
11,467
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Drilling
Activities
The following
table sets forth the results of our participation in the
drilling of developmental and exploratory wells during 2003,
2002 and 2001:
Developmental Wells
Exploratory Wells
Productive
Dry Holes
Productive
Dry Holes
Years ended December 31,
Gross
Net
Gross
Net
Gross
Net
Gross
Net
27
4.58
11
2.52
12
1.99
4
0.88
24
4.17
11
2.67
6
0.56
1
0.25
20
3.82
5
1.06
5
0.87
2
0.56
71
12.57
27
6.25
23
3.42
7
1.69
In addition, we were participating in six wells, 1.33 net, that were being drilled at December 31, 2003.
Generally, a developmental well is a well that is drilled into an oil and natural gas reservoir that is known to be productive. An exploratory well is a well that is drilled to find oil and natural gas in an unproved area.
Customers
The customers of each of our four business segments are oil and natural gas operators or purchasers of these commodities. Our customer base includes both major and independent oil and natural gas operators. During 2003, no single customer accounted for 10% or more of our consolidated operating revenues.
Competition
Contract Drilling and Pressure Pumping Businesses Our land drilling and pressure pumping businesses are intensely competitive due to the fact that the supply of available land drilling rigs and pressure pumping equipment exceeds the demand for those rigs and equipment. This excess capacity has resulted in substantial competition for drilling and pressure pumping contracts. The fact that drilling rigs and pressure pumping equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry.
We believe that price competition for drilling and pressure pumping contracts will continue for the foreseeable future due to the existence of available rigs and pressure pumping equipment.
In recent years, many drilling and pressure pumping companies have consolidated or merged with other companies. Although this consolidation has decreased the total number of competitors, we believe the competition for drilling and pressure pumping services will continue to be intense.
Drilling and Completion Fluids Business The drilling and completion fluids services industry is highly competitive. Price is generally the most important competitive factor in the industry. Other competitive factors include the availability of chemicals and experienced personnel, the reputation of the fluids services provider in the drilling industry, and our relationship with customers. Some of our competitors have substantially greater resources and longer operating histories than we have. We believe that competition for drilling and completion fluids service contracts will continue to be intense.
Oil and Natural Gas Business There is substantial competition for the acquisition of oil and natural gas leases suitable for development and exploration and for the hiring of experienced personnel. Our competitors in this business include:
| major integrated oil and natural gas operators, | |
| independent oil and natural gas operators, and | |
| drilling and production purchase programs. |
Our ability to increase our oil and natural gas reserves in the future is directly dependent upon our ability to select, acquire, and develop suitable prospects. Many of our competitors have financial resources, staffs, and facilities greater than ours.
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Government and Environmental Regulation
All of our operations and facilities are subject to numerous federal, state, foreign, and local laws, rules, and regulations related to various aspects of our business, including:
| drilling of oil and natural gas wells, | |
| containment and disposal of hazardous materials, oilfield waste, other waste materials, and acids, | |
| use of underground storage tanks, and | |
| use of underground injection wells. |
To date, we have not been required to expend significant resources in order to satisfy applicable environmental laws and regulations. We do not anticipate any material capital expenditures for environmental control facilities or extraordinary expenditures to comply with environmental rules and regulations in the foreseeable future. However, compliance costs under existing laws or under any new requirements could become material and we could incur liability for noncompliance.
Our business is generally affected by political developments and by federal, state, foreign, and local laws and regulations, which relate to the oil and natural gas industry. The adoption of laws and regulations affecting the oil and natural gas industry for economic, environmental, and other policy reasons could increase costs relating to drilling and production. They could have an adverse effect on our operations. Several state and federal environmental laws and regulations currently apply to our operations and may become more stringent in the future.
We have utilized operating and disposal practices that were or are currently standard in the industry. However, hydrocarbons and other materials may have been disposed of or released in or under properties currently or formerly owned or operated by us or our predecessors. In addition, some of these properties have been operated by third parties over whom we have no control either as to such entities treatment of hydrocarbon and other materials or the manner in which such materials may have been disposed of or released.
The federal Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, commonly known as CERCLA, and comparable state statutes impose strict liability on:
| owners and operators of sites, and | |
| persons who disposed of or arranged for the disposal of hazardous substances found at sites. |
The federal Resource Conservation and Recovery Act, as amended, and comparable state statutes govern the disposal of hazardous wastes. Although CERCLA currently excludes petroleum from the definition of hazardous substances, and the Resource Conservation and Recovery Act also excludes certain classes of exploration and production wastes from regulation, such exemptions by Congress under both CERCLA and the Resource Conservation and Recovery Act may be deleted, limited, or modified in the future. If such changes are made to CERCLA and/or the Resource Conservation and Recovery Act, we could be required to remove and remediate previously disposed of materials (including materials disposed of or released by prior owners or operators) from properties (including ground water contaminated with hydrocarbons) and to perform removal or remedial actions to prevent future contamination.
The Federal Water Pollution Control Act and the Oil Pollution Act of 1990, as amended, and implementing regulations govern:
| the prevention of discharges, including oil and produced water spills, and | |
| liability for drainage into waters. |
The Oil Pollution Act is more comprehensive and stringent than previous oil pollution liability and prevention laws. It imposes strict liability for a comprehensive and expansive list of damages from an oil spill into waters from facilities. Liability may be imposed for oil removal costs and a variety of public and private
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The Oil Pollution Act also expands the authority and capability of the federal government to direct and manage oil spill clean-up and operations, and requires operators to prepare oil spill response plans in cases where it can reasonably be expected that substantial harm will be done to the environment by discharges on or into navigable waters. We have spill prevention control and countermeasure plans in place for our oil and natural gas properties in each of the areas in which we operate and for each of the stockpoints operated by our drilling and completion fluids business. Failure to comply with ongoing requirements or inadequate cooperation during a spill event may subject a responsible party, such as Patterson-UTI, to civil or criminal actions. Although the liability for owners and operators is the same under the Federal Water Pollution Act the damages recoverable under the Oil Pollution Act are potentially much greater and can include natural resource damages.
Our operations are also subject to federal, state, and local regulations for the control of air emissions. The federal Clean Air Act, as amended, and various state and local laws impose certain air quality requirements on Patterson-UTI. Amendments to the Clean Air Act revised the definition of major source such that emissions from both wellhead and associated equipment involved in oil and natural gas production may be added to determine if a source is a major source. As a consequence, more facilities may become major sources and thus would be required to obtain operating permits. This permitting process may require capital expenditures in order to comply with permit limits.
Risks and Insurance
Our operations are subject to the many hazards inherent in the drilling business, including:
| accidents at the work location, | |
| blow-outs, | |
| cratering, | |
| fires, and | |
| explosions. |
These hazards could cause:
| personal injury or death, | |
| suspension of drilling operations, or | |
| serious damage or destruction of the equipment involved and, in addition to environmental damage, could cause substantial damage to producing formations and surrounding areas. |
Damage to the environment, including property contamination in the form of either soil or ground water contamination, could also result from our operations, particularly through:
| oil or produced water spillage, | |
| natural gas leaks, and | |
| fires. |
In addition, we could become subject to liability for reservoir damages. The occurrence of a significant event, including pollution or environmental damages, could materially affect our operations and financial condition.
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As a protection against operating hazards, we maintain insurance coverage we believe to be adequate, including:
| all-risk physical damages, | |
| employers liability, | |
| commercial general liability, and | |
| workers compensation insurance. |
We believe that we are adequately insured for public liability and property damage to others with respect to our operations. However, such insurance may not be sufficient to protect us against liability for all consequences of:
| personal injury, | |
| well disasters, | |
| extensive fire damage, | |
| damage to the environment, or | |
| other hazards. |
We also carry insurance coverage for major physical damage to our drilling rigs. However, we do not carry insurance against loss of earnings resulting from such damage. In view of the difficulties that may be encountered in renewing such insurance at reasonable rates, no assurance can be given that:
| we will be able to maintain the type and amount of coverage that we believe to be adequate at reasonable rates, or | |
| any particular types of coverage will be available. |
In addition to insurance coverage, we also attempt to obtain indemnification from our customers for certain risks. These indemnity agreements typically require our customers to hold us harmless in the event of loss of production or reservoir damage. These contractual indemnifications may not be supported by adequate insurance maintained by the customer.
Employees
We employed approximately 5,800 full-time persons (300 office personnel and 5,500 field personnel) at December 31, 2003. The number of field employees fluctuates depending on the current and expected demand for our services. We consider our employee relations to be satisfactory. None of our employees are represented by a union.
Seasonality
Seasonality does not significantly affect our overall operations. However, our pressure pumping division in Appalachia and our drilling operations in Canada are subject to slow periods of activity during the Spring thaw. In addition, our drilling operations in Canada are subject to slow periods of activity during the Fall.
Raw Materials and Subcontractors
Patterson-UTI uses many suppliers of raw materials and services. These materials and services have been and continue to be available. We also utilize numerous independent subcontractors from various trades.
Incorporation by Reference
The various factors disclosed under the caption Forward Looking Statements and Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995,
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Corporate Headquarters, Field Offices, and Other Facilities
Our corporate headquarters are located in Snyder, Texas. We also have a number of offices, yard, and stockpoint facilities located in our various operating areas.
Our corporate headquarters are located at 4510 Lamesa Highway, Snyder, Texas, and our telephone number at that address is (325) 574-6300. There are a number of improvements at our headquarters, including:
| an office building with approximately 34,000 square feet of office space and storage, | |
| a shop facility with approximately 7,000 square feet used for drilling equipment repairs and metal fabrication, | |
| a truck shop facility with approximately 10,000 square feet used to maintain, overhaul and repair our truck fleet, | |
| an engine shop facility with approximately 20,000 square feet used to overhaul and repair the engines used to power our drilling rigs, and | |
| an open-ended metal storage facility with approximately 10,200 square feet. |
We have regional administrative offices, yard, and stockpoint facilities in many of the areas in which we operate. The facilities are primarily used to support the day-to-day operations, including the repair and maintenance of equipment as well as the storage of equipment, inventory, and supplies and to facilitate administrative responsibilities and sales.
Contract Drilling Operations Our drilling services are supported by several administrative offices and yard facilities located throughout our areas of operations including:
| Texas, | |
| New Mexico, | |
| Oklahoma, | |
| Colorado, | |
| Utah, and | |
| Western Canada. |
Pressure Pumping Our pressure pumping services are supported by several offices and yard facilities located throughout our areas of operations including:
| Pennsylvania, | |
| Ohio, | |
| West Virginia, | |
| Kentucky, | |
| Wyoming, and | |
| Eastern Canada. |
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Drilling and Completion Fluids Our drilling and completion fluids services are supported by several administrative offices and stockpoint facilities located throughout our areas of operations including:
| Texas, | |
| Louisiana, | |
| New Mexico, and | |
| Oklahoma. |
Oil and Natural Gas Our oil and natural gas services are supported by administrative and field offices in Texas.
We own our headquarters in Snyder, Texas, and lease the majority of our other facilities. We do not believe that any of these other facilities are individually material to our operations. We believe that our existing facilities are suitable and adequate to meet our needs.
Item 3. | Legal Proceedings. |
Westfort Energy LTD and Westfort Energy (US) LTD f/k/a Canadian Delta, Inc. (Westfort), filed a lawsuit against two Patterson-UTI subsidiaries, Patterson Petroleum LP, and Patterson-UTI Drilling Company LP, in the Circuit Court, Rankin County, Mississippi, Case No. 2002-18. The lawsuit relates to a letter agreement entered into in July 2000 between Patterson Petroleum LP and Westfort concerning the drilling of a daywork well in Mississippi. This lawsuit was filed by Westfort after Patterson Petroleum LP made demand on Westfort for payment of the contract drilling services.
The Westfort lawsuit has been dismissed without prejudice. Westfort filed for bankruptcy in May of 2003. We continue to assert claims against Westfort including the monies owed Patterson Petroleum LP under the letter agreement in the amount of approximately $5,075,000. Amounts deemed uncollectible have been reserved. We believe that it is remote that the outcome of this matter will have a material adverse effect on Patterson-UTIs financial condition and results of operations.
In this lawsuit, Westfort alleged breach of contract, fraud, and negligence causes of action. Westfort sought alleged monetary damages, the return of shares of Westfort stock, unspecified damages from alleged lost profits, lost use of income stream, and additional operating expenses, along with alleged punitive damages to be determined by the jury, but not less than 25% of Patterson-UTIs net worth. We intend to vigorously contest these claims if reasserted by Westfort.
We are also party to various legal proceedings arising in the normal course of our business. We do not believe that the outcome of these proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
14
FORWARD LOOKING STATEMENTS AND CAUTIONARY
Patterson-UTI from time to time makes written or oral forward-looking statements, including statements contained in this Annual Report on Form 10-K, our other filings with the SEC, press releases, and reports to stockholders. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements relating to liquidity, financing of operations, sources and sufficiency of funds, and impact of inflation. The words believes, budgeted, expects, project, will, could, may, plans, intends, strategy, or anticipates, and similar expressions are used to identify our forward-looking statements. We do not undertake to update, revise, or correct any of our forward-looking information.
We include the following cautionary statement in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by us, or on our behalf. The factors identified in this cautionary statement are important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us, or on our behalf. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, we caution that, while we believe such assumptions or bases to be reasonable and make them in good faith, assumed facts or bases almost always vary from actual results. The differences between assumed facts or bases and actual results can be material, depending upon the circumstances.
Where, in any forward-looking statement, Patterson-UTI, or our management, expresses an expectation or belief as to the future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the statement of expectation or belief will result, or be achieved or accomplished. Taking this into account, the following are identified as important risk factors currently applicable to, or which could readily be applicable to, Patterson-UTI:
Patterson-UTI 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 Our Operations.
Our 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, | |
| international military, political, and economic conditions, and | |
| the ability of the Organization of Petroleum Exporting Countries, commonly known as OPEC, to set and maintain production and price targets. |
All of these factors are beyond our control. Natural gas prices fell from an average of $6.23 per Mcf in the first quarter of 2001 to an average of $2.51 per Mcf for the same period in 2002. During this same period, the average number of our rigs operating dropped by approximately 50%. The average market price of natural gas improved to $5.45 in 2003 compared to $3.36 in 2002, resulting in an increase in demand for our drilling services. Our average number of rigs operating increased to 188 in 2003 from 126 in 2002. We expect oil and natural gas prices to continue to be volatile and to affect our financial condition and operations and ability to access sources of capital.
A General Excess of Operable Land Drilling Rigs Adversely Affects Our Profit Margins Particularly in Times of Weaker Demand.
The contract drilling business experienced increased demand for drilling services in 1997, 2000 and 2001. However, except for those periods and other occasional upturns, generally, there have been substantially more drilling rigs available than necessary to meet demand in most operational and geographic segments of the
15
In addition to adverse effects that future declines in demand could have on Patterson-UTI, ongoing factors which could adversely affect utilization rates and pricing, even in an environment of stronger oil and natural gas prices and increased drilling activity, include:
| movement of drilling rigs from region to region, | |
| reactivation of land-based drilling rigs, or | |
| new construction of drilling rigs. |
We cannot predict either the future level of demand for our contract drilling services or future conditions in the oil and natural gas contract drilling business.
Shortages of Drill Pipe, Replacement Parts, and Other Related Rig Equipment Adversely Affects Patterson-UTIs Operating Results.
During periods of increased demand for drilling services, the industry has experienced shortages of drill pipe, replacement parts, and other related rig equipment. These shortages can cause the price of these items to increase significantly and require that orders for the items be placed well in advance of expected use. These price increases and delays in delivery may require us to substantially increase capital expenditures in our contract drilling segment. Severe shortages could impair our ability to operate our drilling rigs.
The Various Business Segments in Which We Operate Are Highly Competitive with Excess Capacity which may Adversely Affect Our Operating Results.
Our land drilling and pressure pumping businesses are intensely competitive due to the fact that the supply of available land drilling rigs and pressure pumping equipment exceeds the demand for those rigs and equipment. This excess capacity has resulted in substantial competition for drilling and pressure pumping contracts. The fact that drilling rigs and pressure pumping equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry.
Patterson-UTI believes that price competition for drilling and pressure pumping contracts will continue for the foreseeable future due to the existence of available rigs and pressure pumping equipment.
In recent years, many drilling and pressure pumping companies have consolidated or merged with other companies. Although this consolidation has decreased the total number of competitors, we believe the competition for drilling and pressure pumping services will continue to be intense.
The drilling and completion fluids services industry is highly competitive. Price is generally the most important competitive factor in the industry. Other competitive factors include the availability of chemicals and experienced personnel, the reputation of the fluids services provider in the drilling industry, and our relationship with existing customers. Some of our competitors have substantially greater resources and longer operating histories than we have. We believe that competition for our drilling and completion fluids service contracts will continue to be intense.
Labor Shortages Adversely Affect Our Operating Results.
During periods of increased demand for contract drilling services, the industry experiences shortages of qualified drilling rig personnel. During these periods, our ability to attract and retain sufficient qualified personnel to market and operate our drilling rigs is adversely affected which in turn has a negative impact on both our operations and profitability. Operationally, it is more difficult to hire qualified personnel which adversely affects our ability to mobilize inactive rigs in response to the increased demand for our contract drilling services. Additionally, wage rates for drilling personnel are likely to increase, resulting in greater operating costs. During the last upturn in our industry, we experienced an approximate 30% to 40% increase in wage rates to our drilling personnel.
16
Continued Growth of Patterson-UTI Through Rig Acquisition is Not Assured.
We have increased our drilling rig fleet over the past several years through mergers and acquisitions. The land drilling industry has experienced significant consolidation over the past several years, and there can be no assurance that acquisition opportunities will continue to be available. Additionally, we are likely to continue to face intense competition from other companies for available acquisition opportunities.
There can be no assurance that we would:
| have sufficient capital resources to complete additional acquisitions, | |
| successfully integrate acquired operations and assets, | |
| be able to manage effectively the growth and increased size, | |
| be successful in deploying idle or stacked rigs, | |
| be able to maintain the crews and market share attributable to operating drilling rigs acquired, or | |
| be successful in improving our financial condition, results of operations, business, or prospects in any material manner as a result of any completed acquisition. |
We may incur substantial indebtedness to finance future acquisitions and also may issue equity securities or convertible securities in connection with any such acquisitions. Debt service requirements could represent a significant burden on our results of operations and financial condition and the issuance of additional equity could be dilutive to our existing stockholders. Also, continued growth could strain our management, operations, employees, and resources.
The Nature of our Business Operations Presents Inherent Risks of Loss that, if not Insured or Indemnified Against, Could Adversely Affect Patterson-UTIs Operating Results.
Our operations are subject to many hazards inherent in the contract drilling, pressure pumping, and drilling and completion fluids businesses, which in turn could cause personal injury or death, work stoppage, or serious damage to our equipment. Our operations could also cause environmental and reservoir damages. We maintain insurance coverage and have indemnification agreements with many of our customers. However, there is no assurance that such insurance or indemnification agreements would adequately protect Patterson-UTI against liability or losses from all consequences of the hazards. Additionally, there can be no assurance that insurance would be available to cover any or all of these risks, or, even if available, that insurance premiums or other costs would not rise significantly in the future, so as to make such insurance prohibitive.
We have elected in some cases to accept a greater amount of risk through increased deductibles on certain insurance policies. For example, we maintain a $750,000 per occurrence deductible on our workers compensation insurance coverage and a $1.0 million per occurrence deductible on our general liability insurance coverage. These levels of self-insurance expose us to increased operating costs and risks.
Violations of Environmental Laws and Regulations Could Materially Adversely Affect Patterson-UTIs Operating Results.
The drilling of oil and natural gas wells is subject to various federal, state, foreign, and local laws, rules, and regulations. The cost to Patterson-UTI of compliance with these laws and regulations could be substantial. Failure to comply with these requirements could subject Patterson-UTI to substantial civil and criminal penalties. In addition, federal law imposes a variety of regulations on responsible parties related to the prevention of oil spills and liability for damages from such spills. Patterson-UTI, as an owner and operator of land-based drilling rigs, may be deemed to be a responsible party under federal law. Our operations and facilities are subject to numerous state and federal environmental laws, rules, and regulations, including, without limitation, laws concerning the containment, and disposal of hazardous substances, oil field waste and other waste materials, the use of underground storage tanks, and the use of underground injection wells.
17
Some of Our Contract Drilling Services are Done Under Turnkey and Footage Contracts, Which are Financially Risky.
A portion of our contract drilling is done under turnkey and footage contracts, which involve significant risks. Under turnkey drilling contracts, we contract to drill a well to a certain depth under specified conditions for a fixed price. Under footage contracts, we contract to drill a well to a certain depth under specified conditions at a fixed price per foot. The risk to us under these types of drilling contracts are greater than on a well drilled on a daywork basis. Unlike daywork contracts, we must bear the cost of performing drilling services until the target depth is reached. We must also make significant up-front working capital commitments prior to receiving payment. In addition, we must assume most of the risk associated with the drilling operations, generally assumed by the operator of the well on a daywork contract, including blowouts, loss of hole from fire, machinery breakdowns, and abnormal drilling conditions. Accordingly, if severe drilling problems are encountered in drilling wells under such contracts, we could suffer substantial losses.
Anti-takeover Measures in Our Charter Documents and Under State Law Could Discourage an Acquisition of Patterson-UTI and Thereby Affect the Related Purchase Price.
Patterson-UTI, as a Delaware corporation, is subject to the Delaware General Corporation Law, including Section 203, an anti-takeover law enacted in 1988. We have 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-UTI may find it more difficult or be discouraged from attempting to effect an acquisition transaction with us. This may deprive holders of our securities of certain opportunities to sell or otherwise dispose of the securities at above-market prices pursuant to any such transactions.
We have Paid no Dividends on Our Common Stock and have no Plans to Pay Dividends.
We have not declared or paid cash dividends on our common shares in the past. We currently have no plan to declare or pay any cash dividends on our common stock in the foreseeable future. The terms of our existing credit facility limit payment of dividends without the prior written consent of the lenders.
PART II
Item 5. | Market for Registrants Common Equity and Related Stockholder Matters. |
Our common stock, par value $0.01 per share, is publicly traded on the Nasdaq National Market and is quoted under the symbol PTEN. In December 2002, our common stock was added to the Nasdaq-100 Index and in November 2001, our common stock was added to the S&P MidCap 400 Index. Our common stock is also included in several other market indexes.
18
The following table sets forth the high and low
sales prices of our common shares for the periods indicated:
High
Low
$
35.50
$
27.09
36.97
31.80
32.28
25.15
33.93
25.67
$
29.85
$
18.87
34.60
26.83
29.78
20.63
33.97
23.96
As of December 31, 2003, there were approximately 300 holders of record and approximately 19,000 beneficial holders of our common shares.
We have not declared or paid cash dividends on our common shares in the past. We currently have no plan to declare or pay any cash dividends on our common stock in the foreseeable future. Instead, we currently intend to retain our earnings to support the operations and growth of our business. Any future cash dividends would depend on future earnings, capital requirements, financial condition, and other factors deemed relevant by the Board of Directors. In addition, the terms of our existing credit facility limit payment of dividends without the prior written consent of the lenders.
The following table summarizes as of
December 31, 2003, certain information regarding equity
compensation to our employees, officers, directors, and other
persons under our equity compensation plans:
Equity Compensation Plan Information
Number of
Number of
securities
securities to
Weighted-
remaining available
be issued upon
average exercise
for future issuance
exercise of
price of
under equity
outstanding
outstanding
compensation plans
options,
options,
(excluding
warrants and
warrants and
securities reflected
Plan category
rights
rights
in column (a))
(a)
(b)
(c)
5,279,021
$
20.82
2,242,037
858,737
$
19.39
25,694
6,137,758
$
20.62
2,267,731
(1) | The Patterson-UTI Energy, Inc. 2001 Long-Term Incentive Plan was approved by the Companys Board of Directors in July 2001. The terms of the Plan provide for grants of stock options to eligible employees other than officers and directors of the Company. The total number of stock options that could be granted under the Plan was 1,000,000. No Incentive Stock Options may be awarded under the Plan. All options are granted with an exercise price equal to or greater than the fair market value of the Companys common stock at the time of grant. The vesting schedule and term are set by the Compensation Committee of the Board of Directors. |
Also in July 2001, the Companys Board of Directors approved option grants, not included in any of the Companys stock option plans, for two non-employee directors, each covering options to purchase 12,000 shares of the Companys common stock at an exercise price greater than the fair market value of the |
19
Companys common stock on the grant date. The options vested in November 2001 and expire in November 2005. |
Item 6. | Selected Financial Data. |
The selected consolidated financial data of
Patterson-UTI as of December 31, 2003, 2002, 2001, 2000,
and 1999, and for each of the five years then ended should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the Consolidated Financial Statements and related Notes
thereto, included as Items 7 and 8, respectively, of this
Report. Historical financial statements as presented herein,
have been restated to provide for the retroactive effect of the
merger with UTI Energy Corp., on May 8, 2001.
Years Ended December 31,
2003
2002
2001
2000
1999
(In thousands, except per share amounts)
$
639,694
$
410,295
$
839,931
$
512,998
$
266,212
46,083
32,996
39,600
21,465
20,721
69,230
69,943
94,456
32,053
11,686
21,163
14,723
15,988
15,806
8,563
184
776,170
527,957
989,975
582,322
307,366
475,224
318,201
487,343
384,840
224,590
26,184
19,802
21,146
13,403
12,219
61,424
60,762
80,034
26,545
9,864
4,808
3,956
5,190
4,872
2,500
97,998
91,216
86,159
61,464
52,553
27,709
26,140
28,561
22,190
17,735
259
320
2,045
570
282
5,943
(2,452
)
4,700
7,202
(2,174
)
(538
)
(820
)
(147
)
(2,927
)
688,980
524,559
722,803
513,737
316,816
87,190
3,398
267,172
68,585
(9,450
)
967
441
(677
)
(8,481
)
(7,053
)
88,157
3,839
266,495
60,104
(16,503
)
32,362
1,670
102,333
22,878
(4,766
)
55,795
2,169
164,162
37,226
(11,737
)
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Years Ended December 31,
2003
2002
2001
2000
1999
(In thousands, except per share amounts)
(469
)
$
55,326
$
2,169
$
164,162
$
37,226
$
(11,737
)
$
0.69
$
0.03
$
2.15
$
0.52
$
(0.18
)
(0.01
)
$
0.68
$
0.03
$
2.15
$
0.52
$
(0.18
)
$
0.68
$
0.03
$
2.07
$
0.50
$
(0.18
)
(0.01
)
$
0.67
$
0.03
$
2.07
$
0.50
$
(0.18
)
80,636
78,705
76,407
71,207
66,483
82,286
81,252
79,197
74,841
66,483
$
308,060
$
243,015
$
199,458
$
237,742
$
106,091
1,075,830
942,509
869,642
739,898
496,715
108,447
75,152
89,286
110,443
60,930
79,416
82,196
820,071
737,556
687,142
481,299
309,695
199,613
167,863
110,172
127,299
45,161
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Item 7 contains forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Management Overview We are a leading provider of contract services to the North American oil and natural gas industry. Our services primarily involve the drilling, on a contract basis, of land-based oil and natural gas wells and to a lesser extent, we provide pressure pumping services and drilling and completion fluid services. In addition to the aforementioned contract services, we also engage in the development, exploration,
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2003 | 2002 | 2001 | ||||||||||||||||||||||
|
|
|
||||||||||||||||||||||
Contract drilling
|
$ | 639,694 | 82 | % | $ | 410,295 | 78 | % | $ | 839,931 | 85 | % | ||||||||||||
Pressure pumping
|
46,083 | 6 | 32,996 | 6 | 39,600 | 4 | ||||||||||||||||||
Drilling and completion fluids
|
69,230 | 9 | 69,943 | 13 | 94,456 | 9 | ||||||||||||||||||
Oil and natural gas
|
21,163 | 3 | 14,723 | 3 | 15,988 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
$ | 776,170 | 100 | % | $ | 527,957 | 100 | % | $ | 989,975 | 100 | % | |||||||||||||
|
|
|
|
|
|
We provide our contract services to oil and natural gas operators throughout the oil and natural gas producing regions of North America. Our contract drilling operations are focused in various regions of Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Colorado, Utah, Wyoming and Western Canada while our pressure pumping services are focused primarily in the Appalachian Basin. Our drilling and completion fluids services are provided to operators in Texas, New Mexico, Oklahoma, the Gulf Coast regions of Texas and Louisiana and the Gulf of Mexico. Our oil and natural gas operations are primarily focused in Texas, New Mexico and Mississippi.
We have been a leading consolidator of the land-based contract drilling industry over the past several years increasing our drilling fleet to 343 rigs, which we believe is the second largest drilling fleet in North America. Our most significant transaction occurred in May 2001 when we merged with UTI Energy Corp. in a merger of equals which basically doubled our drilling fleet and added the pressure pumping services business. Growth by acquisition has been a corporate strategy intended to expand both revenues and market share.
The profitability of our business is most readily assessed by two primary indicators: our average number of rigs operating and our average revenue per operating day. During 2003, our average number of rigs operating increased to 188 from 126 in 2002 and our average revenue per operating day increased to $9,300 from $8,930 in 2002. Primarily due to these improved operating results, we experienced an increase of approximately $53 million in net income in 2003.
Our revenues, profitability and cash flows are highly dependent upon the market prices of oil and natural gas. During periods of improved commodity prices, the capital spending budgets of oil and natural gas operators tend to expand, which results in increased demand for our contract services. Conversely, in periods of time when these commodity prices deteriorate, the demand for our contract services generally weakens and we experience downward pressure on pricing for our services. In addition, our operations are also highly impacted by competition, the availability of excess equipment, labor issues and various other factors which are more fully described as risk factors in our Forward Looking Statements and Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 contained on page 15 of this Report.
Management believes that the liquidity of our balance sheet as of December 31, 2003, which includes approximately $200 million in working capital (including $100 million in cash), no long term debt and a $100 million undrawn line of credit, provides us with the ability to pursue acquisition opportunities, expand into new regions, make improvements to our assets and to survive downturns in our industry.
Commitments and Contingencies We have no commitments or contingencies which require disclosure in our financial statements other than letters of credit totaling $37.0 million at December 31, 2003, maintained for the benefit of various insurance companies as collateral for retrospective premiums and retained losses which may become payable under the terms of the underlying insurance contracts. No amounts have been drawn under the letters of credit.
Net income for the year ended December 31, 2002 includes a charge of $4.7 million related to the financial failure in 2002 of a workers compensation insurance carrier that had provided coverage for us in prior years.
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Trading and investing We have not engaged in trading activities that include high-risk securities, such as derivatives and non-exchange traded contracts. We invest cash primarily in highly liquid, short-term investments such as overnight deposits, money markets, and highly rated municipal and commercial bonds. However in June 2002 and October 2002, we acquired a total of 1,058,673 shares of common stock of TMBR/Sharp Drilling, Inc., a company whose stock is traded on the NASDAQ National Market System, for a total cost of $17.7 million.
Description of business Based on publicly available information, we believe we are the second largest owner of land-based drilling rigs in North America. We conduct our contract drilling operations in Texas, New Mexico, Oklahoma, Louisiana, Mississippi, Colorado, Utah, Wyoming, and Western Canada. As of December 31, 2003, we owned 343 drilling rigs. We provide pressure pumping services to oil and natural gas operators primarily in the Appalachian Basin. These services consist primarily of well stimulation and cementing for completion of new wells and remedial work on existing wells. We provide drilling fluids, completion fluids, and related services to oil and natural gas operators in West Texas, Southeast New Mexico, South Texas, East Texas, Oklahoma, the Gulf Coast regions of Texas and Louisiana, and the Gulf of Mexico. Drilling and completion fluids are used by oil and natural gas operators during the drilling process to control pressure when drilling oil and natural gas wells. We are also engaged in the development, exploration, acquisition, and production of oil and natural gas. Our oil and natural gas business operates primarily in producing regions in West Texas, Southeast New Mexico, South Texas and Mississippi.
The contract drilling business experienced increased demand for drilling services in 1997, 2000 and 2001. However, except for those periods and other occasional upturns, generally, there have been substantially more drilling rigs available than necessary to meet demand in most operational and geographic segments of the North American land 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-UTI, ongoing factors which could adversely affect utilization rates and pricing, even in an environment of stronger oil and natural gas prices and increased drilling activity, include:
| movement of drilling rigs from region to region, | |
| reactivation of land-based drilling rigs, or | |
| new construction of drilling rigs. |
We cannot predict either the future level of demand for our contract drilling services or future conditions in the oil and natural gas contract drilling business.
Critical Accounting Policies
In addition to established accounting policies, our consolidated financial statements are impacted by certain estimates and assumptions made by management. The following is a discussion of our critical accounting policies pertaining to property and equipment, oil and natural gas properties, intangible assets, revenue recognition, and the use of estimates.
Property and equipment Property and equipment, including betterments which extend the useful life of the asset, are stated at cost. Maintenance and repairs are charged to expense when incurred. We provide for the depreciation of our property and equipment using the straight-line method over the estimated useful lives. Our method of depreciation does not change when equipment becomes idle; we continue to depreciate idled equipment on a straight-line basis. No provision for salvage value is considered in determining depreciation of our property and equipment. We review our assets, including intangible assets, for impairment when events or changes in circumstances indicate that the carrying values of certain assets either exceed their respective fair values or may not be recovered over their estimated remaining useful lives. The cyclical nature of our industry has resulted in fluctuations in rig utilization over periods of time. Management believes that the contract drilling industry will continue to be cyclical and rig utilization will fluctuate. Based on managements expectations of future trends, we estimate future cash flows in our assessment of impairment assuming the
23
Oil and natural gas properties Oil and natural gas properties are accounted for using the successful efforts method of accounting. Exploration and development costs which result directly in the discovery of oil and natural gas reserves are capitalized to the appropriate well. Exploration costs which do not result directly in the discovery of oil and natural gas reserves are charged to expense when such determinations are made. In accordance with Statement of Financial Accounting Standards No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, (SFAS No. 19) costs of exploratory wells are initially capitalized to wells in progress until the outcome of the drilling is known. We review wells in progress quarterly to determine the related reserve classification. If the reserve classification is uncertain after one year following the completion of drilling, we consider the costs of the well to be impaired and recognize the costs as expense. Geological and geophysical costs, including seismic costs, and costs to carry and retain undeveloped properties are charged to expense when incurred. Capitalized costs of both developmental and successful exploratory type wells, consisting of lease and well equipment, lease acquisition costs, and intangible development costs, are depreciated, depleted, and amortized on the units-of-production method, based on petroleum engineer estimates of proved oil and natural gas reserves of each respective field. We review our proved oil and natural gas properties for impairment when an event occurs such as downward revisions in reserve estimates or decreases in oil and natural gas prices. Proved properties are grouped by field and undiscounted cash flow estimates are provided by our reserve engineer. If the net book value of a field exceeds its undiscounted cash flow estimate, impairment expense is measured and recognized as the difference between its net book value and discounted cash flow. Unproved oil and natural gas properties are reviewed quarterly to determine impairment. Our intent to drill, lease expiration, and abandonment of area are considered. Assessment of impairment is made on a lease-by-lease basis. If an unproved property is determined to be impaired, then costs related to that property are expensed. Impairment expense of approximately $1.4 million, $700,000 and $1.1 million for the years ended December 31, 2003, 2002 and 2001, respectively, is included in depreciation, depletion, and amortization in the accompanying financial statements.
Intangible assets Intangible assets consist primarily of goodwill arising from business combinations (see Note 5 of Notes to Consolidated Financial Statements included as part of Item 8 of this Report). Intangible assets other than goodwill are amortized on a straight line basis over their estimated useful lives. Covenants not to compete are amortized over their underlying contractual lives of five years. Prior to 2002, goodwill, representing the excess of the purchase price over the estimated fair value of the net assets of the acquired business, was amortized over the period of expected benefit of 15 years. However, effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142) which requires that we cease amortization of all intangible assets having indefinite useful economic lives. Such assets, including goodwill, are not to be amortized until their lives are determined to be finite, however, a recognized intangible asset with an indefinite useful life should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of the asset has decreased below its carrying value. At December 31, 2003, we evaluated our goodwill and other intangible assets and determined that fair value had not decreased below carrying value and no adjustment to impair goodwill and other intangible assets was necessary in accordance with SFAS No. 142. With respect to our drilling and completion fluids business, the determination that no impairment existed was based on our expectations of improvement in the results of operations for that business segment. If the expected improvement in results does not occur, all or part of the goodwill and other intangible assets of approximately $10 million associated with that business segment may be determined to be impaired.
Revenue recognition Revenues are recognized when services are performed, except for revenues earned under turnkey contract drilling arrangements which are recognized using the completed contract method of accounting, as described below. We follow the percentage-of-completion method of accounting for footage contract drilling arrangements. Under this method, drilling revenues and costs related to a well in
24
Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period. Actual results could differ from such estimates.
Key estimates used by management include:
| allowance for doubtful accounts, | |
| depreciation, depletion, and amortization, | |
| asset impairment, | |
| reserves for self-insured levels of insurance coverages, and | |
| fair values of assets and liabilities assumed. |
For additional information on our accounting policies, see Note 1 of Notes to Consolidated Financial Statements included as a part of Item 8 of this Report.
Related party transactions In 2001, we leased a 1981 Beech King-Air 90 airplane owned by SSI Oil and Gas, Inc., an entity beneficially owned 50% by Cloyce A. Talbott, Patterson-UTIs Chief Executive Officer, and directly owned 50% by A. Glenn Patterson, Patterson-UTIs President/Chief Operating Officer. Under the terms of the lease, we paid a monthly rental of $9,200, the costs of fuel, insurance, taxes, and maintenance of the aircraft. Such amounts totaled approximately $212,000 for the year ended December 31, 2001.
We operate certain oil and natural gas properties in which certain of our affiliated persons have participated, either individually or through entities they control, in the prospects or properties in which we have an interest. These participations, which have been on a working interest basis, have been in prospects or properties originated or acquired by Patterson-UTI. At December 31, 2003, affiliated persons were working interest owners in 236 of the 260 wells operated by Patterson-UTI. Sales of working interests are made by Patterson-UTI to reduce its economic risk in the properties. Generally, it is more efficient for Patterson-UTI to sell the working interests to these affiliated persons than to market them to unrelated third parties. Sales were made by Patterson-UTI at its cost, comprised of Patterson-UTIs costs of acquiring and preparing the working interests for sale. These costs were paid by the working interest owners on a pro rata basis based upon their working interest ownership percentage. The price at which working interests were sold to affiliated persons was the same price at which working interests were sold to unaffiliated persons.
The following table sets forth production revenues and joint interest costs of each of the affiliated persons during 2003 for all wells operated by Patterson-UTI in which they have working interests. These amounts do not necessarily represent their profits or losses from these interests because the joint interest costs do not include the parties related drilling and leasehold acquisition costs incurred prior to January 1, 2003. These
25
Year Ended | ||||||||||
December 31, 2003 | ||||||||||
|
||||||||||
Joint | ||||||||||
Production | Interest | |||||||||
Name | Revenues(1) | Costs(2) | ||||||||
|
|
|
||||||||
Cloyce A. Talbott
|
$ | 185,180 | $ | 85,244 | ||||||
Anita Talbott(3)
|
73,424 | 27,514 | ||||||||
Jana Talbott, Executrix to the Estate of Steve
Talbott(3)
|
2,633 | 3,467 | ||||||||
Stan Talbott(3)
|
8,802 | 2,531 | ||||||||
John Evan Talbott Trust(3)
|
2,880 | 1,066 | ||||||||
Lisa Beck and Stacy Talbott(3)
|
737,445 | 503,017 | ||||||||
SSI Oil & Gas, Inc.(4)
|
240,921 | 129,290 | ||||||||
IDC Enterprises, Ltd.(5)
|
9,558,279 | 6,829,996 | ||||||||
SSSL, Ltd.(6)(8)
|
| 1,177 | ||||||||
|
|
|||||||||
Subtotal
|
10,809,564 | 7,583,302 | ||||||||
|
|
|||||||||
A. Glenn Patterson
|
125,283 | 45,942 | ||||||||
Glenn Patterson Family Limited Partnership(7)(8)
|
| 1,181 | ||||||||
Robert Patterson(7)
|
8,423 | 3,348 | ||||||||
Thomas M. Patterson(7)
|
8,423 | 3,348 | ||||||||
|
|
|||||||||
Subtotal
|
142,129 | 53,819 | ||||||||
Jonathan D. Nelson, Patterson-UTIs Chief
Financial Officer
|
151,912 | 265,355 | ||||||||
|
|
|||||||||
Total
|
$ | 11,103,605 | $ | 7,902,476 | ||||||
|
|
(1) | Revenues for production of oil and natural gas, net of state severance taxes. |
(2) | Includes leasehold costs, tangible equipment costs, intangible drilling costs, and lease operating expense billed during that period. All joint interest costs have been paid on a timely basis. |
(3) | Anita Talbott is the wife of Cloyce A. Talbott. Stan Talbott, Lisa Beck, and Stacy Talbott are Mr. Talbotts adult children. Steve Talbott is the deceased son of Mr. Talbott. John Evan Talbott is Mr. Talbotts grandson. |
(4) | SSI Oil & Gas, Inc. is beneficially owned 50% by Cloyce A. Talbott and directly owned 50% by A. Glenn Patterson. |
(5) | IDC Enterprises, Ltd. is 50% owned by Cloyce A. Talbott and 50% owned by A. Glenn Patterson. |
(6) | SSSL, Ltd. is a limited partnership in which children and grandchildren of Mr. Talbott are beneficiaries and Mr. Talbott is the general partner. |
(7) | Robert and Thomas M. Patterson are A. Glenn Pattersons adult children. The Glenn Patterson Family Limited Partnership is a partnership in which each of Mr. Pattersons children shares equally and Mr. Patterson is the manager. |
(8) | Revenues included in IDC Enterprises, Ltd. revenues. |
In 2003, 2002 and 2001, we paid approximately $740,000, $279,000 and $387,000, respectively, to TMP Truck and Trailer LP (TMP), an entity owned by Thomas M. Patterson (son of A. Glenn Patterson), for certain equipment and metal fabrication services. Purchases from TMP were at current market prices.
In 2003, we paid approximately $209,000 to Melco Services (Melco) for dirt contracting services and $59,000 to L&N Transportation (L&N) for water hauling services. Both entities are owned by Lance D. Nelson, brother of Jonathan D. Nelson. Purchases from Melco and L&N were at current market prices.
26
Liquidity and Capital Resources
As of December 31, 2003, we had working
capital of $199.6 million including cash and cash
equivalents of $100.5 million. For 2003, our significant
sources of cash flow were:
We used approximately $157.9 million:
In January 2003, we acquired four land-based
drilling rigs and related equipment from SEI Drilling Company
for $6.0 million in cash. The transaction was accounted for
as an acquisition of assets and the purchase price was allocated
among the assets acquired based on their estimated fair market
values.
In February 2003, we acquired three land-based
drilling rigs, a yard, and other related equipment from Mesa
Drilling, Inc. and related entities for $10.5 million in
cash. The transaction was accounted for as an acquisition of
assets and the purchase price was allocated among the assets
acquired based on their estimated fair market values.
In April 2003, we acquired two land-based
drilling rigs for $3.9 million in cash. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
In May 2003, we acquired seven land-based
drilling rigs and related equipment from Hexadyne Drilling
Corporation for $10.1 million in cash. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
In May 2003, the Company, Patterson-UTI
Acquisition, LLC, a wholly-owned subsidiary of the Company
(Sub), and TMBR/Sharp Drilling, Inc., a Texas
corporation (TMBR), entered into an Agreement and
Plan of Merger, as amended by Amendment No. 1 to Agreement
and Plan of Merger, dated as of December 30, 2003, by and
among the same parties (the Merger Agreement),
pursuant to which, upon the satisfaction and completion of the
conditions to the merger contained in the Merger Agreement,
including approval of the Merger Agreement by at least
two-thirds of the shareholders of TMBR, TMBR will merge with and
into Sub with Sub being the surviving company. If the merger is
completed, each issued and outstanding share of common stock,
$.10 par value per share, of TMBR not owned directly or
indirectly by the Company or TMBR or held by TMBR shareholders
who validly exercise their dissenters rights under Texas
law, will be converted into the right to receive $9.09 in cash
from the Company and 0.312166 of a share of common stock, $0.01
par value per share, of the Company (the Company Common
Stock), for a total of approximately $40.4 million in
cash and approximately 1.39 million shares of Company
Common Stock based on the outstanding shares of TMBR common
stock as of January 5, 2004. The Company currently intends
to pay the cash portion of the merger consideration to TMBR
shareholders out of funds available on hand and existing
financing facilities. The TMBR shareholders meeting is
currently scheduled for February 11, 2004.
In November 2003, we acquired three land-based
drilling rigs, a shop facility, and related equipment from Fort
Drilling LLC for $7.2 million in cash. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
In addition to the above mentioned acquisitions,
we spent approximately $3.1 million on other acquisitions
of assets and costs associated with the acquisitions completed
during 2003.
27
We believe that the current level of cash and
short-term investments, together with cash generated from
operations, should be sufficient to meet our capital needs. From
time to time, acquisition opportunities are reviewed relating to
our business. The timing, size or success of any acquisition and
the associated capital commitments are unpredictable. Over the
longer term, should further opportunities for growth requiring
capital arise, we believe we would be able to satisfy these
needs through a combination of working capital, cash generated
from operations, and either debt or equity financing. However,
there can be no assurance that such capital would be available.
Results of Operations
The following tables summarize operations by
business segment for the twelve months ended December 31,
2003 and 2002:
The following table illustrates the average
market price of natural gas and our average rigs operating for
each of the fiscal quarters in 2003 and 2002:
The average market price of natural gas improved
to $5.45 per Mcf in 2003 compared to $3.36 per Mcf in 2002,
resulting in an increase in demand for our contract drilling
services. Our average number of rigs operating increased to 188
in 2003 from 126 in 2002.
Revenues and direct operating costs increased as
a result of the increased number of operating days in 2003.
Revenue per operating day increased as a result of increased
demand for our services which resulted in additional increases
in revenues and operating income. As a result of the increased
utilization of our drilling rigs in 2003, significant capital
expenditures were incurred to modify and upgrade our existing
drilling rigs and
28
The increases in revenues and expenses for our
pressure pumping operations were attributable to improved
industry conditions, as discussed in Contract
Drilling above, and continued expansion of our pressure
pumping services into the Appalachian regions of Kentucky and
West Virginia. This expansion also resulted in increases in
selling, general and administrative expenses and depreciation in
2003 compared to 2002.
The decrease in revenues was primarily due to the
decrease in larger jobs completed in the Gulf of Mexico as
activity in the Gulf of Mexico continued to be slow despite
improved natural gas prices in 2003. The decrease in revenues
from the Gulf of Mexico was largely offset by increased demand
for our land-based drilling and completion fluids services.
Land-based drilling and completion fluids jobs typically
generate less
29
Increased revenues and operating income are
primarily attributable to increased prices received from sales
of oil and natural gas and increased production of natural gas
in 2003. Depreciation and depletion expense primarily increased
as a result of increased production of natural gas in 2003 as
compared to 2002, as well as an increase of approximately
$700,000 associated with expenses incurred to partially impair
certain oil and natural gas properties.
In 2003, Restructuring and other charges reflects
a payment received in the first quarter of 2003 of approximately
$2.5 million as settlement for contract drilling services
previously provided in Mexico by Norton Drilling Company Mexico,
Inc., a wholly-owned subsidiary of Patterson-UTI. The underlying
accounts receivable balance had been reserved as uncollectible
at the time of our acquisition of Norton Drilling Company
Mexico, Inc. in 1999. In 2002, Restructuring and other charges
reflects a $4.7 million charge due to the financial failure
of a workers compensation insurance carrier we used from
1992 until March 2001.
30
The following tables summarize operations by
business segment for the twelve months ended December 31,
2002 and 2001:
The following table illustrates the average
market price of natural gas and our average rigs operating for
each of the fiscal quarters in 2002 and 2001:
Our rig count began to decline in the third
quarter of 2001 and continued until March 2002 when our rig
count bottomed at 103 rigs (90 rigs in the U.S. and 13 rigs in
Canada). The deterioration in our rig count was primarily the
result of weakening natural gas prices through mid-February
2002. Natural gas prices then rebounded somewhat and our rig
count improved marginally during the period from March through
September 2002. In the fourth quarter of 2002, consistent with
improved natural gas prices, our rig count continued to improve
and averaged 140 rigs (132 rigs in the U.S. and 8 rigs in
Canada).
The decreased operating results in 2002 were
reflective of a significant decline in demand for our contract
drilling services as evidenced by decreases in the number of
operating days and average rig utilization. Increased
competition during 2002 for available jobs resulted in downward
pricing pressure and decreased operating revenues. Increased
operating costs per operating day were primarily attributable to
increased labor costs, including payroll expenses and
workers compensation insurance costs. Payroll expenses
increased as experienced field personnel were retained despite
the significant decline in our average rig utilization.
Management believes this strategy is beneficial as it
(1) retains experienced personnel and (2) facilitates
our response to increased demand levels as industry conditions
improve. General and administrative expenses decreased primarily
as a result of reduced incentive compensation in 2002.
Depreciation and amortization increased in 2002 primarily as a
result of (1) significant capital expenditures in 2001 and
2002 to modify and
31
The decreases in revenues and expenses for our
pressure pumping operations were primarily attributable to
industry conditions, as discussed in Contract
Drilling above. Expansion of our pressure pumping services
in 2001 and 2002 into the Appalachian regions of Kentucky and
West Virginia resulted in increased depreciation and selling,
general, and administrative expenses in 2002. Additionally,
direct operating costs per job increased in 2002 since a portion
of direct operating costs remain constant despite fluctuating
activity levels.
The decrease in revenues for our drilling and
completion fluids operations were primarily attributable to
industry conditions, as discussed in Contract
Drilling above, and the resulting 24.1% decline in the
number of jobs completed. Direct operating costs per job
increased despite reduced activity levels due to a portion of
32
Decreased revenues are attributable to lower
average prices received from sales of natural gas. Direct
operating costs declined in 2002 primarily due to the
divestiture of marginally productive wells in 2002, thus
reducing lease operating costs. Depreciation and depletion
declined in 2002 primarily due to significant decreased
depletion expense in 2002 as a result of increased commodity
prices at December 31, 2002.
The decrease in selling, general, and
administrative expense of 8.7% primarily relates to reduced
employee incentive compensation in 2002. Restructuring and other
charges reflect a $4.7 million charge taken in the second
quarter of 2002 due to the financial failure of a workers
compensation insurance carrier we used from 1992 until March
2001. Merger costs and restructuring and other charges in 2001
include an aggregate of $13.1 million for professional
fees, severance and related expenses, closing of duplicate
operational facilities and costs to amend our credit facilities
associated with the merger with UTI.
Income Taxes
Net operating losses were fully utilized in 2001
and our remaining alternative minimum tax credit of $602,000 may
be carried forward indefinitely. Other deferred tax assets
consist primarily of various allowance accounts and tax deferred
expenses expected to generate a future tax benefit of
approximately $15.8 million.
33
Our effective income tax rate of 36.7% for 2003
is primarily attributable to a federal rate of 35.0% and a state
income tax rate of 1.5%. The impact of permanent differences was
not significant in 2003. The significance of the impact of the
permanent differences of approximately 6.0% to our effective
income tax rate in 2002 was largely attributable to our reduced
2002 pretax earnings.
We record non-cash deferred federal income taxes
based primarily on the relationship between the amount of our
unused federal net operating loss carryforwards and the
temporary differences between the book basis and tax basis in
our assets. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the year in which those temporary differences are expected to be
settled. As a result of fully recognizing the benefit of our
deferred income taxes, we incur deferred income tax expense as
these benefits are utilized. We incurred deferred income tax
expense of approximately $17.3 million, $23.5 million, and
$14.6 million for 2003, 2002, and 2001, respectively.
Volatility of Oil and Natural Gas
Prices
Our revenue, profitability, and future rate of
growth are substantially dependent upon prevailing prices for
oil and natural gas, with respect to all of our operating
segments. Historically, oil and natural gas prices and markets
have been volatile. Prices are affected by market supply and
demand factors as well as actions of state and local agencies,
the United States and foreign governments, and international
cartels. All of these factors are beyond our control. Natural
gas prices fell from an average of $6.23 per Mcf in the first
quarter of 2001 to an average of $2.51 per Mcf for the same
period in 2002. During this same period, the average number of
our rigs operating dropped by approximately 50%. The average
market price of natural gas improved to $5.45 in 2003 compared
to $3.36 in 2002, resulting in an increase in demand for our
drilling services. Our average number of rigs operating
increased to 188 in 2003 from 126 in 2002. We expect oil and
natural gas prices to continue to be volatile and to affect our
financial condition and operations and ability to access sources
of capital.
The contract drilling business experienced
increased demand for drilling services in 1997, 2000 and 2001.
However, except for those periods and other occasional upturns,
generally, there have been substantially more drilling rigs
available than necessary to meet demand in most operational and
geographic segments of the North American land drilling
industry. As a result, drilling contractors have had difficulty
sustaining profit margins.
Impact of Inflation
We believe that inflation will not have a
significant near-term impact on our financial position.
Recently-Issued Accounting Standards
The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142) in June 2001. SFAS
No. 142 supersedes APB Opinion No. 17,
Intangible Assets. Under the provisions of SFAS
No. 142, which the Company adopted on January 1, 2002,
goodwill is no longer amortized but is subject to an annual
impairment test. During the year ended December 31, 2001,
goodwill amortization totaled approximately $4.7 million.
The FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations, (SFAS No. 143) in June 2001.
SFAS No. 143 addresses financial accounting requirements
for retirement obligations associated with tangible long-lived
assets. The Company adopted SFAS No. 143 in January 2003.
As a result, a charge of $469,000 (net of tax) was recorded as a
cumulative effect of a change in accounting principle during
2003. The change relates to the cost associated with the future
abandonment of oil and natural gas properties. The related
effect to basic and diluted earnings per share as a result of
the change in accounting principle was a decrease of $0.01 per
share for the twelve months ended December 31, 2003.
34
The FASB issued Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, (SFAS No. 145)
in April 2002. SFAS No. 145 amends existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS No. 145,
which the Company adopted January 1, 2003, did not have a
material impact on the Companys consolidated financial
statements.
The FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, (SFAS
No. 146) in June 2002. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146
did not have a material impact on the Companys
consolidated financial statements.
The FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation, (SFAS No. 148) in December
2002. SFAS No. 148 amends the disclosure requirements of
Statement of Financial Accounting Standards No. 123 to
require prominent disclosures in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148,
which the Company adopted on January 1, 2003, did not have
a material impact on the Companys consolidated financial
statements (see Note 12 of Notes to Consolidated Financial
Statements).
The FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS
No. 149) in April 2003. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS
No. 149 is effective for existing contracts and new
contracts entered into after June 30, 2003. The provisions
of SFAS No. 149, which the Company adopted on July 1,
2003, did not have a material impact on the Companys
consolidated financial statements.
The FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, (SFAS No. 150) in May 2003. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. The Company has no financial
instruments which are subject to SFAS No. 150.
The FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements,
Including Guarantees of Indebtedness of Others,
(FIN 45) which the Company adopted effective
January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account
for the fair value of the guarantee as a liability. FIN 45
contains exclusions to this requirement, including the exclusion
of a parents guarantee of its subsidiaries debt to a
third party. The adoption of FIN 45 did not have a material
impact on the Companys consolidated financial statements.
The FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities,
(FIN 46) which addresses the consolidation of
variable interest entities (VIEs) by business
enterprises that are the primary beneficiaries. A VIE is an
entity that does not have sufficient equity investment at risk
to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack
the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the
majority of the risks or rewards associated with the VIE. The
Company believes it has no interests in VIEs that will require
disclosure or consolidation under FIN 46.
$161.5 million derived from operations,
$10.3 million from the exercise of stock
options and warrants, and
$4.5 million from the sale of certain
property and equipment.
to make capital expenditures for the betterment
and refurbishment of our drilling rigs,
for the acquisition and procurement of drilling
equipment,
to fund capital expenditures for our pressure
pumping and drilling and completion fluids divisions, and
to fund leasehold acquisition and development and
exploration of oil and natural gas properties.
Table of Contents
Comparison of the years ended
December 31, 2003 and 2002
Years Ended December 31,
Contract Drilling
2003
2002
% Change
(Dollars in thousands)
$
639,694
$
410,295
55.9
%
$
475,224
$
318,201
49.3
%
$
4,425
$
3,987
11.0
%
$
84,379
$
80,500
4.8
%
$
75,666
$
7,607
894.7
%
68,798
45,919
49.8
%
$
9.30
$
8.94
4.0
%
$
6.91
$
6.93
(0.3
)%
343
324
5.9
%
336
323
4.0
%
188
126
49.2
%
56
%
39
%
43.6
%
$
95,175
$
68,516
38.9
%
1st
2nd
3rd
4th
Quarter
Quarter
Quarter
Quarter
$
5.91
$
5.70
$
4.88
$
5.29
176
195
192
191
$
2.51
$
3.41
$
3.20
$
4.31
117
119
127
140
Table of Contents
Years Ended December 31,
Pressure Pumping
2003
2002
% Change
(Dollars in thousands)
$
46,083
$
32,996
39.7
%
$
26,184
$
19,802
32.2
%
$
5,683
$
4,301
32.1
%
$
3,774
$
2,803
34.6
%
$
10,442
$
6,090
71.5
%
5,667
3,796
49.3
%
$
8.13
$
8.69
(6.4
)%
$
4.62
$
5.22
(11.5
)%
$
10,524
$
7,399
42.2
%
Years Ended December 31,
Drilling and Completion Fluids
2003
2002
% Change
(Dollars in thousands)
$
69,230
$
69,943
(1.0
)%
$
61,424
$
60,762
1.1
%
$
7,447
$
7,243
2.8
%
$
2,319
$
2,216
4.6
%
$
(1,960
)
$
(278
)
605.0
%
1,931
1,457
32.5
%
$
35.85
$
48.00
(25.3
)%
$
31.81
$
41.70
(23.7
)%
$
912
$
1,571
(41.9
)%
Table of Contents
Years Ended December 31,
Oil and Natural Gas Production and Exploration
2003
2002
% Change
(Dollars in thousands)
$
21,163
$
14,723
43.7
%
$
4,808
$
3,956
21.5
%
$
1,489
$
1,571
(5.2
)%
$
7,082
$
5,251
34.9
%
$
7,784
$
3,945
97.3
%
$
10,484
$
6,357
64.9
%
788
794
(0.8
)%
5,656
5,109
10.7
%
$
30.54
$
25.02
22.1
%
$
4.97
$
2.91
70.8
%
Years Ended December 31,
Corporate and Other
2003
2002
% Change
(Dollars in thousands)
$
8,665
$
9,038
(4.1
)%
$
259
$
320
(19.1
)%
$
444
$
446
(0.4
)%
$
2,174
$
538
304.1
%
$
(2,452
)
$
4,700
N/A
Table of Contents
Comparison of the years ended
December 31, 2002 and 2001
Years Ended December 31,
Contract Drilling
2002
2001
% Change
(Dollars in thousands)
$
410,295
$
839,931
(51.2
)%
$
318,201
$
487,343
(34.7
)%
$
3,987
$
5,277
(24.4
)%
$
80,500
$
72,797
10.6
%
$
7,607
$
274,514
(97.2
)%
45,919
76,871
(40.3
)%
$
8.94
$
10.93
(18.2
)%
$
6.93
$
6.34
9.3
%
324
319
1.6
%
323
302
7.0
%
126
211
(40.3
)%
39
%
70
%
(44.3
)%
$
68,516
$
150,788
(54.6
)%
1st
2nd
3rd
4th
Quarter
Quarter
Quarter
Quarter
$
2.51
$
3.41
$
3.20
$
4.31
117
119
127
140
$
6.23
$
4.41
$
2.78
$
2.70
231
248
225
140
Table of Contents
Years Ended December 31,
Pressure Pumping
2002
2001
% Change
(Dollars in thousands)
$
32,996
$
39,600
(16.7
)%
$
19,802
$
21,146
(6.4
)%
$
4,301
$
3,910
10.0
%
$
2,803
$
1,895
47.9
%
$
6,090
$
12,649
(51.9
)%
3,796
4,609
(17.6
)%
$
8.69
$
8.59
1.2
%
$
5.22
$
4.59
13.7
%
$
7,399
$
7,756
(4.6
)%
Years Ended December 31,
Drilling and Completion Fluids
2002
2001
% Change
(Dollars in thousands)
$
69,943
$
94,456
(26.0
)%
$
60,762
$
80,034
(24.1
)%
$
7,243
$
7,936
(8.7
)%
$
2,216
$
2,644
(16.2
)%
$
(278
)
$
3,842
N/A
1,457
1,920
(24.1
)%
$
48.00
$
49.20
(2.4
)%
$
41.70
$
41.68
0.0
%
$
1,571
$
4,937
(68.2
)%
Table of Contents
Years Ended December 31,
Oil and Natural Gas Production and Exploration
2002
2001
% Change
(Dollars in thousands)
$
14,723
$
15,988
(7.9
)%
$
3,956
$
5,190
(23.8
)%
$
1,571
$
1,537
2.2
%
$
5,251
$
8,505
(38.3
)%
$
3,945
$
756
421.8
%
$
6,357
$
7,956
(20.1
)%
794
739
7.4
%
5,109
4,654
9.8
%
$
25.02
$
24.88
0.6
%
$
2.91
$
4.12
(29.4
)%
Years Ended December 31,
Corporate and Other
2002
2001
% Change
(Dollars in thousands)
$
9,038
$
9,901
(8.7
)%
$
320
$
2,045
(84.4
)%
$
446
$
318
40.3
%
$
538
$
820
(34.4
)%
$
$
5,943
N/A
$
4,700
$
7,202
(34.7
)%
$
$
5,320
N/A
Years Ended December 31,
2003
2002
2001
(Dollars in thousands)
$
88,157
$
3,839
$
266,495
32,362
1,670
102,333
36.7
%
43.5
%
38.4
%
Table of Contents
Table of Contents
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
We currently have no exposure to interest rate market risk as we have no outstanding balance under our credit facility. Should we incur a balance in the future, we would have exposure associated with the floating rate of the interest charged on that balance. The revolving credit facility calls for periodic interest payments at a floating rate ranging from LIBOR plus 1.75% to 2.75%. The applicable rate above LIBOR (1.75% at
35
We conduct some business in Canadian dollars through our Canadian land-based drilling operations. The exchange rate between Canadian dollars and U.S. dollars has fluctuated over the last ten years. If the value of the Canadian dollar against the U.S. dollar weakens, revenues and earnings of our Canadian operations will be reduced when they are translated to U.S. dollars. Also, the value of our Canadian net assets in U.S. dollars may decline.
Item 8. | Financial Statements and Supplementary Data. |
Financial Statements are filed as a part of this Report at the end of Part IV hereof beginning at page F-1, Index to Consolidated Financial Statements, and are incorporated herein by this reference.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
Item 9A. | Controls and Procedures. |
As of the end of the period covered by this Annual Report on Form 10-K, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) was evaluated by our management, with the participation of our Chief Executive Officer, Cloyce A. Talbott (principal executive officer), and our Vice President, Chief Financial Officer, Secretary and Treasurer, Jonathan D. Nelson (principal financial officer). Messrs. Talbott and Nelson have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this Report, to help ensure that information we are required to disclose in reports that we file with the SEC is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods prescribed by the SEC.
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter (the quarter ended December 31, 2003) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
36
PART III
The information required by Part III is omitted from this Report because Patterson-UTI will file a definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 no later than 120 days after the end of the fiscal year covered by this Report and certain information included therein is incorporated herein by reference.
Item 10. | Directors and Executive Officers of the Registrant. |
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 11. | Executive Compensation. |
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management. |
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 13. | Certain Relationships and Related Transactions. |
The information required by this Item is incorporated herein by reference to the Proxy Statement.
Item 14. | Principal Accountant Fees and Services. |
The information required by this Item is incorporated herein by reference to the Proxy Statement.
37
PART IV
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K. |
(a)(1) Financial Statements
See Index to Consolidated Financial Statements on page F-1 of this Report.
(a)(2) Financial Statement Schedule
Schedule II Valuation and qualifying accounts is filed herewith on page S-1.
All other financial statement schedules have been omitted because they are not applicable or the information required therein is included elsewhere in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed herewith or
incorporated by reference herein.
2.1
Agreement and Plan of Merger, dated as of
May 26, 2003, by and among Patterson-UTI Energy, Inc.,
Patterson-UTI Acquisition, LLC and TMBR/Sharp Drilling, Inc.(1)
2.2
Amendment No. 1 to Agreement and Plan of
Merger, dated as of December 30, 2003, by and among
Patterson-UTI Energy, Inc., Patterson-UTI Acquisition, LLC and
TMBR/Sharp Drilling, Inc.(2)
3.1
Restated Certificate of Incorporation, as
amended.(3)
3.2
Amended and Restated Bylaws.(4)
4.1
Rights Agreement dated January 2, 1997,
between Patterson Energy, Inc. and Continental Stock
Transfer & Trust Company.(5)
4.2
Amendment to Rights Agreement dated as of
October 23, 2001.(6)
4.3
Restated Certificate of Incorporation, as amended
(See Exhibit 3.1)
4.4
Registration Rights Agreement with Bear, Stearns
and Co. Inc., dated March 25, 1994, as assigned by REMY
Capital Partners III, L.P.(4)
4.5
Patterson-UTI Energy, Inc. 1993 Stock Incentive
Plan, as amended.(7)*
4.6
Patterson-UTI Energy, Inc. Non-Employee
Directors Stock Option Plan, as amended.(8)*
4.7
Amended and Restated Patterson-UTI Energy, Inc.
2001 Long-Term Incentive Plan.(9)*
4.8
Patterson-UTI Energy, Inc. Amended and Restated
1997 Long-Term Incentive Plan.(3)*
4.9
Amended and Restated Patterson-UTI Energy, Inc.
Non-Employee Director Stock Option Plan.(3)*
4.10
Amended and Restated Patterson-UTI Energy, Inc.
1996 Employee Stock Option Plan.(10)*
4.11
1997 Stock Option Plan of DSI Industries,
Inc.(11)*
4.12
Stock Option Agreement dated July 20, 2001
between Patterson-UTI Energy, Inc. and Kenneth R. Peak (a
non-employee director of Patterson-UTI Energy, Inc.).(4)*
10.1
For additional material contracts, see
Exhibits 4.1, 4.2 and 4.4 through 4.11.
10.2
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Mark S. Siegel.*
10.3
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and A. Glenn Patterson.*
10.4
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Cloyce A. Talbott.*
10.5
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Kenneth N. Berns.*
10.6
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Jonathan D. Nelson.*
10.7
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and John E. Vollmer III.*
10.8
Model Form Operating Agreement.(12)
38
10.9
Form of Drilling Bid Proposal and Footage
Drilling Contract.(12)
10.10
Form of Turnkey Drilling Agreement.(12)
14.1
Patterson-UTI Energy, Inc. Code of Business
Conduct and Ethics for Senior Financial Executives.
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Accountants
PricewaterhouseCoopers LLP.
23.2
Consent of Independent Petroleum
Engineer M. Brian Wallace, P.E.
31.1
Certification of Chief Executive Officer pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2
Certification of Chief Financial Officer pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1
Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K of TMBR/Sharp Drilling, Inc. filed on May 27, 2003. | |
(2) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed on December 31, 2003. | |
(3) | Incorporated herein by reference to Item 6, Exhibits and Reports on Form 8-K to Form 10-Q for the quarterly period ended June 30, 2003, filed on July 28, 2003. | |
(4) | Incorporated herein by reference to Item 14, Exhibits, Financial Statement Schedules and Reports on Form 8-K to Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed on March 19, 2002. | |
(5) | Incorporated herein by reference to Item 2, Exhibits to Registration Statement on Form 8-A filed on January 14, 1997. | |
(6) | Incorporated herein by reference to Item 6, Exhibits and Reports on Form 8-K to Form 10-Q for the quarterly period ended September 30, 2001, filed on October 31, 2001. | |
(7) | Incorporated herein by reference to Item 8, Exhibits to Registration Statement on Form S-8 (File No. 333-47917) filed on March 13, 1998. | |
(8) | Incorporated herein by reference to Item 8, Exhibits to Registration Statement on Form S-8 (File No. 333-39471) filed on November 4, 1997. | |
(9) | Incorporated herein by reference to Item 8, Exhibits to Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (File No. 333-60470) filed on November 27, 2002. |
(10) | Incorporated herein by reference to Item 8, Exhibits to Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (File No. 333-60466) filed on July 25, 2001. |
(11) | Incorporated herein by reference to Item 8, Exhibits to Post-Effective Amendment No. 1 to Registration Statement on Form S-8 (File No. 333-60470) filed on July 25, 2001. |
(12) | Incorporated herein by reference to Item 27, Exhibits to Registration Statement on Form SB-2 (File No. 33-68058-FW) filed on August 30, 1993. |
* | Management Contract or Compensatory Plan identified as required by Item 15(a)(3) of Form 10-K. |
(b) Reports on Form 8-K.
On December 31, 2003, the Company filed a Current Report on Form 8-K, dated December 30, 2003, reporting the amendment to its Agreement and Plan of Merger with TMBR/Sharp Drilling, Inc. to extend the date under which the parties have certain rights of termination to February 14, 2004 from December 31, 2003.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
|
||||
Report of Independent Auditors;
PricewaterhouseCoopers LLP
|
F-2 | |||
Consolidated Financial Statements:
|
||||
Consolidated Balance Sheets as of
December 31, 2003 and 2002
|
F-3 | |||
Consolidated Statements of Income for the years
ended December 31, 2003, 2002, and 2001
|
F-4 | |||
Consolidated Statements of Changes In
Stockholders Equity for the years ended December 31,
2003, 2002, and 2001
|
F-5 | |||
Consolidated Statements of Changes In Cash Flows
for the years ended December 31, 2003, 2002, and 2001
|
F-6 | |||
Notes to Consolidated Financial Statements
|
F-8 |
F-1
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Patterson-UTI
Energy, Inc. and its subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule on
page S-1 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial schedule based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Notes 1 and 5 to the
consolidated financial statements, in accordance with Statement
of Financial Accounting Standards No. 142 Goodwill
and Other Intangible Assets beginning in 2002 the Company
no longer amortizes goodwill.
PricewaterhouseCoopers LLP
Houston, Texas
F-2
PATTERSON-UTI ENERGY, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
Table of Contents
Table of Contents
PATTERSON-UTI ENERGY, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
2003
2002
2001
(In thousands, except
per share data)
$
639,694
$
410,295
$
839,931
46,083
32,996
39,600
69,230
69,943
94,456
19,058
12,738
13,842
2,105
1,985
2,146
776,170
527,957
989,975
475,224
318,201
487,343
26,184
19,802
21,146
61,424
60,762
80,034
4,276
3,672
4,334
532
284
856
97,998
91,216
86,159
27,709
26,140
28,561
259
320
2,045
5,943
(2,452
)
4,700
7,202
(2,174
)
(538
)
(820
)
688,980
524,559
722,803
87,190
3,398
267,172
1,116
1,110
2,080
(292
)
(532
)
(3,142
)
143
(137
)
385
967
441
(677
)
88,157
3,839
266,495
15,088
(21,878
)
87,773
17,274
23,548
14,560
32,362
1,670
102,333
55,795
2,169
164,162
(469
)
$
55,326
$
2,169
$
164,162
$
0.69
$
0.03
$
2.15
(0.01
)
$
0.68
$
0.03
$
2.15
$
0.68
$
0.03
$
2.07
(0.01
)
$
0.67
$
0.03
$
2.07
80,636
78,705
76,407
82,286
81,252
79,197
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PATTERSON-UTI ENERGY, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY
Common stock
Accumulated
Additional
other
Number
Paid-in
Retained
Comprehensive
Treasury
of Shares
Amount
Capital
Earnings
Income (loss)
Stock
Total
(In thousands)
76,250
$
763
$
397,489
$
94,672
$
30
$
(11,655
)
$
481,299
1,260
12
31,405
31,417
2,600
2,600
121
1
1,819
1,820
832
8
4,237
4,245
3,925
3,925
(2,326
)
(2,326
)
164,162
164,162
78,463
784
441,475
258,834
(2,296
)
(11,655
)
687,142
650
7
16,933
16,940
2,464
25
15,714
15,739
15,079
15,079
457
457
30
30
2,169
2,169
81,577
816
489,201
261,003
(1,809
)
(11,655
)
737,556
906
9
10,277
10,286
6,540
6,540
8,773
8,773
1,590
1,590
55,326
55,326
82,483
$
825
$
506,018
$
316,329
$
8,554
$
(11,655
)
$
820,071
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PATTERSON-UTI ENERGY, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN CASH
FLOWS
Years ended December 31,
2003
2002
2001
(In thousands)
$
55,326
$
2,169
$
164,162
97,998
91,216
86,159
259
320
2,045
17,274
23,548
14,560
6,540
15,079
3,925
(2,174
)
(538
)
(648
)
(55,791
)
34,565
6,648
10,919
(23,216
)
796
(196
)
(222
)
(355
)
12,322
(11,079
)
(33,174
)
14,026
(771
)
12,430
5,015
362
(2,542
)
161,518
131,433
254,006
(40,832
)
(40,546
)
(117,095
)
(83,843
)
(172,850
)
4,548
1,813
742
(17,659
)
34
1,097
(1,101
)
(153,345
)
(98,592
)
(213,755
)
9,760
(89,176
)
10,286
15,739
6,065
10,286
15,739
(73,351
)
18,459
48,580
(33,100
)
(130
)
(10
)
(232
)
82,154
33,584
66,916
$
100,483
$
82,154
$
33,584
$
(292
)
$
(532
)
$
(3,142
)
2,730
13,492
(81,802
)
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (Continued)
Non-cash investing and financing activities:
During March 2002, the Company acquired five SCR electric land-based drilling rigs through the acquisition of Odin Drilling, Inc., for a purchase price of $16.9 million. The purchase price consisted of 650,000 shares of common stock valued at $26.06 per share. A deferred tax liability of $4.1 million was recorded as a result of the transaction. The transaction was accounted for as an acquisition of assets and the purchase price was allocated among the assets acquired based on their estimated fair market values.
During 2001 the Company acquired Jones Drilling Corporation and certain assets of three other entities affiliated with Jones Drilling Corporation for $33.0 million, drilling rigs and related equipment from Cleere Drilling Company for an aggregate purchase price of $25.8 million and six drilling rigs through three separate transactions for $15.7 million. Of the $74.6 million, approximately $40.5 million was paid in cash as follows:
(in thousands) | ||||||
|
||||||
Purchase price
|
$ | 74,563 | ||||
Less non-cash items:
|
||||||
Common stock issued
|
(31,417 | ) | ||||
Warrants issued
|
(2,600 | ) | ||||
|
||||||
Total cash paid
|
$ | 40,546 | ||||
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
PATTERSON-UTI ENERGY, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Description of
business
Patterson-UTI
Energy, Inc. and its wholly-owned subsidiaries, (collectively
referred to herein as Patterson-UTI or the
Company) is a leading provider of onshore contract
drilling services to major and independent oil and natural gas
operators in Texas, New Mexico, Oklahoma, Louisiana,
Mississippi, Colorado, Utah, Wyoming, and Western Canada. The
Company owns 343 drilling rigs. The Company provides pressure
pumping services to oil and natural gas operators primarily in
the Appalachian Basin. The Company provides drilling fluids,
completion fluids, and related services to oil and natural gas
operators in West Texas, Southeast New Mexico, South Texas, East
Texas, Oklahoma, the Gulf Coast regions of Texas and Louisiana,
and the Gulf of Mexico. The Company is also engaged in the
development, exploration, acquisition, and production of oil and
natural gas. The Companys oil and natural gas business
operates primarily in producing regions of West Texas, Southeast
New Mexico, South Texas and Mississippi.
Basis of
presentation
The
consolidated financial statements of Patterson-UTI Energy, Inc.
and its wholly-owned subsidiaries have been prepared to give
retroactive effect to the merger between Patterson Energy, Inc.
(Patterson) and UTI Energy Corp. (UTI)
on May 8, 2001. The transaction was treated as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and accounted for as
a pooling of interests for financial accounting purposes.
Principles of
consolidation
The
consolidated financial statements include the accounts of
Patterson-UTI and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Management
estimates
The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue
recognition
Revenues are
recognized when services are performed, except for revenues
earned under turnkey contract drilling arrangements which are
recognized using the completed contract method of accounting, as
described below. The Company follows the
percentage-of-completion method of accounting for footage
contract drilling arrangements. Under this method, drilling
revenues and costs related to a well in progress are recognized
proportionately over the time it takes to drill the well.
Percentage-of-completion is determined based upon the amount of
expenses incurred through the measurement date as compared to
total estimated expenses to be incurred drilling the well. Under
the percentage-of-completion method, management estimates are
relied upon in the determination of the total estimated expenses
to be incurred drilling the well. Due to the nature of turnkey
contract drilling arrangements and risks therein, the Company
follows the completed contract method of accounting for such
arrangements. Under this method, all drilling advances and costs
related to a well in progress are deferred and recognized as
revenues and expenses in the period the well is completed.
Provisions for losses on incomplete or in-process wells are made
when estimated total costs are expected to exceed estimated
total revenues.
Inventories
Inventories consist primarily of chemical products to be used in
conjunction with the Companys drilling and completion
fluids activities. The inventories are stated at the lower of
cost or market, determined by the first-in, first-out method.
F-8
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Property and
equipment
Property and
equipment is carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the
estimated useful lives. The method of depreciation does not
change when equipment becomes idle. The estimated useful lives
are defined below.
Oil and natural gas
properties
Oil and natural
gas properties are accounted for using the successful efforts
method of accounting. Under the successful efforts method of
accounting, exploration costs which result directly in the
discovery of oil and natural gas reserves and all development
costs are capitalized to the appropriate well. Exploration costs
which do not result directly in discovering oil and natural gas
reserves are charged to expense when such determinations are
made. In accordance with Statement of Financial Accounting
Standards No. 19, Financial Accounting and Reporting
by Oil and Gas Producing Companies, (SFAS
No. 19) costs of exploratory wells are
initially capitalized to wells in progress until the outcome of
the drilling is known. We review wells in progress quarterly to
determine the related reserve classification. If the reserve
classification is uncertain after one year following the
completion of drilling, we consider the costs of the well to be
impaired and recognize the costs as expense. Geological and
geophysical costs, including seismic costs, and costs to carry
and retain undeveloped properties are charged to expense when
incurred. The capitalized costs of both developmental and
successful exploratory type wells, consisting of lease and well
equipment, lease acquisition costs, and intangible development
costs, are depreciated, depleted, and amortized on the
units-of-production method, based on petroleum engineer
estimates of proved oil and natural gas reserves of each
respective field. The Company reviews its proved oil and natural
gas properties for impairment when an event occurs such as
downward revisions in reserve estimates or decreases in oil and
natural gas prices. Proved properties are grouped by field and
undiscounted cash flow estimates are provided by our reserve
engineer. If the net book value of a field exceeds its
undiscounted cash flow estimate, impairment expense is measured
and recognized as the difference between its net book value and
discounted cash flow. Unproved oil and natural gas properties
are reviewed quarterly to determine impairment. The
Companys intent to drill, lease expiration, and
abandonment of area are considered. Assessment of impairment is
made on a lease-by-lease basis. If an unproved property is
determined to be impaired, then costs related to that property
are expensed. Impairment expense is included in depreciation,
depletion, and amortization in the accompanying financial
statements.
Intangible
assets
Intangible assets
consist primarily of goodwill arising from business combinations
(see Note 5). Intangible assets other than goodwill are
amortized on a straight line basis over their estimated useful
lives. Covenants not to compete are amortized over their
underlying contractual lives of five years. Prior to 2002,
goodwill, representing the excess of the purchase price over the
estimated fair value of the net assets of the acquired business,
was amortized over the period of expected benefit of
15 years. However, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
(SFAS No. 142) which requires that the Company
cease amortization of all intangible assets having indefinite
useful economic lives. Such assets, including goodwill, are not
to be amortized until their lives are determined to be finite,
however, a recognized intangible asset with an indefinite useful
life should be tested for impairment annually or on an interim
basis if events or circumstances indicate that the fair value of
the asset has decreased below its carrying value. At
December 31, 2003, the Company evaluated its goodwill and
other intangible assets and determined that fair value had not
decreased below carrying value and no adjustment to impair
goodwill and other intangible assets was necessary in accordance
with SFAS No. 142. With respect to the Companys
drilling and completion fluids business, the determination
F-9
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
that no impairment existed was based on the
Companys expectations of improvement in the results of
operations for that business segment. If the expected
improvement in results does not occur, all or part of the
goodwill and other intangible assets of approximately
$10 million associated with that business segment may be
determined to be impaired.
The following table summarizes depreciation,
depletion, amortization, and impairment expense for 2003, 2002
and 2001 (in millions):
Maintenance and
repairs
Maintenance and
repairs are charged to expense when incurred. Renewals and
betterments which extend the life or improve existing properties
are capitalized.
Retirements
Upon disposition or retirement of property and equipment, the
cost and related accumulated depreciation are removed and any
resulting gain or loss is credited or charged to operations.
Investments in equity
securities
In accordance
with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, (SFAS No. 115) investments in
Available-for-Sale equity securities are recorded at fair value.
Unrealized gains and losses on such investments, net of tax, are
included in accumulated other comprehensive income (loss) in our
consolidated balance sheets as of December 31, 2003 and
2002, and are shown as a separate component of
stockholders equity (see Notes 3 and 6).
Earnings per
share
The Company provides
a dual presentation of its earnings per share; Basic Earnings
per Share (Basic EPS) and Diluted Earnings per Share
(Diluted EPS) in its Consolidated Statements of
Income. Basic EPS is computed using the weighted average number
of shares outstanding during the year. Diluted EPS includes
common stock equivalents which are dilutive to earnings per
share. For the years ended December 31, 2003, 2002, and
2001, dilutive securities, consisting of certain stock options
and warrants (See Note 12) included in the calculation of
Diluted EPS were 1.7 million shares, 2.5 million
shares, and 2.8 million shares, respectively. At
December 31, 2003, 2002, and 2001, there were potentially
dilutive securities of 930,000, 328,500, and 490,000,
respectively, excluded from the calculation of Diluted EPS as
their exercise prices were greater than the average market price
for the respective year.
Income
taxes
The asset and
liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized
for operating loss and tax credit carryforwards and for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless it
is more likely than not that such assets will be realized.
F-10
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Stock based
compensation
The Company
grants stock options to employees and non-employee directors
under stock-based incentive compensation plans, (the
Plans). The Company accounts for all stock-based
employee compensation plans under the recognition and
measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, (APB
No. 25) and related interpretations. Under APB
No. 25, no stock-based employee compensation cost is
reflected in net income, as all options granted under those
plans had an exercise price equal to or in excess of the market
value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and
earnings per share as if the company had applied the fair value
recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, (SFAS
No. 123) to stock-based employee compensation:
The FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based
Compensation, (SFAS No. 148) in December
2002. SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The provisions of SFAS
No. 148, which the Company adopted on January 1, 2003,
did not have a material impact on the Companys
consolidated financial statements (see Note 12).
Statement of cash
flows
For purposes of
reporting cash flows, cash and cash equivalents include cash on
deposit and unrestricted certificates of deposit with original
maturities of 90 days or less.
Recently Issued Accounting
Standards
The Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, (SFAS
No. 142) in June 2001. SFAS No. 142 supersedes
APB Opinion No. 17, Intangible Assets. Under
the provisions of SFAS No. 142, which the Company adopted
on January 1, 2002, goodwill is no longer amortized but is
subject to an annual impairment test. During the year ended
December 31, 2001, goodwill amortization totaled
approximately $4.7 million.
The FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement
Obligations, (SFAS No. 143) in June 2001.
SFAS No. 143 addresses financial accounting requirements
for retirement obligations associated with tangible long-lived
assets. The Company adopted SFAS No. 143 in January 2003.
As a result, a charge of $469,000 (net of tax) was recorded as a
cumulative effect of a change in accounting principle during
2003. The change relates to the cost associated with the
F-11
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
future abandonment of oil and natural gas
properties. The related effect to basic and diluted earnings per
share as a result of the change in accounting principle was a
decrease of $0.01 per share for the twelve months ended
December 31, 2003.
The FASB issued Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, (SFAS No. 145)
in April 2002. SFAS No. 145 amends existing
authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of SFAS No. 145,
which the Company adopted January 1, 2003, did not have a
material impact on the Companys consolidated financial
statements.
The FASB issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, (SFAS
No. 146) in June 2002. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146
did not have a material impact on the Companys
consolidated financial statements.
The FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS
No. 149) in April 2003. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS
No. 149 is effective for existing contracts and new
contracts entered into after June 30, 2003. The provisions
of SFAS No. 149, which the Company adopted on July 1,
2003, did not have a material impact on the Companys
consolidated financial statements.
The FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, (SFAS No. 150) in May 2003. SFAS
No. 150 establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. The Company has no financial
instruments which are subject to SFAS No. 150.
The FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements,
Including Guarantees of Indebtedness of Others,
(FIN 45) which the Company adopted effective
January 1, 2003. FIN 45 requires that upon issuance of
certain types of guarantees, a guarantor recognize and account
for the fair value of the guarantee as a liability. FIN 45
contains exclusions to this requirement, including the exclusion
of a parents guarantee of its subsidiaries debt to a
third party. The adoption of FIN 45 did not have a material
impact on the Companys consolidated financial statements.
The FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities,
(FIN 46) which addresses the consolidation of
variable interest entities (VIEs) by business
enterprises that are the primary beneficiaries. A VIE is an
entity that does not have sufficient equity investment at risk
to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack
the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the
majority of the risks or rewards associated with the VIE. The
Company believes it has no interests in VIEs that will require
disclosure or consolidation under FIN 46.
Reclassifications
Certain reclassifications have been made to the 2002 and 2001
consolidated financial statements in order for them to conform
with the 2003 presentation.
2. Mergers and
Acquisitions
TMBR/Sharp Drilling,
Inc.
On May 26, 2003,
the Company, Patterson-UTI Acquisition, LLC, a wholly-owned
subsidiary of the Company (Sub), and TMBR/Sharp
Drilling, Inc., a Texas corporation (TMBR), entered
into an Agreement and Plan of Merger, as amended by Amendment
No. 1 to Agreement and Plan of Merger dated as of
December 30, 2003, by and among the same parties (the
Merger
F-12
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Agreement), pursuant to which, upon the
satisfaction and completion of the conditions to the merger
contained in the Merger Agreement, including approval of the
Merger Agreement by at least two-thirds of the shareholders of
TMBR, TMBR will merge with and into Sub with Sub being the
surviving company. If the merger is completed, each issued and
outstanding share of common stock, $.10 par value per share, of
TMBR not owned directly or indirectly by the Company or TMBR or
held by TMBR shareholders who validly exercise their
dissenters rights under Texas law, will be converted into
the right to receive $9.09 in cash from the Company and 0.312166
of a share of common stock, $0.01 par value per share, of the
Company (the Company Common Stock), for a total of
approximately $40.4 million in cash and approximately
1.39 million shares of Company Common Stock based on the
outstanding shares of TMBR common stock as of January 5,
2004. The Company currently intends to pay the cash portion of
the merger consideration to TMBR shareholders out of funds
available on hand and existing financing facilities. The TMBR
shareholders meeting is scheduled for February 11,
2004.
SEI Drilling
Company
On
January 31, 2003, the Company acquired four land-based
drilling rigs and related equipment from SEI Drilling Company
for $6.0 million in cash. The transaction was accounted for
as an acquisition of assets and the purchase price was allocated
among the assets acquired based on their estimated fair market
values.
Mesa Drilling,
Inc.
On February 7,
2003, the Company acquired three land-based drilling rigs, a
yard, and other related equipment from Mesa Drilling, Inc. and
related entities for $10.5 million in cash. The transaction
was accounted for as an acquisition of assets and the purchase
price was allocated among the assets acquired based on their
estimated fair market values.
Other
On
April 28, 2003, the Company acquired two land-based
drilling rigs for $3.9 million in cash. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
Hexadyne Drilling
Corporation
On
May 30, 2003, the Company acquired seven land-based
drilling rigs and related equipment from Hexadyne Drilling
Corporation for $10.1 million in cash. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
Fort Drilling
LLC
On November 17,
2003, the Company acquired three land-based drilling rigs, a
shop facility, and related equipment from Fort Drilling LLC for
$7.2 million in cash. The transaction was accounted for as
an acquisition of assets and the purchase price was allocated
among the assets acquired based on their estimated fair market
values.
Other
In
addition to the above mentioned acquisitions, the Company spent
approximately $3.1 million on other acquisitions of assets
and costs associated with the acquisitions completed during 2003.
Odin Drilling,
Inc.
On March 21,
2002, the Company acquired five SCR electric land-based drilling
rigs through the acquisition of Odin Drilling, Inc., for a
purchase price of $16.9 million. The purchase price
consisted of 650,000 shares of common stock valued at
$26.06 per share. A deferred tax liability of $4.1 million
was recorded as a result of the transaction. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
Cleere Drilling
Company
On
December 21, 2001, the Company acquired 17 drilling
rigs and related equipment from Cleere Drilling Company for an
aggregate purchase price of $25.8 million. The purchase
price
F-13
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
consisted of $13.5 million cash plus
450,000 shares of its common stock and warrants to acquire
an additional 325,000 shares of common stock at an exercise
price of $26.75 per share. The common stock was recorded at
$21.55 per share and the warrants were valued at $8.00 per
underlying share of the Companys common stock using the
Black-Scholes option valuation model. The transaction was
accounted for as an acquisition of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
UTI Energy
Corp.
On February 4,
2001, Patterson entered into an Agreement and Plan of Merger
with UTI providing for the merger of the two entities. On
May 8, 2001, the stockholders of each company approved the
merger and the merger was consummated. Each outstanding share of
UTI common stock was converted into one share of Patterson
common stock and each option or warrant then outstanding
representing the right to receive UTI common stock was converted
into the right to purchase Patterson-UTI common stock on an
equivalent basis. A total of 37,782,135 shares of common
stock was issued pursuant to the merger and an additional
3,621,079 shares were reserved for issuance under the then
outstanding UTI stock option plans. Additionally, the
stockholders of Patterson approved an increase in the authorized
shares of common stock from 50 million to 200 million
and a name change to Patterson-UTI Energy, Inc.
Pursuant to the terms of the Agreement and Plan of Merger and
resolutions adopted by the Companys Board of Directors,
the Company has agreed to indemnify its directors and officers
and former directors and officers of UTI for acts or omissions
occurring at or prior to the merger with UTI or for certain
liabilities that might occur as a result of the merger with UTI.
The Company incurred $13.1 million in
expenses related to the merger. The expenses consisted of
$5.9 million in merger costs which were primarily related
to professional fees paid to investment banking firms,
attorneys, accountants and commercial printers for their
professional services rendered and $7.2 million in restructuring
costs and related charges incurred as a result of the following:
The merger was treated as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of
1986, as amended, and was accounted for as a pooling of
interests for financial accounting purposes. The consolidated
financial statements give retroactive effect to the merger.
Certain adjustments were made in those periods to conform the
previous accounting policies of UTI with those of Patterson.
Jones Drilling
Corporation
On
January 5, 2001, the Company acquired assets consisting of
21 drilling rigs and related equipment and approximately
$2.3 million of net working capital from Jones Drilling
Corporation and three of its affiliated entities. The purchase
price of $33.2 million consisted of 810,070 shares of the
Companys common stock valued at $26.8125 per share and
$11.3 million cash plus approximately $240,000 in
transaction costs. The transaction was accounted for as a
business combination and the purchase price, net of working
capital acquired, was allocated among the assets acquired based
on their estimated fair market values.
Other
In
January 2001, the Company acquired six drilling rigs, through
three separate transactions, for approximately
$15.7 million cash in aggregate. The transactions were
accounted for as acquisitions of assets and the purchase price
was allocated among the assets acquired based on their estimated
fair market values.
F-14
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table illustrates the
Companys comprehensive income including the effects of
foreign currency translation adjustments for the years ended
December 31, 2003, 2002, and 2001 (in thousands):
Property and equipment consisted of the following
at December 31, 2003 and 2002 (in thousands):
Intangible assets consist primarily of goodwill
arising from business combinations. In accordance with SFAS
No. 142, all of the Companys intangible assets that
have definite lives are being amortized on a straight-line basis
over their estimated useful lives and goodwill is evaluated to
determine if fair value of the asset has decreased below its
carrying value. At December 31, 2003, the Company evaluated
its goodwill and other intangible assets and determined no
adjustment to impair goodwill and other intangible assets was
necessary. Amortization expense of approximately
$4.7 million recognized during 2001, would not have been
recognized under SFAS No. 142. Goodwill and other
intangible assets as of December 31, 2003 and 2002 are as
follows (in thousands):
F-15
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The amount of goodwill and other intangible
assets as of December 31, 2003 and 2002 assigned to the
contract drilling and drilling and completion fluids operating
segments, the only operating segments that had intangible assets
for such periods, is as follows (in thousands):
Change in the net carrying amount of goodwill for
the years ended December 31, 2003 and 2002 is as follows (in
thousands):
Amortization expense consists of the following
(in thousands):
Our weighted average amortization period for
other intangible assets is approximately 13 years.
Estimated amortization expense for these assets is approximately
$97,000 for each of the five succeeding fiscal years.
F-16
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Had SFAS No. 142 been in effect prior to
January 1, 2002, our reported net income and net income per
share would have been as follows (in thousands, except per share
amounts):
In 2002, the Company purchased 1,058,673 shares
of the common stock of TMBR, $.10 par value per share, for an
aggregate cash purchase price of $17.6 million, or $16.60 per
share, and approximately $84,000 of additional costs incurred to
acquire the shares. At December 31, 2003, the Company owned
approximately 19.2% of the outstanding shares of TMBR.
The accounting treatment of shares representing
the Companys investment in the common stock of TMBR has
been affected by the Companys ability to sell shares
within one year. As of December 31, 2003, the Company no
longer has restrictions on its ability to sell the TMBR shares
within one year. Previously, the restricted shares were
reflected in the balance sheet at cost under the cost method of
accounting in accordance with Accounting Principles Board
Opinion No. 18, The Equity Method of Accounting for
Investment in Common Stock. None of the TMBR shares are
restricted from sale within one year. Accordingly, all shares
are classified as Available-for-Sale and are reflected in the
balance sheet at fair value in accordance with SFAS
No. 115. Fair value is determined from publicly quoted
market prices as of the balance sheet date. In accordance with
SFAS No. 115, unrealized gains and losses recorded as a
result of the adjustment to fair value are reflected directly in
stockholders equity.
F-17
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table summarizes the Companys
unrealized gain on its investment in equity securities as of
December 31, 2003 and 2002 (in thousands, except share
amounts):
Accrued expenses consisted of the following at
December 31, 2003 and 2002 (in thousands):
The following table summarizes activity in
restructuring and merger related accrual accounts for the years
ended December 31, 2003 and 2002, respectively (in
thousands):
SFAS No. 143 requires that we record a
liability for the estimated costs to be incurred in connection
with the abandonment of oil and natural gas properties in the
future. We recorded a liability of approximately
F-18
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
$1.1 million in the first quarter of 2003
upon initial adoption of SFAS No. 143. The following table
describes the changes to our asset retirement obligations during
2003:
Had SFAS No. 143 been in effect as of
January 1, 2001, the impact on the Companys results
of operations would have been immaterial for the years ended
December 31, 2002, and 2001 and the asset retirement
obligation would have been $1.1 million, $1.0 million
and $959,000 as of December 31, 2002 and 2001 and
January 1, 2001, respectively. In addition, the cumulative
effect of this change in accounting principle of approximately
$469,000, net of tax, was recorded in the first quarter of 2003.
There were no amounts outstanding under the
Companys revolving credit facility at December 31,
2003 or December 31, 2002. The maximum borrowings under
this revolving credit facility were increased from
$90.0 million to $100.0 million in June 2001 and the
term of the facility was also extended to June 2005. A fee of
.375% per annum is assessed on the unused facility amount. The
amount used for letters of credit decreases the borrowing base
of the facility on a dollar-for-dollar basis. The revolving
credit facility calls for periodic interest payments at a
floating rate ranging from LIBOR plus 1.75% to 2.75%. The
applicable rate above LIBOR (1.75% at December 31, 2003) is
based upon our trailing twelve-month earnings before interest
expense, income taxes and depreciation, depletion and
amortization. Assets of the Company secure the facility. The
facility has restrictions customary in financial instruments of
this type including restrictions on certain investments,
acquisitions and loans. The facility has no financial covenants
unless availability under the facility is less than
$20.0 million. The terms of the facility limit the payment
of dividends without the prior written consent of the lenders.
During 2001, the Company repaid
$89.2 million under its existing credit facilities and
other term obligations. The Company incurred expenses of
$448,000 as a result of prepayment penalties and $942,000
related to deferred financing costs which were unamortized at
the time the debt was extinguished. The penalties and deferred
financing costs were included in restructuring and other charges
in 2001.
The Company maintains letters of credit in the
aggregate amount of $37.0 million for the benefit of
various insurance companies as collateral for retrospective
premiums and retained losses which may become payable under the
terms of the underlying insurance contracts. These letters of
credit expire variously during each calendar year. No amounts
have been drawn under the letters of credit.
Contingencies
The Companys contract services and oil and natural gas
exploration and production operations are subject to inherent
risks, including blowouts, cratering, fire, and explosions which
could result in personal injury or death, suspended drilling
operations, damage to, or destruction of equipment, damage to
producing formations, and pollution or other environmental
hazards.
As a protection against these hazards, the
Company maintains general liability insurance coverage of
$2.0 million per occurrence with $4.0 million of
aggregate coverage and excess liability and umbrella coverages
up to $50.0 million per occurrence and in the aggregate. We
maintain a $1.0 million per occurrence deductible on our
general liability insurance coverage and a $750,000 per
occurrence deductible on our workers compensation
insurance coverage. These levels of self-insurance expose us to
increased operating costs and risks.
F-19
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Net income for the year ended December 31,
2002 includes a charge of $4.7 million related to the
financial failure in 2002 of a workers compensation
insurance carrier that had provided coverage for the Company in
prior years.
The Company believes it is adequately insured for
public liability and property damage to others with respect to
its operations. However, such insurance may not be sufficient to
protect the Company against liability for all consequences of
well disasters, extensive fire damage, or damage to the
environment. The Company also carries insurance to cover
physical damage to, or loss of, its rigs; however, it does not
carry insurance against loss of earnings resulting from such
damage or loss. The Companys lender who has a security
interest in the drilling rigs is named as loss payee on the
physical damage insurance on such rigs.
Westfort Energy LTD and Westfort Energy
(US) LTD f/k/a Canadian Delta, Inc. (Westfort),
filed a lawsuit against two Patterson-UTI subsidiaries,
Patterson Petroleum LP, and Patterson-UTI Drilling Company LP,
in the Circuit Court, Rankin County, Mississippi, Case
No. 2002-18. The lawsuit relates to a letter agreement
entered into in July 2000 between Patterson Petroleum LP and
Westfort concerning the drilling of a daywork well in
Mississippi. This lawsuit was filed by Westfort after Patterson
Petroleum LP made demand on Westfort for payment of the contract
drilling services.
The Westfort lawsuit has been dismissed without
prejudice. Westfort filed for bankruptcy in May of 2003. The
Company continues to assert claims against Westfort including
the monies owed Patterson Petroleum LP under the letter
agreement in the amount of approximately $5,075,000. Amounts
deemed uncollectible have been reserved. The Company believes
that it is remote that the outcome of this matter will have a
material adverse effect on the Companys financial
condition and results of operations.
In this lawsuit, Westfort alleged breach of
contract, fraud, and negligence causes of action. Westfort
sought alleged monetary damages, the return of shares of
Westfort stock, unspecified damages from alleged lost profits,
lost use of income stream, and additional operating expenses,
along with alleged punitive damages to be determined by the
jury, but not less than 25% of the Companys net worth. The
Company intends to vigorously contest these claims if reasserted
by Westfort.
The Company is also party to various legal
proceedings arising in the normal course of its business. The
Company does not believe that the outcome of these proceedings,
either individually or in the aggregate, will have a material
adverse effect on its financial condition.
Other Matters
Effective January 29, 2004, the
Company entered into Change in Control Agreements with its
Chairman of the Board, Chief Executive Officer, President and
Chief Operating Officer, two Senior Vice Presidents and Chief
Financial Officer (the Key Employees). Each Change
in Control Agreement generally has a three-year term with
automatic twelve month renewals unless the Company notifies the
Key Employee at least ninety days before the end of such renewal
period that the term will not be extended. If a change in
control of the Company occurs during the term of the agreement
and the Key Employees employment is terminated (i) by
the Company other than for cause or other than automatically as
a result of death, disability or retirement or (ii) by the
Key Employee for good reason (as those terms are defined in the
Change in Control Agreements), then the Key Employee shall be
entitled to, among other things,
F-20
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Each Change in Control Agreement provides the Key
Employee with a full gross-up payment for any excise taxes
imposed on payments and benefits received under the Change in
Control Agreements or otherwise, including other taxes that may
be imposed as a result of the gross-up payment.
During March 2002, the Company issued 650,000
shares of its common stock as consideration for the acquisition
of Odin Drilling, Inc. (see Note 2). The common stock was
valued at $26.06 per share, its fair market value on the date
the terms of the transaction were agreed upon.
During December 2001, the Company issued 450,000
shares of its common stock and warrants to acquire an additional
325,000 shares at an exercise price of $26.75 per share, as
partial consideration for the acquisition of 17 drilling rigs
and related equipment from Cleere Drilling Company. The common
stock was recorded at $21.55 per share and the warrants were
valued at $8.00 per underlying share of common stock using the
Black-Scholes option valuation model (see Note 2).
On May 8, 2001, pursuant to the merger
between Patterson and UTI, the Companys stockholders
approved an amendment to the Companys charter increasing
the number of authorized shares of the Companys common
stock to 200 million.
During January 2001, the Company issued 810,070
shares of its common stock as partial consideration for the
acquisition of Jones Drilling Corporation and certain assets
owned by its related entities (see Note 2). The common
stock was valued at $26.8125 per share, its fair market value on
the date of the transaction.
Employee and Non-Employee Director Stock
Option Plans
The Company
has seven stock option plans of which three have shares
available for grant. The remaining four plans are dormant and
the Company does not intend to grant any further options under
such plans. At December 31, 2003, the Companys stock
option plans were as follows:
F-21
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Companys active plans are the 1997
Plan, the 2001 Plan and the Non-Employee Director Plan. A
summary of each of these plans is set forth below.
The terms and conditions of the 2001 Plan are
identical to the 1997 Plan except as follows:
Of the four dormant plans administered by the
Company, two of the plans (the 1993 Plan and the 1995
Non-Employee Director Plan) were plans of the Company prior to
the merger of Patterson and UTI and two of the plans (the DSI
Plan and the 1996 Plan) were plans of UTI.
1995 Non-Employee Director
Plan
Options granted under
the 1995 Non-Employee Director Plan vest on the first
anniversary of the option grant. 1995 Non-Employee Director Plan
options have five year terms.
F-22
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
All options were granted with an exercise price
equal to the fair market value of the Companys common
stock at the time of grant.
DSI Plan
The options granted under the DSI plan typically vested at a
rate of 33% per year with ten year terms. All options were
granted with an exercise price equal to the fair market value of
the Companys common stock at the time of grant.
1996
Plan
The options granted
under the 1996 plan vested over one, four and five years as
dictated by the Compensation Committee. These options had terms
of five and ten years as dictated by the Compensation Committee.
All options were granted with an exercise price equal to the
fair market value of the Companys common stock at the time
of grant.
1993
Plan
Options granted under
the 1993 Plan, typically had terms of 10 years and vested
over five years in 20% increments beginning at the end of the
first year. These options vest in the event of a change of
control as defined in the plan. All options were granted with an
exercise price equal to the fair market value of the
Companys common stock at the time of grant.
Additional Options
In July 2001, the Compensation
Committee granted to each of two non-employee directors of the
Company an option to purchase 12,000 shares of the
Companys common stock. These options vested on
November 6, 2001 and terminate four years later on
November 5, 2005. The exercise price of each of the options
was $28.625, which was in excess of the fair market value of the
Companys common stock on the date of grant.
A summary of the status of the Companys
stock options issued as of December 31, 2003, 2002, and
2001 and the changes during each of the years then ended are
presented below (in thousands, except weighted average exercise
price):
The following table summarizes information about
stock options outstanding at December 31, 2003:
F-23
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Pro Forma Stock-Based Compensation
Disclosure
Pro forma
information in accordance with SFAS No. 123 regarding
net income and earnings per share, as described in Note 1,
has been determined as if the Company had accounted for its
employee stock options under the fair value method as defined in
that statement. The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions
for grants in 1996 through 2003 respectively; dividend yield of
0.00%; risk-free interest rates are different for each grant and
range from 2.81% to 7.02%; the expected term ranges from 3 to
6 years; and a volatility of 38.68% for all 1996 grants,
35.97% for all 1997 grants, 51.08% for all 1998 grants, 61.97%
for all 1999 grants, 67.71% for all 2000 grants, 68.33% for all
2001 grants, 63.02% for all 2002 grants and 52.05% for all 2003
grants. The effects of applying SFAS No. 123 in this pro
forma disclosure are not indicative of future amounts. SFAS No.
123 does not apply to awards prior to 1996.
Stock Purchase
Warrants
In December 2001,
the Company issued 325,000 warrants exercisable at $26.75
per share as partial consideration for the purchase of
17 drilling rigs and related equipment from Cleere Drilling
Company (see Note 2). The warrants were fully exercisable
at the date of issuance. If not exercised, the warrants will
expire on December 21, 2004.
In June 2000, the Company issued 127,000 warrants
exercisable at $22 per share as partial consideration for the
purchase of eight drilling rigs and related equipment from High
Valley Drilling, Inc. The warrants were fully exercisable at the
date of issuance and none remain outstanding at
December 31, 2003.
Tabular
Summary
The following
table summarizes information regarding the Companys stock
options and warrants granted under the provisions of the
aforementioned plans as well as stock options and warrants
issued pursuant to certain transactions described in
Notes 2 and 11:
F-24
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
13. Leases
The Company incurred rent expense, consisting
primarily of daily rental charges for the use of drilling
equipment, of $8.6 million, $5.7 million, and
$5.9 million, for the years 2003, 2002, and 2001,
respectively. The Companys obligations under
non-cancelable operating lease agreements are not material to
the Companys operations.
14. Income
Taxes
Components of the income tax provision applicable
for federal, state and foreign income taxes are as follows (in
thousands):
The difference between the statutory federal
income tax rate and the effective income tax rate is summarized
as follows:
In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. The Company
expects the deferred tax assets at December 31, 2003 to be
realized as a result of the reversal during the carryforward
period of existing taxable temporary differences giving rise to
deferred tax liabilities and the generation of taxable income in
the carryforward period; therefore, no valuation allowance is
necessary.
F-25
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The tax effect of significant temporary
differences representing deferred tax assets and liabilities and
changes therein were as follows (in thousands):
The alternative minimum tax credit may be carried
forward indefinitely.
15. Employee
Benefits
The Company maintains a 401(k) plan for all
eligible employees. The Companys operating results include
expenses of $1.5 million in 2003, and $2.1 million in
2002 and 2001 for the Companys discretionary contributions
to the plan.
16. Business
Segments
The Company conducts its business through four
distinct operating segments: contract drilling of oil and
natural gas wells, pressure pumping services and drilling and
completion fluids services to operators in the oil and natural
gas industry, and the exploration, development, acquisition and
production of oil and natural gas. Each of these segments
represents a distinct type of business based upon the type and
nature of services and products offered. These segments have
separate management teams which report to the Companys
chief executive officer and have distinct and identifiable
revenues and expenses.
Contract
Drilling
The Company
markets its contract drilling services to major and independent
oil and natural gas operators. The Company owns 343 drilling
rigs, of which 226 operated in 2003. Currently, 143 of the
drilling rigs are based in West Texas and New Mexico, 56 in
South Texas, 42 in the Ark-La-Tex region and Mississippi, 70 in
the Mid-Continent region, 16 in the Rocky Mountain region, and
16 in Western Canada.
Pressure
Pumping
The Company
provides pressure pumping services primarily in the Appalachian
Basin. Pressure pumping services consist primarily of well
stimulation and cementing for the completion of new wells and
remedial work on existing wells. Well stimulation involves
processes inside a well designed to enhance the flow of oil,
natural gas, or other desired substances from the well.
Cementing is the process of inserting material between the hole
and the pipe to center and stabilize the pipe in the hole.
Drilling and Completion
Fluids
The Company
provides drilling fluids, completion fluids, and related
services to oil and natural gas operators in West Texas,
Southeast New Mexico, South Texas, East Texas, Oklahoma, the
Gulf Coast regions of Texas and Louisiana, and the Gulf of
Mexico. Drilling and completion
F-26
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
fluids are used by oil and natural gas operators
during the drilling process to control pressure when drilling
oil and natural gas wells. The drilling fluids operations were
added by the Company during 1998 with its acquisition of two
companies with operations in Texas, New Mexico, Oklahoma, and
Colorado. Our services were expanded to include completion
fluids in October 2000 with the acquisition of the drilling and
completion fluids division of Ambar, Inc., which had operations
in the coastal areas of Texas, Louisiana, and in the Gulf of
Mexico.
Oil and Natural
Gas
The Company is engaged
in the development, exploration, acquisition, and production of
oil and natural gas.
The following tables summarize selected financial
information relating to our business segments (in thousands):
F-27
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
F-28
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Quarterly financial information for the years
ended December 31, 2003 and 2002 is as follows (in
thousands):
Financial instruments, which potentially subject
the Company to concentrations of credit risk, consist primarily
of demand deposits, temporary cash investments, and trade
receivables.
The Company believes that it places its demand
deposits and temporary cash investments with high credit quality
financial institutions. At December 31, 2003 and 2002, the
Companys demand deposits and temporary cash investments
consisted of the following (in thousands):
Concentrations of credit risk with respect to
trade receivables are primarily focused on companies involved in
the exploration and development of oil and natural gas
properties. The concentration is somewhat mitigated by the
diversification of customers for which the Company provides
drilling services. As is general industry practice, the Company
generally does not require customers to provide collateral. No
significant losses from individual contracts were experienced
during the years ended December 31, 2003, 2002, or 2001. We
recognized bad debt expense for 2003, 2002, and 2001 of
$259,000, $320,000, and $2.0 million, respectively.
The carrying values of cash and cash equivalents,
marketable securities, and trade receivables approximate fair
value due to the short-term maturity of these assets.
19. Related Party
Transactions
Use of
Assets
In 2001, we leased
a 1981 Beech King-Air 90 airplane owned by SSI Oil and Gas,
Inc., an entity beneficially owned 50% by Cloyce A.
Talbott, Patterson-UTIs Chief Executive Officer, and
directly
F-29
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
owned 50% by A. Glenn Patterson,
Patterson-UTIs President/Chief Operating Officer. Under
the terms of the lease, we paid a monthly rental of $9,200, the
costs of fuel, insurance, taxes and maintenance of the aircraft.
Such amounts totaled approximately $212,000 for the year ended
December 31, 2001.
Joint Operation of Oil and Natural Gas
Properties
The Company
operates certain oil and natural gas properties in which certain
of our affiliated persons have participated, either individually
or through entities they control, in the prospects or properties
in which we have an interest. These participations, which have
been on a working interest basis, have been in prospects or
properties originated or acquired by Patterson-UTI. At
December 31, 2003, affiliated persons were working interest
owners in 236 of the 260 wells operated by Patterson-UTI. Sales
of working interests are made by Patterson-UTI to reduce its
economic risk in the properties. Sales were made by
Patterson-UTI at its cost, comprised of Patterson-UTIs
costs of acquiring and preparing the working interests for sale.
These costs were paid by the working interest owners on a pro
rata basis based upon their working interest ownership
percentage. The price at which working interests were sold to
affiliated persons was the same price at which working interests
were sold to unaffiliated persons. The affiliated persons earned
oil and natural gas production revenue (net of royalty) of
$11.1 million, $6.9 million, and $8.3 million
from these properties in 2003, 2002, and 2001, respectively.
These persons or entities were in turn billed for joint
operating costs (including drilling and other development
expenses) of $7.9 million, $5.5 million, and
$5.9 million incurred in 2003, 2002, and 2001,
respectively. This activity resulted in a net receivable from
the affiliated persons of approximately $17,000 at
December 31, 2003 and a net payable to the affiliated
persons of approximately $466,000 at December 31, 2002.
Other
In
2003, 2002 and 2001, we paid approximately $740,000, $279,000
and $387,000, respectively, to TMP Truck and Trailer LP
(TMP), an entity owned by Thomas M. Patterson
(son of A. Glenn Patterson), for certain equipment and
metal fabrication services. Purchases from TMP were at current
market prices.
In 2003, we paid approximately $209,000 to Melco
Services (Melco) for dirt contracting services and
$59,000 to L&N Transportation (L&N) for
water hauling services. Both entities are owned by Lance D.
Nelson, brother of Jonathan D. Nelson, Patterson-UTIs
Chief Financial Officer. Purchases from Melco and L&N were
at current market prices.
Gross oil and natural gas expenditures by the
Company for the years ended December 31, 2003, 2002 and
2001 are summarized below (in thousands):
The aggregate amount of capitalized costs of oil
and natural gas properties as of December 31, 2003, 2002
and 2001 is comprised of the following (in thousands):
F-30
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table sets forth information with
respect to quantities of net proved developed oil and natural
gas reserves and changes in those reserves for the years ended
December 31, 2003, 2002, and 2001 (in thousands). The
quantities were estimated by an independent petroleum engineer.
The Companys proved developed oil and natural gas reserves
are located entirely within the United States.
Estimates of our proved reserves and future net
revenues are determined based on various assumptions such as oil
and natural gas prices, operating costs, reservoir performance,
and economic conditions. The oil and natural gas prices and
operating cost assumptions were based on the actual prices and
costs in effect as of the date of such estimates. These
assumptions are held constant throughout the life of the
properties, except operating costs are adjusted for contractual
escalations. Our reserve engineer estimates the assumptions
relating to reservoir performance and economic conditions using
information available and industry experience. The oil and
natural gas prices used to value our reserves as of
December 31, 2003 were $32.52 per Bbl of
F-31
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
oil and $6.19 per Mcf of natural gas. Estimates
of reserves and production performance are subjective and may
change materially as actual production information becomes
available.
F-32
1.
Description of Business and Summary of
Significant Accounting Policies
A description and basis of presentation
follows:
A summary of the significant accounting
policies follows:
Table of Contents
Useful Lives
(years)
2-15
3-10
5-20
2-7
3-7
Table of Contents
2003
2002
2001
$
90.9
$
85.8
$
72.6
5.6
4.4
7.3
0.1
0.3
5.2
1.4
0.7
1.1
$
98.0
$
91.2
$
86.2
Table of Contents
Years Ended December 31,
2003
2002
2001
(In thousands, except
per share amounts)
$
55,326
$
2,169
$
164,162
(10,506
)
(5,296
)
(7,053
)
$
44,820
$
(3,127
)
$
157,109
$
0.68
$
0.03
$
2.15
$
0.56
$
(0.04
)
$
2.06
$
0.67
$
0.03
$
2.07
$
0.54
$
(0.04
)
$
1.98
$
15.33
$
15.19
$
9.97
(1)
See Note 12 for additional information regarding
the computations presented here.
Table of Contents
Table of Contents
2003 Acquisitions
2002 Acquisition
2001 Merger and Acquisitions
Table of Contents
severance costs and related expenses of
$2.8 million,
closing of duplicate operational facilities of
$1.6 million,
costs of $1.4 million incurred in connection
with changes to the Companys credit facilities (see
Note 9), and
fees and expenses related to the transfer of
licenses and leaseholds, and in some instances the impairment of
such leaseholds, the combination or cancellation of various
service contracts and the renegotiation of certain insurance
policies of $1.4 million.
Table of Contents
3.
Comprehensive Income
2003
2002
2001
$
55,326
$
2,169
$
164,162
8,773
457
(2,326
)
1,590
30
$
65,689
$
2,656
$
161,836
4.
Property and Equipment
2003
2002
$
1,022,795
$
895,125
65,659
54,788
57,625
52,011
11,773
11,073
3,684
3,779
1,161,536
1,016,776
(467,905
)
(389,042
)
$
693,631
$
627,734
5.
Goodwill and Other Intangible Assets
2003
2002
$
69,860
$
69,860
(19,661
)
(19,661
)
50,199
50,199
$
1,956
$
1,956
(976
)
(842
)
980
1,114
$
51,179
$
51,313
Table of Contents
$
56,543
Accumulated amortization
$
16,278
$
1,909
Accumulated amortization
$
959
$
13,317
Accumulated amortization
$
3,383
$
47
Accumulated amortization
$
17
$
56,543
Accumulated amortization
$
16,278
$
1,909
Accumulated amortization
$
828
$
13,317
Accumulated amortization
$
3,383
$
47
Accumulated amortization
$
14
Drilling &
Completion
Drilling
Fluids
Total
$
40,265
$
9,934
$
50,199
40,265
9,934
50,199
$
40,265
$
9,934
$
50,199
Years Ended December 31,
2003
2002
2001
$
$
$
4,665
134
315
507
$
134
$
315
$
5,172
Table of Contents
Years Ended December 31,
2003
2002
2001
$
55,326
$
2,169
$
164,162
4,665
$
55,326
$
2,169
$
168,827
$
0.68
$
0.03
$
2.15
0.06
$
0.68
$
0.03
$
2.21
$
0.67
$
0.03
$
2.07
0.06
$
0.67
$
0.03
$
2.13
6.
Investment in Equity Securities
Table of Contents
Common
Unrealized
Shares
Cost
Gain
Total
$
$
$
1,058,673
17,681
2,593
20,274
1,058,673
$
17,681
$
2,593
$
20,274
892,742
$
14,833
$
$
14,833
165,931
2,826
48
2,874
1,058,673
$
17,659
$
48
$
17,707
7.
Accrued Expenses
2003
2002
$
15,740
$
10,573
22,859
15,516
5,796
2,712
1,848
2,605
1,000
1,029
4,823
3,078
$
52,066
$
35,513
2003
2002
$
1,029
$
2,200
(21
)
(324
)
(4
)
(392
)
(4
)
(455
)
$
1,000
$
1,029
8.
Asset Retirement Obligation
Table of Contents
2003
$
1,056
173
(100
)
34
$
1,163
9.
Notes Payable
10.
Commitments, Contingencies, and Other
Matters
Table of Contents
bonus payment equal to the greater of the highest
bonus paid after the Change in Control Agreement was entered
into and the average of the two annual bonuses earned in the two
fiscal years immediately preceding a change in control (such
bonus payment prorated for the portion of the fiscal year
preceding the termination date);
a payment equal to 2.5 times (in the case of the
Chairman of the Board, Chief Executive Officer and President and
Chief Operating Officer) or 1.5 times (in the case of the Senior
Vice Presidents and the Chief Financial Officer) of the sum of
(i) the highest annual salary in effect for such Key
Employee and (ii) the average of the three annual bonuses
earned by the Key Employee for the three fiscal years preceding
the termination date; and
Table of Contents
continued coverage under the Companys
welfare plans for up to three years (in the case of the Chairman
of the Board, Chief Executive Officer and President and Chief
Operating Officer) or two years (in the case of the Senior Vice
Presidents and the Chief Financial Officer).
11.
Stockholders Equity
12.
Stock Options and Warrants
Options
Options
Authorized
Options
Available
Plan Name
For Grant
Outstanding
For Grant
8,250,000
4,503,838
1,949,537
1,000,000
846,737
25,694
600,000
150,000
292,500
120,000
16,000
1,608
238,900
2,800,000
368,675
Table of Contents
(1)
Plan was assumed by the Company as a part of the
merger between Patterson and UTI.
(2)
Plan is for the benefit of employees of the
Company, other than officers and directors of the Company.
(3)
Plan is for the benefit of employees of the
Company, including officers and directors of the Company.
1997 Plan
Administered by the Compensation Committee of the
Board of Directors.
All employees including officers and employee
directors are eligible for awards.
Vesting schedule is set by the Compensation
Committee, however, typically options vest over 3 or
5 years.
The Compensation Committee sets the term of the
option except that no Incentive Stock Option (ISO)
can have a term of longer than 10 years. Typically options
granted under the plan have a term of 10 years.
The options granted under the plan, unless
otherwise stated in the grant thereof, vest upon a change of
control as defined in the plan. Options granted to non-executive
employees typically do not vest upon a change of control.
All options granted under the plan are granted
with an exercise price equal to or greater than the fair market
value of the Companys common stock at the time the option
is granted.
Although the plan allows for awards of tandem and
independent stock appreciation rights, restricted stock and
performance awards, no such awards have been granted.
During 2003, the Company increased the options
authorized for grant from 6,000,000 to 8,250,000.
2001 Plan
Officers and directors of the Company are not
eligible for grants of options under the 2001 Plan.
No ISOs may be awarded under the 2001 Plan.
Unless the grant states otherwise, options
granted under the 2001 Plan do not vest upon a change of control
of the Company.
Non-Employee Director Plan
Administered by the Compensation Committee of the
Board of Directors.
All options vest upon the first anniversary of
the option grant.
Each director receives options to purchase 20,000
shares upon becoming a director of the Company and options to
purchase 10,000 shares on December 31 of each subsequent
year in which the director serves as a director of the Company.
The exercise price of the options is the fair
market value of the Companys common stock on the date of
grant.
Table of Contents
2003
2002
2001
No. of
Weighted
No. of
Weighted
No. of
Weighted
Shares of
Average
Shares of
Average
Shares of
Average
Underlying
Exercise
Underlying
Exercise
Underlying
Exercise
Options
Price
Options
Price
Options
Price
6,139
$
17.61
6,596
$
10.40
5,488
$
7.57
915
32.48
2,149
26.77
2,103
16.19
(868
)
11.84
(2,457
)
6.41
(805
)
5.26
(48
)
19.97
(149
)
15.32
(190
)
14.39
6,138
$
20.62
6,139
$
17.61
6,596
$
10.40
2,986
$
16.29
2,395
$
10.88
4,110
$
7.52
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Remaining
Weighted
Average
Number
Contracted
Average
Number
Exercise
Range of Exercise Prices
Outstanding
Life
Exercise Price
Exercisable
Prices
832,681
5.17
$
4.75
810,548
$
4.74
118,545
4.36
$
9.35
118,545
$
9.35
201,958
3.65
$
14.20
201,958
$
14.20
1,852,074
7.43
$
16.02
812,097
$
16.09
47,500
3.88
$
22.88
47,500
$
22.88
2,125,000
8.50
$
26.72
949,912
$
26.59
960,000
8.76
$
32.41
45,000
$
31.07
6,137,758
7.49
$
20.62
2,985,560
$
16.29
Table of Contents
Weighted
Average
Shares
Exercise Price
915,000
$
32.48
2,148,500
26.77
2,428,500
17.60
970,782
$
12.91
2,481,486
6.56
804,581
5.26
47,562
$
19.97
149,205
15.32
190,473
14.39
6,462,758
$
20.93
6,566,101
18.13
7,048,292
11.36
3,310,560
$
17.32
2,822,726
13.11
4,562,259
9.29
Table of Contents
2003
2002
2001
$
13,856
$
(18,064
)
$
82,417
14,509
21,687
10,887
28,365
3,623
93,304
1,214
(1,811
)
4,294
76
1,117
661
1,290
(694
)
4,955
18
(2,003
)
1,062
2,689
744
3,012
2,707
(1,259
)
4,074
15,088
(21,878
)
87,773
17,274
23,548
14,560
$
32,362
$
1,670
$
102,333
2003
2002
2001
35.0
%
35.0
%
35.0
%
1.5
2.8
1.9
0.8
5.7
1.3
(0.6
)
0.2
36.7
%
43.5
%
38.4
%
Table of Contents
December 31,
Net
December 31,
Net
December 31,
Net
January 1,
2003
Change
2002
Change
2001
Change
2001
$
$
$
$
$
$
(5,850
)
$
5,850
(469
)
469
10,107
2,934
7,173
2,663
4,510
3,951
559
602
602
602
(3,770
)
4,372
5,740
(1,775
)
7,515
3,880
3,635
(1,160
)
4,795
16,449
1,159
15,290
6,543
8,747
(7,298
)
16,045
(143,490
)
(16,484
)
(127,006
)
(34,147
)
(92,859
)
(16,005
)
(76,854
)
$
(127,041
)
$
(15,325
)
$
(111,716
)
$
(27,604
)
$
(84,112
)
$
(23,303
)
$
(60,809
)
Table of Contents
Years Ended December 31,
2003
2002
2001
$
639,694
$
410,295
$
839,931
46,083
32,996
39,600
69,230
69,943
94,456
21,163
14,723
15,988
$
776,170
$
527,957
$
989,975
$
75,666
$
7,607
$
274,514
10,442
6,090
12,649
(1,960
)
(278
)
3,842
7,784
3,945
756
(7,194
)
(9,266
)
(11,444
)
(5,943
)
2,452
(4,700
)
(7,202
)
1,116
1,110
2,080
(292
)
(532
)
(3,142
)
143
(137
)
385
$
88,157
$
3,839
$
266,495
(a)
Restructuring and other charges relate to
decisions of the executive management group regarding corporate
strategy, credit risk, loss contingencies and restructuring
activities. Due to the non-operating nature of these decisions,
the related charges have been separately presented and excluded
from the results of specific segments. These charges are
primarily related to the contract drilling segment.
Table of Contents
Years Ended December 31,
2003
2002
2001
$
801,109
$
694,020
$
681,700
46,763
35,084
29,473
30,860
34,687
41,724
33,494
20,854
15,398
163,604
157,864
101,347
$
1,075,830
$
942,509
$
869,642
$
84,379
$
80,500
$
72,797
3,774
2,803
1,895
2,319
2,216
2,644
7,082
5,251
8,505
444
446
318
$
97,998
$
91,216
$
86,159
$
95,175
$
68,516
$
150,788
10,524
7,399
7,756
912
1,571
4,937
10,484
6,357
7,956
5,320
$
117,095
$
83,843
$
176,757
(a)
Corporate assets primarily include cash on hand
managed by the parent corporation and certain deferred federal
income tax assets.
Table of Contents
17.
Quarterly Financial Information
1st
2nd
3rd
4th
Quarter
Quarter
Quarter
Quarter
Total
$
165,239
$
195,624
$
207,015
$
208,292
$
776,170
9,844
19,153
27,354
30,839
87,190
5,756
12,052
17,113
20,405
55,326
$
0.07
$
0.15
$
0.21
$
0.25
$
0.68
$
0.07
$
0.15
$
0.21
$
0.25
$
0.67
$
128,223
$
125,363
$
133,495
$
140,876
$
527,957
6,428
(6,591
)
683
2,878
3,398
3,935
(3,845
)
249
1,830
2,169
$
0.05
$
(0.05
)
$
0.00
$
0.02
$
0.03
$
0.05
$
(0.05
)
$
0.00
$
0.02
$
0.03
18.
Concentrations of Credit Risk
2003
2002
$
(3,326
)
$
1,711
112,226
90,464
108,900
92,175
(8,417
)
(10,021
)
$
100,483
$
82,154
Table of Contents
20.
Supplementary Oil and Natural Gas Reserve
Information and Related Data (Unaudited)
Oil and Natural Gas Expenditures and
Capitalized Costs:
2003
2002
2001
$
1,120
$
905
$
3,813
7,572
6,267
6,788
1,531
845
1,354
$
10,223
$
8,017
$
11,955
2003
2002
2001
$
50,481
$
44,849
$
43,500
(42,405
)
(35,684
)
(35,828
)
$
8,076
$
9,165
$
7,672
Table of Contents
Results of operations for oil and natural
gas producing activities:
2003
2002
2001
$
19,058
$
12,738
$
13,842
571
303
213
19,629
13,041
14,055
3,479
3,068
3,393
1,073
785
1,212
5,638
4,633
7,417
1,444
727
1,088
11,634
9,213
13,110
$
7,995
$
3,828
$
945
Oil and natural gas reserve
quantities:
Oil (Bbls)
Gas (Mcf)
1,129
3,880
16
609
175
1,862
(1
)
(272
)
(1,717
)
1,047
4,634
145
2,103
331
1,420
(12
)
(110
)
(284
)
(1,807
)
1,227
6,240
87
(1,123
)
149
2,446
(27
)
(244
)
(289
)
(2,052
)
1,147
5,267
Table of Contents
Standardized measure of future net cash
flows of proved developed oil and natural gas reserves,
discounted at 10% per annum (in thousands):
Years Ended December 31,
2003
2002
2001
$
70,894
$
68,165
$
32,674
(23,021
)
(22,149
)
(13,077
)
(15,155
)
(15,964
)
(5,110
)
32,718
30,052
14,487
(8,768
)
(8,952
)
(3,773
)
$
23,950
$
21,100
$
10,714
(a)
Future income taxes are computed by applying the
statutory tax rate to future net cash flows less the tax basis
of the properties and net operating loss attributable to oil and
natural gas operations and investment tax credit carryforwards
as of year-end; statutory depletion and tax credits applicable
to future oil and natural gas-producing activities are also
considered in the income tax computation.
Changes in the standardized measure of net
cash flows of proved developed oil and natural gas reserves
discounted at 10% per annum (in thousands):
Years Ended December 31,
2003
2002
2001
$
21,100
$
10,714
$
16,640
(11,362
)
(8,342
)
(8,684
)
4,718
4,888
(10,670
)
10,052
6,017
2,870
(2,017
)
(30
)
(1
)
(2,976
)
4,315
(2,824
)
3,547
1,531
2,440
101
(9,358
)
13,588
787
11,365
(2,645
)
$
23,950
$
21,100
$
10,714
Table of Contents
PATTERSON-UTI ENERGY, INC.
SCHEDULE II VALUATION
AND QUALIFYING ACCOUNTS
S-1
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, Patterson-UTI
Energy, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 4, 2004
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons on behalf of Patterson-UTI Energy, Inc. and in
the capacities indicated as of February 4, 2004.
EXHIBIT INDEX
Additions(1)
Charged to
Acquired
Beginning
Costs and
through
Ending
Description
Balance
Expenses
Acquisition
Deductions(2)
Balance
(In thousands)
$
3,144
$
259
$
$
1,270
$
2,133
$
4,021
$
320
$
$
1,197
$
3,144
$
3,462
$
2,045
$
$
1,486
$
4,021
(1)
Net of recoveries.
(2)
Uncollectible accounts written off.
Table of Contents
PATTERSON-UTI ENERGY, INC.
By:
/s/ CLOYCE A. TALBOTT
Cloyce A. Talbott
Chief Executive Officer
Signature
Title
/s/ MARK S. SIEGEL
Mark S. Siegel
Chairman of the Board
/s/ CLOYCE A. TALBOTT
Cloyce A. Talbott
(Principal Executive Officer)
Chief Executive Officer and Director
/s/ A. GLENN PATTERSON
A. Glenn Patterson
President, Chief Operating Officer and Director
/s/ KENNETH N. BERNS
Kenneth N. Berns
Senior Vice President and Director
/s/ JONATHAN D. NELSON
Jonathan D. Nelson
(Principal Accounting Officer)
Vice President, Chief Financial Officer,
Secretary and Treasurer
/s/ ROBERT C. GIST
Robert C. Gist
Director
/s/ CURTIS W. HUFF
Curtis W. Huff
Director
/s/ TERRY H. HUNT
Terry H. Hunt
Director
/s/ KENNETH R. PEAK
Kenneth R. Peak
Director
/s/ NADINE C. SMITH
Nadine C. Smith
Director
Table of Contents
2.1
Agreement and Plan of Merger, dated as of
May 26, 2003, by and among Patterson-UTI Energy, Inc.,
Patterson-UTI Acquisition, LLC and TMBR/Sharp Drilling, Inc.(1)
2.2
Amendment No. 1 to Agreement and Plan of
Merger, dated as of December 30, 2003, by and among
Patterson-UTI Energy, Inc., Patterson-UTI Acquisition, LLC and
TMBR/Sharp Drilling, Inc.(2)
3.1
Restated Certificate of Incorporation, as
amended.(3)
3.2
Amended and Restated Bylaws.(4)
4.1
Rights Agreement dated January 2, 1997,
between Patterson Energy, Inc. and Continental Stock
Transfer & Trust Company.(5)
4.2
Amendment to Rights Agreement dated as of
October 23, 2001.(6)
4.3
Restated Certificate of Incorporation, as amended
(See Exhibit 3.1)
4.4
Registration Rights Agreement with Bear, Stearns
and Co. Inc., dated March 25, 1994, as assigned by REMY
Capital Partners III, L.P.(4)
4.5
Patterson-UTI Energy, Inc. 1993 Stock Incentive
Plan, as amended.(7)*
4.6
Patterson-UTI Energy, Inc. Non-Employee
Directors Stock Option Plan, as amended.(8)*
4.7
Amended and Restated Patterson-UTI Energy, Inc.
2001 Long-Term Incentive Plan.(9)*
4.8
Patterson-UTI Energy, Inc. Amended and Restated
1997 Long-Term Incentive Plan.(3)*
4.9
Amended and Restated Patterson-UTI Energy, Inc.
Non-Employee Director Stock Option Plan.(3)*
4.10
Amended and Restated Patterson-UTI Energy, Inc.
1996 Employee Stock Option Plan.(10)*
4.11
1997 Stock Option Plan of DSI Industries,
Inc.(11)*
4.12
Stock Option Agreement dated July 20, 2001
between Patterson-UTI Energy, Inc. and Kenneth R. Peak (a
non-employee director of Patterson-UTI Energy, Inc.).(4)*
10.1
For additional material contracts, see
Exhibits 4.1, 4.2 and 4.4 through 4.11.
10.2
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Mark S. Siegel.*
10.3
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and A. Glenn Patterson.*
10.4
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Cloyce A. Talbott.*
10.5
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Kenneth N. Berns.*
10.6
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and Jonathan D. Nelson.*
10.7
Patterson-UTI Energy, Inc. Change in Control
Agreement, effective as of January 29, 2004, by and between
Patterson-UTI Energy, Inc. and John E. Vollmer III.*
10.8
Model Form Operating Agreement.(12)
10.9
Form of Drilling Bid Proposal and Footage
Drilling Contract.(12)
10.10
Form of Turnkey Drilling Agreement.(12)
14.1
Patterson-UTI Energy, Inc. Code of Business
Conduct and Ethics for Senior Financial Executives.
21.1
Subsidiaries of the Registrant.
23.1
Consent of Independent Accountants
PricewaterhouseCoopers LLP.
23.2
Consent of Independent Petroleum
Engineer M. Brian Wallace, P.E.
31.1
Certification of Chief Executive Officer pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
31.2
Certification of Chief Financial Officer pursuant
to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended.
32.1
Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1)
Incorporated herein by reference to
Exhibit 2.1 to Form 8-K of TMBR/Sharp Drilling, Inc.
filed on May 27, 2003.
(2)
Incorporated herein by reference to
Exhibit 2.1 to Form 8-K filed on December 31,
2003.
Table of Contents
(3)
Incorporated herein by reference to Item 6,
Exhibits and Reports on Form 8-K to
Form 10-Q for the quarterly period ended June 30,
2003, filed on July 28, 2003.
(4)
Incorporated herein by reference to Item 14,
Exhibits, Financial Statement Schedules and Reports on
Form 8-K to Annual Report on Form 10-K for the
fiscal year ended December 31, 2001, filed on
March 19, 2002.
(5)
Incorporated herein by reference to Item 2,
Exhibits to Registration Statement on Form 8-A
filed on January 14, 1997.
(6)
Incorporated herein by reference to Item 6,
Exhibits and Reports on Form 8-K to
Form 10-Q for the quarterly period ended September 30,
2001, filed on October 31, 2001.
(7)
Incorporated herein by reference to Item 8,
Exhibits to Registration Statement on Form S-8
(File No. 333-47917) filed on March 13, 1998.
(8)
Incorporated herein by reference to Item 8,
Exhibits to Registration Statement on Form S-8
(File No. 333-39471) filed on November 4, 1997.
(9)
Incorporated herein by reference to Item 8,
Exhibits to Post-Effective Amendment No. 1 to
Registration Statement on Form S-8 (File No. 333-60470)
filed on November 27, 2002.
(10)
Incorporated herein by reference to Item 8,
Exhibits to Post-Effective Amendment No. 1 to
Registration Statement on Form S-8 (File
No. 333-60466) filed on July 25, 2001.
(11)
Incorporated herein by reference to Item 8,
Exhibits to Post-Effective Amendment No. 1 to
Registration Statement on Form S-8 (File
No. 333-60470) filed on July 25, 2001.
(12)
Incorporated herein by reference to Item 27,
Exhibits to Registration Statement on Form SB-2
(File No. 33-68058-FW) filed on August 30, 1993.
*
Management Contract or Compensatory Plan
identified as required by Item 15(a)(3) of Form 10-K.
Exhibit 10.2
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and Mark S. Siegel (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
-1-
(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
-2-
result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentional if it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to two and one-half (2.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and | |
(2) if a Change in Control of the Company shall have
occurred at that date, the physical or mental disability of
the Employee determined in accordance with the disability
policy of the Company in effect immediately before the
occurrence of the first Change in Control of the Company and
generally applicable to its salaried employees.
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the third anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||||
By: | /s/ Cloyce A. Talbott | |||
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Name: | Cloyce A. Talbott | |||
Title: | Chief Executive Officer | |||
/s/ Mark S. Siegel | ||||
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Mark S. Siegel |
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Exhibit 10.3
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and A. Glenn Patterson (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
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(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
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result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentional if it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to two and one-half (2.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and | |
(2) if a Change in Control of the Company shall have
occurred at that date, the physical or mental disability of
the Employee determined in accordance with the disability
policy of the Company in effect immediately before the
occurrence of the first Change in Control of the Company and
generally applicable to its salaried employees.
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the third anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||||
By: | /s/ Cloyce A. Talbott | |||
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Name: | Cloyce A. Talbott | |||
Title: | Chief Executive Officer | |||
/s/ A. Glenn Patterson | ||||
|
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A. Glenn Patterson |
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Exhibit 10.4
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and Cloyce A. Talbott (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
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(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
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result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentionalif it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to two and one-half (2.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and | |
(2) if a Change in Control of the Company shall have occurred at that date, the physical or mental disability of the Employee determined in accordance with the disability policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees. | |
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the third anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||
By: | /s/ Mark S. Siegel | |
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Name: | Mark S. Siegel | |
Title: | Chairman of the Board | |
/s/ Cloyce A. Talbott | ||
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Cloyce A. Talbott |
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Exhibit 10.5
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and Kenneth N. Berns (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
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(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
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result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or | |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentionalif it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to one and one-half (1.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and | |
(2) if a Change in Control of the Company shall have occurred at that date, the physical or mental disability of the Employee determined in accordance with the disability policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees. | |
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the second anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||||
By: | /s/ Cloyce A. Talbott | |||
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Name: | Cloyce A. Talbott | |||
Title: | Chief Executive Officer | |||
/s/ Kenneth N. Berns | ||||
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Kenneth N. Berns |
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Exhibit 10.6
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and Jonathan D. Nelson (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
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(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
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result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentional if it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to one and one-half (1.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and | |
(2) if a Change in Control of the Company shall have occurred at that date, the physical or mental disability of the Employee determined in accordance with the disability policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees. |
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the second anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||||
By: | /s/ Cloyce A. Talbott | |||
|
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Name: | Cloyce A. Talbott | |||
Title: | Chief Executive Officer | |||
/s/ Jonathan D. Nelson
Jonathan D. Nelson |
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Exhibit 10.7
PATTERSON-UTI ENERGY, INC.
CHANGE IN CONTROL AGREEMENT
This Agreement between Patterson-UTI Energy, Inc., a Delaware corporation (the Company), and John E. Vollmer III (the Employee) is effective as of January 29, 2004 (the Effective Date). Certain capitalized terms used herein are defined in Section 21.
W I T N E S S E T H:
Whereas , the Company considers it to be in the best interests of its stockholders to encourage the continued employment of certain key employees of the Company and its Wholly Owned Entities notwithstanding the possibility, threat or occurrence of a Change in Control of the Company (as that phrase is defined in Section 2);
Whereas , the Employee is a key employee of the Company and/or one or more of its Wholly Owned Entities;
Whereas , the Company believes that the possibility of the occurrence of a Change in Control of the Company may result in the termination of the Employees employment by the Company or in the distraction of the Employee from the performance of his duties to the Company, in either case to the detriment of the Company and its stockholders;
Whereas , the Company recognizes that the Employee could suffer adverse financial and professional consequences if a Change in Control of the Company were to occur; and
Whereas , the Company wishes to enter into this Agreement to protect the Employee if a Change in Control of the Company occurs, thereby encouraging the Employee to remain in the employ of the Company and not to be distracted from the performance of his duties to the Company by the possibility of a Change in Control of the Company;
Now , Therefore , the parties agree as follows:
Section 1. Other Employment Arrangements.
(a) This Agreement does not affect the Employees existing or future employment arrangements with the Company unless a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement. The Employees employment with the Company shall continue to be governed by the Employees existing or future employment agreements with the Company, if any, or, in the absence of any employment agreement, shall continue to be at the will of the Board of Directors or, if the Employee is not an officer of the Company at the time of the termination of the Employees employment with the Company, the will of the Chief Executive Officer of the Company, except that if (i) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (ii) the Employees employment with the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, then the Employee shall be entitled to receive certain benefits as provided in this Agreement.
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(b) Notwithstanding anything contained in this Agreement to the contrary, if following the commencement of any discussion with a third person that ultimately results in a written agreement or agreements to which the Company is a party and which, if the transactions contemplated by such agreement or agreements were consummated, would result in a Change in Control of the Company, the Employees employment with the Company is terminated by the Company for any reason other than as a result of the occurrence of an event described in any of clauses (i) through (v) of Section 4, then for all purposes of this Agreement, a Change in Control of the Company shall be deemed to have occurred on the date immediately prior to the date of such termination, removal, or reduction regardless of whether any Change in Control of the Company actually occurs.
(c) Nothing in this Agreement shall prevent or limit the Employees continuing or future participation in any plan, program, policy or practice of or provided by the Company or any of its Affiliates and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any contract or agreement with the Company or any of its Affiliates. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, program, policy or practice of or provided by, or any contract or agreement with, the Company or any of its Affiliates at or subsequent to the date of termination of the Employees employment with the Company shall be payable or otherwise provided in accordance with such plan, program, policy or practice or contract or agreement except as explicitly modified by this Agreement.
Section 2. Change in Control of the Company . For purposes of this Agreement, a Change in Control of the Company shall mean the occurrence of any of the following after the Effective Date:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a Covered Person) of beneficial ownership (within the meaning of rule 13d-3 promulgated under the Exchange Act) of 35% or more of either (i) the then outstanding shares of the common stock of the Company (the Outstanding Company Common Stock), or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that for purposes of this subsection (a) of this Section 2, the following acquisitions shall not constitute a Change in Control of the Company: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the Effective Date, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors; provided , however , that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a
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result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Covered Person other than the Board; or
(c) Consummation of (xx) a reorganization, merger or consolidation or sale of the Company or any subsidiary of the Company, or (yy) a disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, direct or indirectly, more than 65% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Covered Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination.
Section 3. Term of this Agreement . The term of this Agreement shall begin on the Effective Date and, unless automatically extended pursuant to the second sentence of this Section 3, shall expire on the first to occur of:
(i) the Employees death, the Employees Disability or the Employees Retirement, which events shall also be deemed automatically to terminate the Employees employment by the Company;
(ii) the termination by the Employee or the Company of the Employees employment by the Company; or
(iii) the end of the last day (the Expiration Date) of:
(x) the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3) if no Change in Control of the Company shall have occurred during that three-year period (or any period for which the term of this Agreement |
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shall have been automatically extended pursuant to the second sentence of this Section 3); or |
(y) if one or more Changes in Control of the Company shall have occurred during the three-year period beginning on the Effective Date (or any period for which the term of this Agreement shall have been automatically extended pursuant to the second sentence of this Section 3), the two-year period beginning on the date on which the last Change in Control of the Company occurred. |
If (i) the term of this Agreement shall not have expired as a result of the occurrence of one of the events described in clause (i) or (ii) of the immediately preceding sentence, and (ii) the Company shall not have given notice to the Employee at least ninety (90) days before the Expiration Date that the term of this Agreement will expire on the Expiration Date, then the term of this Agreement shall be automatically extended for successive one-year periods (the first such period to begin on the day immediately following the Expiration Date) unless the Company shall have given notice to the Employee at least ninety (90) days before the end of any one-year period for which the term of this Agreement shall have been automatically extended that such term will expire at the end of that one-year period. The expiration of the term of this Agreement shall not terminate this Agreement itself or affect the right of the Employee or the Employees legal representatives to enforce the payment of any amount or other benefit to which the Employee was entitled before the expiration of the term of this Agreement or to which the Employee became entitled as a result of the event (including the termination, whether by the Employee or the Company or automatically as provided in this Section 3, of the Employees employment by the Company) that caused the term of this Agreement to expire.
Section 4. Event of Termination for Cause . An Event of Termination for Cause shall have occurred if, after a Change in Control of the Company, the Employee shall have committed:
(i) gross negligence or willful misconduct in connection with his duties or in the course of his employment with the Company;
(ii) an act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company;
(iii) intentional wrongful damage to property of the Company;
(iv) intentional wrongful disclosure of secret processes or confidential information of the Company; or
(v) an act leading to a conviction of a felony or a misdemeanor involving moral turpitude.
For purposes of this Agreement, no act, or failure to act, on the part of the Employee shall be deemed intentionalif it was due primarily to an error in judgment or negligence, but shall be deemed intentional only if done, or omitted to be done, by the Employee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Employee shall not be deemed to have been terminated as a
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result of an Event of Termination for Cause hereunder unless and until there shall have been delivered to the Employee a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors then in office at a meeting of the Board of Directors called and held for such purpose (after reasonable notice to the Employee and an opportunity for the Employee, together with his counsel, to be heard before the Board of Directors), finding that, in the good faith opinion of the Board of Directors, the Employee had committed an act set forth above in this Section 4 and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Employee or his legal representatives to contest the validity or propriety of any such determination.
Section 5. An Event of Termination for Good Reason . An Event of Termination for Good Reason shall have occurred if, after a Change in Control of the Company, the Company shall:
(i) assign to the Employee any duties inconsistent with the Employees position (including offices, titles and reporting requirements), authority, duties, status or responsibilities with the Company in effect immediately before the occurrence of the first Change in Control of the Company or otherwise make any change in any such position, authority, duties or responsibilities;
(ii) remove the Employee from, or fail to re-elect or appoint the Employee to, any duties or position with the Company or any of its Affiliates that were assigned or held by the Employee immediately before the occurrence of the first Change in Control of the Company, except that a nominal change in the Employees title that is merely descriptive and does not affect rank or status shall not constitute such an event;
(iii) take any other action that results in a material diminution in such position, authority, duties or responsibilities or otherwise take any action that materially interferes therewith;
(iv) reduce the Employees annual base salary as in effect immediately before the occurrence of the first Change in Control of the Company or as the Employees annual base salary may be increased from time to time after that occurrence (the Base Salary);
(v) reduce the Employees annual bonus to an amount less than the average of the two annual bonuses earned by the Employee with respect to the two fiscal years of the Company immediately preceding the fiscal year of the Company in which the first Change in Control of the Company occurred (the amount of such average is referred to herein as the Benchmark Bonus);
(vi) relocate the Employees principal place of employment to a location outside of a 50-mile radius from the Employees principal place of employment immediately prior to the first Change in Control of the Company;
(vii) fail to (x) continue in effect any bonus, incentive, profit sharing, performance, savings, retirement or pension policy, plan, program or arrangement (such policies, plans, programs and arrangements collectively being referred to herein as Basic Benefit Plans),
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including, but not limited to, any deferred compensation, supplemental executive retirement or other retirement income, stock option, stock purchase, stock appreciation, or similar policy, plan, program or arrangement of the Company, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company, or any substitute plan adopted by the Board of Directors and in which the Employee was a participant immediately before the occurrence of the last Change in Control of the Company, unless an equitable and reasonably comparable arrangement (embodied in a substitute or alternative benefit or plan) shall have been made with respect to such Basic Benefit Plan promptly following the occurrence of the last Change in Control of the Company, or (y) continue the Employees participation in any Basic Benefit Plan (or any substitute or alternative plan) on substantially the same basis, both in terms of the amount of benefits provided to the Employee (which are in any event always subject to the terms of any applicable Basic Benefit Plan) and the level of the Employees participation relative to other participants, as existed immediately before the occurrence of the first Change in Control of the Company;
(viii) fail to continue to provide the Employee with benefits substantially similar to those enjoyed by the Employee under any of the Companys other employee benefit plans, policies, programs and arrangements (the Other Benefit Plans), including, but not limited to, life insurance, medical, dental, health, hospital, accident or disability plans, in which the Employee was a participant immediately before the occurrence of the first Change in Control of the Company;
(ix) fail to provide the Employee with the number of paid vacation days to which the Employee was entitled in accordance with the Companys vacation policy in effect immediately before the occurrence of the first Change in Control of the Company;
(x) fail to continue to provide the Employee with office space, related facilities and support personnel (including, but not limited to, administrative and secretarial assistance) (y) that are both commensurate with the Employees responsibilities to and position with the Company immediately before the occurrence of the first Change in Control of the Company and not materially dissimilar to the office space, related facilities and support personnel provided to other employees of the Company having comparable responsibility to the Employee, or (z) that are physically located at the Companys principal executive offices; or
(xi) purport to terminate the Employees employment by the Company unless notice of that termination shall have been given to the Employee pursuant to, and that notice shall meet the requirements of, Section 6.
Section 6. Notice of Termination . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent termination by the Employee or the Company of the Employees employment by the Company, or any determination of the Employees Disability, shall be communicated by notice to the other party that shall indicate the specific paragraph of Section 7 pursuant to which the Employee is to receive benefits as a result of the termination. If the notice states that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability, the notice shall (i) specifically describe the basis for the determination of the Employees Disability, and (ii) state the date of the determination of the Employees Disability,
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which date shall be not more than ten (10) days before the date such notice is given. If the notice is from the Company and states that the Employees employment by the Company is terminated by the Company as a result of the occurrence of an Event of Termination for Cause, the notice shall specifically describe the action or inaction of the Employee that the Company believes constitutes an Event of Termination for Cause and shall be accompanied by a copy of the resolution satisfying Section 4. If the notice is from the Employee and states that the Employees employment by the Company is terminated by the Employee as a result of the occurrence of an Event of Termination for Good Reason, the notice shall specifically describe the action or inaction of the Company that the Employee believes constitutes an Event of Termination for Good Reason. Each notice given pursuant to this Section 6 (other than a notice stating that the Employees employment by the Company has been automatically terminated as a result of the Employees Disability) shall state a date, which shall be not fewer than thirty (30) days nor more than sixty (60) days after the date such notice is given, on which the termination of the Employees employment by the Company is effective. The date so stated in accordance with this Section 6 shall be the Termination Date. If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, any subsequent purported termination by the Company of the Employees employment by the Company, or any subsequent purported determination by the Company of the Employees Disability, shall be ineffective unless that termination or determination shall have been communicated by the Company to the Employee by notice that meets the requirements of the foregoing provisions of this Section 6 and the provisions of Section 9.
Section 7. Benefits Payable on Change in Control of the Company and Termination .
(a) If (x) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, and (y) the Employees employment by the Company is terminated (whether by the Employee or the Company or automatically as provided in Section 3) after the occurrence of that Change in Control of the Company, the Employee shall be entitled to the following benefits:
(i) If the Employees employment by the Company is terminated (x) by the Company as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee before the occurrence of an Event of Termination for Good Reason, then the Company shall pay to the Employee the Base Salary accrued through the Termination Date but not previously paid to the Employee, and the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(ii) If the Employees employment by the Company is automatically terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, then (x) the Company shall pay to the Employee the Base Salary accrued through the date of the occurrence of that event but not previously paid to the Employee, and (y) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
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(iii) If the Employees employment by the Company is terminated (x) by the Company otherwise than as a result of the occurrence of an Event of Termination for Cause, or (y) by the Employee after the occurrence of an Event of Termination for Good Reason, then the Employee shall be entitled to the following:
(1) the Company shall pay to the Employee the Base Salary and compensation for earned but unused vacation time accrued through the Termination Date but not previously paid to the Employee;
(2) the Company shall pay to the Employee an amount equal to the product of (A) the greater of (I) the highest aggregate annual bonus, incentive or other payment of cash compensation in addition to annual base salary pursuant to any bonus, incentive, profit-sharing, performance, discretionary pay or similar policy, plan, program or arrangement of the Company paid or payable to the Employee (including any deferred portion thereof) for any fiscal year (or portion thereof) of the Company paid after the Effective Date, and (II) the Benchmark Bonus, multiplied by (B) a fraction, the numerator of which is the number of days in the current fiscal year of the Company through the Termination Date and the denominator of which is 365;
(3) the Company shall pay to the Employee, as a lump sum, an amount (the Severance Payment) equal to one and one-half (1.5) times the sum of:
A. the amount (including any deferred portion thereof) of the Base Salary that would have been paid to the Employee during the fiscal year of the Company in which the Termination Date occurs based on the assumption that the Employees employment by the Company had continued throughout that fiscal year at the Base Salary at the highest rate in effect at any time during the term of this Agreement; plus
B. the amount equal to the average of the three annual bonuses earned by the Employee with respect to the three fiscal years preceding the year in which the Termination Date occurs;
(4) the Company (at its sole expense) shall take the following actions:
A. throughout the Relevant Period, the Company shall maintain in effect, and not materially reduce the benefits provided by, each of the Other Benefit Plans in which the Employee was a participant immediately before the Termination Date; and
B. the Company shall arrange for the Employees uninterrupted participation throughout the Relevant Period in each of such Other Benefit Plans,
provided that if the Employees participation after the Termination Date in any such Other Benefit Plan is not permitted by the terms of that Other Benefit Plan, then throughout the Relevant Period, the Company (at its sole expense) shall provide the Employee with substantially the same benefits that were provided to the Employee by that Other Benefit Plan immediately before the Termination Date; and |
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(5) the Employee shall be entitled to any other amounts or benefits provided under any plan, policy, practice, program, contract or arrangement of or with the Company, including, but not limited to, the Basic Benefit Plans and the Other Benefit Plans, which shall be governed by the terms thereof (except as explicitly modified by this Agreement).
(b) Each payment required to be made to the Employee pursuant to the foregoing provisions of Section 7(a) above (i) shall be made by check drawn on an account of the Company at a bank located in the United States of America, and (ii) shall be paid (x) if the Employees employment by the Company was terminated as a result of the Employees death, the Employees Disability or the Employees Retirement, not more than thirty (30) days immediately following the date of the occurrence of that event, and (y) if the Employees employment by the Company was terminated for any other reason, not more than ten (10) days immediately following the Termination Date.
Section 8. Successors . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement,
(i) the Company shall not, directly or indirectly, consolidate with, merge into or sell or otherwise transfer its assets as an entirety or substantially as an entirety to, any person, or permit any person to consolidate with or merge into the Company, unless immediately after such consolidation, merger, sale or transfer, the Successor shall have assumed in writing the Companys obligations under this Agreement; and
(ii) not fewer than ten (10) days before the consummation of any consolidation of the Company with, merger by the Company into, or sale or other transfer by the Company of its assets as an entirety or substantially as an entirety to, any person, the Company shall give the Employee notice of that proposed transaction.
Section 9. Notice . Notices required or permitted to be given by either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the other party or when deposited with the United States Postal Service as certified or registered mail with postage prepaid and addressed:
(a) if to the Employee, at the Employees address last shown on the Companys records, and
(b) if to the Company, at 4510 Lamesa Highway, Snyder, Texas 79549, directed to the attention of the Chief Executive Officer.
or, in either case, to such other address as the party to whom or which such notice is to be given shall have specified by notice given to the other party.
Section 10. Withholding Taxes . The Company may withhold from all payments to be paid to the Employee pursuant to this Agreement all taxes that, by applicable federal or state law, the Company is required to so withhold.
Section 11. Certain Additional Payments by the Company .
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(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by, or benefit from, the Company or any of its Affiliates to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (any such payments, distributions or benefits being individually referred to herein as a Payment, and any two or more of such payments, distributions or benefits being referred to herein as Payments), would be subject to the excise tax imposed by Section 4999 of the Code (such excise tax, together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such excise tax, and any interest in respect of such penalties, additions to tax or additional amounts, being collectively referred herein to as the Excise Tax), then the Employee shall be entitled to receive an additional payment or payments (individually referred to herein as a Gross-Up Payment and any two or more of such additional payments being referred to herein as Gross-Up Payments) in an amount such that after payment by the Employee of all taxes (as defined in Section 11(k)) imposed upon the Gross-Up Payment, the Employee retains an amount of such Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 11(c) through (i), any determination (individually, a Determination) required to be made under this Section 11(b), including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall initially be made, at the Companys expense, by nationally recognized tax counsel mutually acceptable to the Company and the Employee (Tax Counsel). Tax Counsel shall provide detailed supporting legal authorities, calculations, and documentation both to the Company and the Employee within 15 business days of the termination of the Employees employment, if applicable, or such other time or times as is reasonably requested by the Company or the Employee. If Tax Counsel makes the initial Determination that no Excise Tax is payable by the Employee with respect to a Payment or Payments, it shall furnish the Employee with an opinion reasonably acceptable to the Employee that no Excise Tax will be imposed with respect to any such Payment or Payments. The Employee shall have the right to dispute any Determination (a Dispute) within 15 business days after delivery of Tax Counsels opinion with respect to such Determination. The Gross-Up Payment, if any, as determined pursuant to such Determination shall, at the Companys expense, be paid by the Company to the Employee within five business days of the Employees receipt of such Determination. The existence of a Dispute shall not in any way affect the Employees right to receive the Gross-Up Payment in accordance with such Determination. If there is no Dispute, such Determination shall be binding, final and conclusive upon the Company and the Employee, subject in all respects, however, to the provisions of Section 11(c) through (i) below. As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that Gross-Up Payments (or portions thereof) which will not have been made by the Company should have been made (Underpayment), and if upon any reasonable written request from the Employee or the Company to Tax Counsel, or upon Tax Counsels own initiative, Tax Counsel, at the Companys expense, thereafter determines that the Employee is required to make a payment of any Excise Tax or any additional Excise Tax, as the case may be, Tax Counsel shall, at the Companys expense, determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Employee.
(c) The Company shall defend, hold harmless, and indemnify the Employee on a fully grossed-up after tax basis from and against any and all claims, losses, liabilities,
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obligations, damages, impositions, assessments, demands, judgements, settlements, costs and expenses (including reasonable attorneys, accountants, and experts fees and expenses) with respect to any tax liability of the Employee resulting from any Final Determination (as defined in Section 11(j)) that any Payment is subject to the Excise Tax.
(d) If a party hereto receives any written or oral communication with respect to any question, adjustment, assessment or pending or threatened audit, examination, investigation or administrative, court or other proceeding which, if pursued successfully, could result in or give rise to a claim by the Employee against the Company under this Section 11 (Claim), including, but not limited to, a claim for indemnification of the Employee by the Company under Section 11(c), then such party shall promptly notify the other party hereto in writing of such Claim (Tax Claim Notice).
(e) If a Claim is asserted against the Employee (Employee Claim), the Employee shall take or cause to be taken such action in connection with contesting such Employee Claim as the Company shall reasonably request in writing from time to time, including the retention of counsel and experts as are reasonably designated by the Company (it being understood and agreed by the parties hereto that the terms of any such retention shall expressly provide that the Company shall be solely responsible for the payment of any and all fees and disbursements of such counsel and any experts) and the execution of powers of attorney provided that:
(i) within 30 calendar days after the Company receives or delivers, as the case may be, the Tax Claim Notice relating to such Employee Claim (or such earlier date that any payment of the taxes claimed is due from the Employee, but in no event sooner than five calendar days after the Company receives or delivers such Tax Claim Notice), the Company shall have notified the Employee in writing (Election Notice) that the Company does not dispute its obligations (including, but not limited to, its indemnity obligations) under this Agreement and that the Company elects to contest, and to control the defense or prosecution of, such Employee Claim at the Companys sole risk and sole cost and expense; and
(ii) the Company shall have advanced to the Employee on an interest-free basis, the total amount of the tax claimed in order for the Employee, at the Companys request, to pay or cause to be paid the tax claimed, file a claim for refund of such tax and, subject to the provisions of the last sentence of Section 11(g), sue for a refund of such tax if such claim for refund is disallowed by the appropriate taxing authority (it being understood and agreed by the parties hereto that the Company shall only be entitled to sue for a refund and the Company shall not be entitled to initiate any proceeding in, for example, United States Tax Court) and shall indemnify and hold the Employee harmless, on a fully grossed-up after tax basis, from any tax imposed with respect to such advance or with respect to any imputed income with respect to such advance; and
(iii) the Company shall reimburse the Employee for any and all costs and expenses resulting from any such request by the Company and shall indemnify and hold the Employee harmless, on fully grossed-up after-tax basis, from any tax imposed as a result of such reimbursement.
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(f) Subject to the provisions of Section 11(e) hereof, the Company shall have the right to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim by all appropriate proceedings, which proceedings shall be defended or prosecuted diligently by the Company to a Final Determination; provided , however , that (i) the Company shall not, without the Employees prior written consent, enter into any compromise or settlement of such Employee Claim that would adversely affect the Employee, (ii) any request from the Company to the Employee regarding any extension of the statute of limitations relating to assessment, payment, or collection of taxes for the taxable year of the Employee with respect to which the contested issues involved in, and amount of, the Employee Claim relate is limited solely to such contested issues and amount, and (iii) the Companys control of any contest or proceeding shall be limited to issues with respect to the Employee Claim and the Employee shall be entitled to settle or contest, in his sole and absolute discretion, any other issue raised by the Internal Revenue Service or any other taxing authority. So long as the Company is diligently defending or prosecuting such Employee Claim, the Employee shall provide or cause to be provided to the Company any information reasonably requested by the Company that relates to such Employee Claim, and shall otherwise cooperate with the Company and its representatives in good faith in order to contest effectively such Employee Claim. The Company shall keep the Employee informed of all developments and events relating to any such Employee Claim (including, without limitation, providing to the Employee copies of all written materials pertaining to any such Employee Claim), and the Employee or his authorized representatives shall be entitled, at the Employees expense, to participate in all conferences, meetings and proceedings relating to any such Employee Claim.
(g) If, after actual receipt by the Employee of an amount of a tax claimed (pursuant to an Employee Claim) that has been advanced by the Company pursuant to Section 11(e)(ii) hereof, the extent of the liability of the Company hereunder with respect to such tax claimed has been established by a Final Determination, the Employee shall promptly pay or cause to be paid to the Company any refund actually received by, or actually credited to, the Employee with respect to such tax (together with any interest paid or credited thereon by the taxing authority and any recovery of legal fees from such taxing authority related thereto), except to the extent that any amounts are then due and payable by the Company to the Employee, whether under the provisions of this Agreement or otherwise. If, after the receipt by the Employee of an amount advanced by the Company pursuant to Section 11(e)(ii), a determination is made by the Internal Revenue Service or other appropriate taxing authority that the Employee shall not be entitled to any refund with respect to such tax claimed and the Company does not notify the Employee in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of any Gross-Up Payments and other payments required to be paid hereunder.
(h) With respect to any Employee Claim, if the Company fails to deliver an Election Notice to the Employee within the period provided in Section 11(e)(i) hereof or, after delivery of such Election Notice, the Company fails to comply with the provisions of Section 11(e)(ii) and (iii) and (f) hereof, then the Employee shall at any time thereafter have the right (but not the obligation), at his election and in his sole and absolute discretion, to defend or prosecute, at the sole cost, expense and risk of the Company, such Employee Claim. The Employee shall have full control of such defense or prosecution and such proceedings, including
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any settlement or compromise thereof. If requested by the Employee, the Company shall cooperate, and shall cause its Affiliates to cooperate, in good faith with the Employee and his authorized representatives in order to contest effectively such Employee Claim. The Company may attend, but not participate in or control, any defense, prosecution, settlement or compromise of any Employee Claim controlled by the Employee pursuant to this Section 11(h) and shall bear its own costs and expenses with respect thereto. In the case of any Employee Claim that is defended or prosecuted by the Employee, the Employee shall, from time to time, be entitled to current payment, on a fully grossed-up after tax basis, from the Company with respect to costs and expenses incurred by the Employee in connection with such defense or prosecution.
(i) In the case of any Employee Claim that is defended or prosecuted to a Final Determination pursuant to the terms of this Section 11(i), the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim that have not theretofore been paid by the Company to the Employee, together with the costs and expenses, on a fully grossed-up after tax basis, incurred in connection therewith that have not theretofore been paid by the Company to the Employee, within ten calendar days after such Final Determination. In the case of any Employee Claim not covered by the preceding sentence, the Company shall pay, on a fully grossed-up after tax basis, to the Employee in immediately available funds the full amount of any taxes arising or resulting from or incurred in connection with such Employee Claim at least ten calendar days before the date payment of such taxes is due from the Employee, except where payment of such taxes is sooner required under the provisions of this Section 11(i), in which case payment of such taxes (and payment, on a fully grossed-up after tax basis, of any costs and expenses required to be paid under this Section 11(i) shall be made within the time and in the manner otherwise provided in this Section 11(i).
(j) For purposes of this Agreement, the term Final Determination shall mean (A) a decision, judgment, decree or other order by a court or other tribunal with appropriate jurisdiction, which has become final and non-appealable; (B) a final and binding settlement or compromise with an administrative agency with appropriate jurisdiction, including, but not limited to, a closing agreement under Section 7121 of the Code; (C) any disallowance of a claim for refund or credit in respect to an overpayment of tax unless a suit is filed on a timely basis; or (D) any final disposition by reason of the expiration of all applicable statutes of limitations.
(k) For purposes of this Agreement, the terms tax and taxes mean any and all taxes of any kind whatsoever (including, but not limited to, any and all Excise Taxes, income taxes, and employment taxes), together with any interest thereon, any penalties, additions to tax, or additional amounts with respect to such taxes and any interest in respect of such penalties, additions to tax, or additional amounts.
Section 12. Expenses of Enforcement . If a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, then, upon demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in enforcing or seeking to enforce the payment of any amount or other benefit to which the Employee shall have become entitled pursuant to this Agreement, including those incurred in connection with any
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arbitration initiated pursuant to Section 20. To the extent that any such reimbursement would be subject to the Excise Tax, then the Employee shall be entitled to receive Gross-Up Payments in an amount such that after payment by the Employee of all taxes imposed on such Gross-Up Payments, the Employee retains an amount equal to the Excise Tax imposed upon the reimbursement, and the other provisions of Section 11 hereof shall also apply to such circumstance unless the context thereof otherwise indicates.
Section 13. Employment by Wholly Owned Entities . If, at or after the Effective Date, the Employee is or becomes an employee of one or more corporations, partnerships, limited liability companies or other entities that are, directly or indirectly, wholly owned by the Company (Wholly Owned Entities), references in this Agreement to the Employees employment by the Company shall include the Employees employment by any such Wholly Owned Entity.
Section 14. No Obligation to Mitigate; No Rights of Offset .
(a) The Employee shall not be required to mitigate the amount of any payment or other benefit required to be paid or provided to the Employee pursuant to this Agreement, whether by seeking other employment or otherwise, nor shall the amount of any such payment or other benefit be reduced on account of any compensation earned by the Employee as a result of employment by another person.
(b) The Companys obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others.
Section 15. Amendment and Waiver . No provision of this Agreement may be amended or waived (whether by act or course of conduct or omission or otherwise) unless that amendment or waiver is by written instrument signed by the parties hereto. No waiver by either party of any breach of this Agreement shall be deemed a waiver of any other or subsequent breach.
Section 16. Governing Law . The validity, interpretation, construction and enforceability of this Agreement shall be governed by the laws of the State of Texas.
Section 17. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 18. Counterparts . This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together will constitute the same instrument.
Section 19. Assignment . This Agreement shall inure to the benefit of and be enforceable by the Employees legal representative. The Company may not assign any of its obligations under this Agreement unless (i) such assignment is to a Successor and (ii) the requirements of Section 8 are fulfilled.
Section 20. Arbitration . Except as otherwise explicitly provided in Section 11, any dispute between the parties arising out of this Agreement, whether as to this Agreements construction,
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interpretation or enforceability or as to any partys breach or alleged breach of any provision of this Agreement, shall be submitted to arbitration in accordance with the following procedures:
(i) Either party may demand such arbitration by giving notice of that demand to the other party. The notice shall state (x) the matter in controversy, and (y) the name of the arbitrator selected by the party giving the notice.
(ii) Not more than 15 days after such notice is given, the other party shall give notice to the party who demanded arbitration of the name of the arbitrator selected by the other party. If the other party shall fail to timely give such notice, the arbitrator that the other party was entitled to select shall be named by the Arbitration Committee of the American Arbitration Association. Not more than 15 days after the second arbitrator is so named, the two arbitrators shall select a third arbitrator. If the two arbitrators shall fail to timely select a third arbitrator, the third arbitrator shall be named by the Arbitration Committee of the American Arbitration Association.
(iii) The dispute shall be arbitrated at a hearing that shall be concluded within ten days immediately following the date the dispute is submitted to arbitration unless a majority of the arbitrators shall elect to extend the period of arbitration. Any award made by a majority of the arbitrators (x) shall be made within ten days following the conclusion of the arbitration hearing, (y) shall be conclusive and binding on the parties, and (z) may be made the subject of a judgment of any court having jurisdiction.
(iv) All expenses of the arbitration shall be borne by the Company.
The agreement of the parties contained in the foregoing provisions of this Section 20 shall be a complete defense to any action, suit or other proceeding instituted in any court or before any administrative tribunal with respect to any dispute between the parties arising out of this Agreement.
Section 21. Interpretation .
(a) As used in this Agreement, the following terms and phrases have the indicated meanings:
(i) Affiliate and Affiliates mean, when used with respect to any entity, individual, or other person, any other entity, individual, or other person which, directly or indirectly, through one or more intermediaries controls, or is controlled by, or is under common control with such entity, individual or person.
(ii) Base Salary has the meaning assigned to that term in Section 5.
(iii) Basic Benefit Plans has the meaning assigned to that term in Section 5.
(iv) Benchmark Bonus has the meaning assigned to that term in Section 5.
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(v) Board of Directors means the Board of Directors of the Company.
(vi) Business Combination has the meaning assigned to that term in Section 2.
(vii) Change in Control of the Company has the meaning assigned to that phrase in Section 2.
(viii) Claim has the meaning assigned to such term in Section 11.
(ix) Code means the Internal Revenue Code of 1986, as amended from time to time.
(x) Commission means the United States Securities and Exchange Commission or any successor agency.
(xi) Company has the meaning assigned to that term in the preamble to this Agreement. The term Company shall also include any Successor, whether the liability of such Successor under this Agreement is established by contract or occurs by operation of law.
(xii) Covered Person has the meaning assigned to that term in Section 2.
(xiii) Determination has the meaning assigned to that term in Section 11.
(xiv) Dispute has the meaning assigned to that term in Section 11.
(xv) Effective Date has the meaning assigned to that term in the preamble to this Agreement.
(xvi) Election Notice has the meaning assigned to such term in Section 11.
(xvii) Employee has the meaning assigned to such term in the preamble to this Agreement.
(xviii) Employee Claim has the meaning assigned to such term in Section 11.
(xix) Employees Disability means:
(1) if no Change in Control of the Company shall have occurred before the date of determination, the physical or mental disability of the Employee determined in accordance with the |
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disability policy of the Company at the time in effect and generally applicable to its salaried employees; and |
(2) if a Change in Control of the Company shall have occurred at that date, the physical or mental disability of the Employee determined in accordance with the disability policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees. | |
The Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed to have occurred on the date of determination, provided that if (1) a Change in Control of the Company shall have occurred before the expiration of the term of this Agreement, (2) the Company shall have subsequently given notice pursuant to Section 6 of the Companys determination of the Employees Disability, and (3) the Employee shall have given notice to the Company that the Employee disagrees with that determination, then (A) whether the Employees Disability shall have occurred shall be submitted to arbitration pursuant to Section 20, and (B) if a majority of the arbitrators decide that the Employees Disability had not occurred, at the date of determination by the Company, then (I) the Employees Disability, and the automatic termination of the Employees employment by the Company by reason of the Employees Disability, shall be deemed not to have occurred, and (II) on demand by the Employee made to the Company, the Company shall reimburse the Employee for the reasonable expenses (including attorneys fees and expenses) incurred by the Employee in obtaining that decision. |
(xx) Employees Retirement means (x) if no Change in Control of the Company shall have occurred before the date of the Employees proposed retirement, the retirement of the Employee in accordance with the retirement policy of the Company at the time in effect and generally applicable to its salaried employees, and (y) if a Change in Control of the Company shall have occurred at that date, the retirement of the Employee from the employ of the Company in accordance with the retirement policy of the Company in effect immediately before the occurrence of the first Change in Control of the Company and generally applicable to its salaried employees.
(xxi) Event of Termination for Good Reason has the meaning assigned to that phrase in Section 5.
(xxii) Event of Termination for Cause has the meaning assigned to that phrase in Section 4.
(xxiii) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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(xxiv) Excise Tax has the meaning assigned to that term in Section 11.
(xxv) Expiration Date has the meaning assigned to that term in Section 3.
(xxvi) Final Determination has the meaning assigned to such term in Section 11.
(xxvii) Gross-Up Payment has the meaning assigned to that term in Section 11.
(xxviii) Other Benefit Plans has the meaning assigned to that term in Section 5.
(xxix) Outstanding Company Common Stock has the meaning assigned to that term in Section 2.
(xxx) Outstanding Company Voting Securities has the meaning assigned to that term in Section 2.
(xxxi) Payment has the meaning assigned to that term in Section 11.
(xxxii) person means any individual, corporation, partnership, joint venture, association, joint-stock company, limited partnership, limited liability company, trust, unincorporated organization, government, or agency or political subdivision of any government.
(xxxiii) Relevant Period means a period beginning on the Termination Date and ending on the first to occur of (x) the second anniversary of the Termination Date, (y) the date on which the Employee becomes a full time employee of another person, and (z) the Employees normal retirement date, determined in accordance with the retirement policy of the Company in effect on the Termination Date.
(xxxiv) Severance Payment has the meaning assigned to that term in Section 7.
(xxxv) Successor means a person with or into which the Company shall have been merged or consolidated or to which the Company shall have transferred its assets as an entirety or substantially as an entirety.
(xxxvi) Tax has the meaning assigned to that term in Section 11.
(xxxvii) Tax Claim Notice has the meaning assigned to that term in Section 11.
(xxxviii) Tax Counsel has the meaning assigned to that term in Section 11.
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(xxxix) Termination Date has the meaning assigned to that term in Section 6.
(xl) this Agreement means this Change in Control Agreement as it may be amended from time to time in accordance with Section 15.
(xli) Underpayment has the meaning assigned to that term in Section 11.
(xlii) Wholly Owned Entities has the meaning assigned to that term in Section 13.
(b) In the event of the enactment of any successor provision to any statute or rule cited in this Agreement, references in this Agreement to such statute or rule shall be to such successor provision.
(c) The headings of Sections of this Agreement shall not control the meaning or interpretation of this Agreement.
(d) References in this Agreement to any Section are to the corresponding Section of this Agreement unless the context otherwise indicates.
In Witness Whereof , the Company and the Employee have executed this Agreement as of the Effective Date.
PATTERSON-UTI ENERGY, INC. | ||||
By: | /s/ Cloyce A. Talbott | |||
|
||||
Name: | Cloyce A. Talbott | |||
Title: | Chief Executive Officer |
/s/ | John E. Vollmer III |
|
John E. Vollmer III |
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Exhibit 14.1
PATTERSON-UTI ENERGY, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
FOR SENIOR FINANCIAL EXECUTIVES
A. | Policy |
1. | It is the policy of Patterson-UTI Energy, Inc. and its subsidiaries (the Company) to conduct its business in accordance with the highest standards of honesty and integrity, the provisions of this Code of Business Conduct and Ethics for Senior Financial Executives (the Code), other Company policies and all applicable laws and regulations of the United States, and the states, counties, cities and other jurisdictions in which the Company operates. |
2. | In addition to the requirements and expectations contained in the Companys general policies and procedures, the Company believes that Senior Financial Executives should abide by a further code of ethics to ensure that the Company maintains the highest integrity with respect to the preparation and reporting of financial information related to the Company. Accordingly, this Code shall apply to the following: the Chief Executive Officer, all Senior Vice Presidents, the Chief Financial Officer, the Chief Accounting Officer and the Controller, and persons performing similar functions (the Senior Financial Executives). |
B. | Focus |
1. | This Code is intended as a codification of standards that are reasonably designed to deter wrongdoing and to promote and reinforce the following: |
a. | Honest and ethical conduct, including ethical handling of actual or apparent conflicts of interest between personal and professional relationships. |
b. | Full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with or submits to the Securities and Exchange Commission (SEC) or releases to the public. |
c. | Compliance with applicable governmental laws, rules and regulations. |
d. | The prompt reporting to an appropriate person or persons identified in this Code of violations of the Code. |
e. | Accountability with respect to adherence to this Code. |
C. | Disclosure Controls |
1. | Each Senior Financial Executive shall endeavor, through actions which include, without limitation, the establishment, maintenance and periodic evaluation of appropriate disclosure controls and procedures and internal controls, to ensure |
that, with respect to each current, quarterly or annual report filed by the Company with the SEC (each a Report): |
a. | The Report does not contain any untrue statements of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading. |
b. | The financial statements, and other financial information contained in each Report fairly present in all material respects the financial condition and results of operations of the Company as of, and for, the periods presented in the Report. |
c. | The Report discloses financial information relating to the Company in a full, fair, accurate, timely and understandable manner. |
2. | Each Senior Financial Executive shall endeavor to design disclosure controls and procedures and internal controls to ensure that material information relating to the Company and its consolidated subsidiaries is made known to such Senior Financial Executives by others within the Company. |
D. | Accuracy and Completeness |
1. | Senior Financial Executives, as the primary executives responsible for the complete and accurate financial reporting of the Company, to the best of their ability, shall not permit the public reporting of any financial information of the Company which they believe is false or misleading in any material respect. |
2. | Should any Senior Financial Executive have reason to believe that the Company has reported or may be intending to report any false or misleading financial information, he/she shall promptly advise the Chief Executive Officer of the Company. If having done so, such Senior Financial Executive believes that appropriate action will not be taken to present such reporting, then the Senior Financial Executive shall report the matter to the Chairman of the Audit Committee of the Companys Board of Directors (the Board). |
E. | Prior Employment |
1. | Each Senior Financial Executive shall fully disclose to the Chairman of the Audit Committee of the Board any prior employment of such executive with any accounting firm which the Company has engaged or proposes to engage, to perform auditing services. |
2. | Each Senior Financial Executive shall also fully disclose the scope of any work performed for the Company while employed by such accounting firm, and the time period during which such work was performed. |
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F. | Questionable Transactions |
1. | No Senior Financial Executive, shall, directly or indirectly, through any business entity in which he/she or any of such executives family members have an interest or otherwise, engage in any transaction with the Company which is required to be reported in, or requires the exercise of any judgment as to whether it is required to be reported in, the financial records or statements of the Company. |
2. | The following are exceptions: |
a. | Regular compensation, including bonuses, and employee benefits received in such executives capacity as an executive and employee of the Company. |
b. | Transactions in goods and services routinely engaged in by the Company with its unaffiliated clients or customers on terms, subject to customary employee discounts and benefits, generally offered to its unaffiliated clients and customers. |
c. | Transactions with publicly held entities in which the executive has less than 1% equity interest and with respect to which transactions such executive has no decision-making role on behalf of such entity. |
d. | Transactions, or transactions normally arising out of business arrangements, fully disclosed to and approved in advance by the Audit Committee of the Board. |
G. | Prompt Disclosure |
1. | Each Senior Financial Executive shall promptly disclose to the Chairman of the Audit Committee of the Board his/her knowledge of the following: |
a. | All significant deficiencies in the design or operation of the Companys internal controls which could adversely affect the Companys ability to accurately record, process, summarize, and report financial data. |
b. | Any material weakness in the Companys internal controls. |
c. | Any fraud, whether or not material, that involves the Companys management or other employees who have a significant role in the Companys internal controls or the proper recording, processing, summarizing or reporting of the Companys financial information. |
2. | The Senior Financial Executives shall ensure that each Report, to the extent required by any law, rule or regulation, fully, accurately and timely discloses whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls in connection with such Report, including any corrective actions with regard to significant deficiencies and material weakness. |
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3. | Each Senior Financial Executive shall promptly report to the Chairman of the Audit Committee of the Board any violations of this Code. |
H. | Reporting Violations |
1. | In the event any Senior Financial Executive shall believe that the Company has engaged or is about to engage in any activity which violates any foreign, federal, state, or local law, rule or regulations, such Senior Financial Executive shall promptly advise the Chief Executive Officer, the Chief Financial Officer, or the General Counsel in person or by telephone, letter, or electronic mail as follows: |
a. |
By Letter:
Patterson-UTI Energy, Inc. 4510 Lamesa Highway Synder, TX 79549 |
b. |
By Telephone:
(325) 574-6323 |
2. | If this is uncomfortable or inappropriate, or if having done so, such Senior Financial Executive believes that appropriate action will not be taken to address the violation or potential violation, then such Senior Financial Executive shall report the matter to the Chairman of the Audit Committee of the Board. |
3. | The Company will not permit retaliation of any kind on or on behalf of the Company, against a Senior Financial Executive, as a result of a good faith report or an actual or suspected violation of this Code or any standard of ethical and lawful conduct. Retaliation is itself a violation of this Code. Any such retaliation shall be reported using the reporting procedures outlined above. |
I. | Enforcement |
1. | If a Senior Financial Executive is found to be in violation of this Code, the Company shall take appropriate action up to and including discharge and, if warranted, legal proceedings. |
2. | To the extent possible, investigations of allegations of violations of this Code will be maintained in confidence. The Company will inform only those individuals who have a need to know of the report in order to conduct a full and fair investigation of the allegations that have been made. |
J. | Amendment, Modification, Waiver and Intent |
1. | This Code may be amended, modified or waived by the Board of Directors and waivers may also be granted by the Governance Committee of the Board subject |
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to the disclosure and other provisions of the Securities Exchange Act of 1934, and the rules thereunder and the applicable rules of the NASDAQ Stock Market, Inc. |
2. | This Code of Business Conduct and Ethics for Senior Financial Executives is intended as a directive for the efficient and professional performance of all Senior Financial Executives. Nothing herein contained shall be construed to be a contract between the Company and the Senior Financial Executives. Additionally, this Code is not to be construed as containing binding terms and conditions of employment. This employment relationship with the Company is at will and the Company retains the absolute right to terminate any Senior Financial Executive, at any time, with or without cause. |
3. | The Company shall immediately disclose, by means of the filing of a Current Report on Form 8-K or by such other means as the SEC may require, any amendments to or any waiver of this Code. |
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Exhibit 21.1
Subsidiaries of the Registrant
Name
State of
Incorporation or
Organization
Ambar Drilling Fluids LP, LLLP
Delaware
Eastern Reservoir Services Company
Nova Scotia
International Petroleum Service Company
Pennsylvania
Lone Star Mud LP, LLLP
Delaware
Norton Drilling Company Mexico, Inc.
Delaware
Norton Drilling, L.P.
Delaware
Norton Drilling Services, Inc.
Delaware
Norton GP, L.L.C.
Delaware
Patterson (GP) LLC
Delaware
Patterson (GP2) LLC
Delaware
Patterson (LP) LLC
Delaware
Patterson Petroleum LP, LLLP
Delaware
Patterson Petroleum Trading Company LP, LLLP
Delaware
Patterson-UTI Acquisition, LLC
Texas
Patterson-UTI Aviation Services, Inc.
Delaware
Patterson-UTI Drilling Company LP, LLLP
Delaware
Patterson-UTI Drilling Company South LP, LLLP
Delaware
Patterson-UTI Drilling Company West LP, LLLP
Delaware
Phelps Drilling Co.
Nova Scotia
Suits Drilling Company
Oklahoma
Universal Well Services, Inc.
Delaware
UTI Drilling Canada, Inc.
Delaware
UTI Drilling, L.P.
Texas
UTI Management Services, L.P.
Texas
UTICO Hard Rock Boring, Inc.
Delaware
UTICO, Inc.
Delaware
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-47917, 333-39471, 333-67810, 333-60470,
333-60466 and 333-108311), in the Registration Statements on Form S-3 (Nos.
333-53336, 333-44932, 333-34018, 333-90440 and 333-89885) and in the
Registration Statement on Form S-4 (No. 333-107298) of Patterson-UTI Energy,
Inc. and its subsidiaries of our report dated January 30, 2004 relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Houston, Texas
February 3, 2004
Exhibit 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
I hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-47917, 333-39471, 333-67810, 333-60470,
333-60466 and 333-108311), in the Registration Statements on Form S-3 (Nos.
333-53336, 333-44932, 333-34018, 333-90440 and 333-89885) and in the
Registration Statement on Form S-4 (No. 333-107298) of Patterson-UTI Energy,
Inc. and its subsidiaries of information contained in my summary reserve
reports relating to the oil and natural gas reserves as of December 31, 2003,
2002, and 2001, which appears in this Form 10-K.
/s/ M. Brian Wallace
M. BRIAN WALLACE, P.E.
Dallas, Texas
February 2, 2004
EXHIBIT 31.1
CERTIFICATIONS
I, Cloyce A. Talbott, certify that,
(1) I have reviewed this annual report on Form 10-K of Patterson-UTI
Energy, Inc;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
(4) The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
(5) The registrants other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting.
/s/ CLOYCE A. TALBOTT
Cloyce A. Talbott
Chief Executive Officer
Date: February 4, 2004
EXHIBIT 31.2
CERTIFICATIONS
I, Jonathan D. Nelson, certify that:
(1) I have reviewed this annual report on Form 10-K of Patterson-UTI
Energy, Inc;
(2) Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report;
(4) The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial
reporting; and
(5) The registrants other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect
the registrants ability to record, process, summarize and report
financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
control over financial reporting.
/s/ JONATHAN D. NELSON
Jonathan D. Nelson
Vice President, Chief Financial Officer,
Secretary and Treasurer
Date: February 4, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
NOT FILED PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Annual Report of Patterson-UTI Energy, Inc. (the
Company) on Form 10-K for the period ending December 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the Report),
Cloyce A. Talbott, Chief Executive Officer, and Jonathan D. Nelson, Chief
Financial Officer, of the Company, each certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission upon request.
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Cloyce A. Talbott
Cloyce A. Talbott
Chief Executive Officer
February 4, 2004
/s/ Jonathan D. Nelson
Jonathan D. Nelson
Chief Financial Officer
February 4, 2004