-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BbScoHC2QWfWtlx3K92JKJDd8SizPrGeYa30vAMkWTf+rB+bfITLhgSzxt7LNkBo jOn/g1Ku+IdkyVCTM163Ig== 0000912057-02-024067.txt : 20020613 0000912057-02-024067.hdr.sgml : 20020613 20020613132545 ACCESSION NUMBER: 0000912057-02-024067 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER DRILLING CO CENTRAL INDEX KEY: 0000320575 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 742088619 STATE OF INCORPORATION: TX FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08182 FILM NUMBER: 02678063 BUSINESS ADDRESS: STREET 1: 9310 BROADWAY BLDG I CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 5128287689 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH TEXAS DRILLING CO DATE OF NAME CHANGE: 19810715 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH TEXAS DRILLING & EXPLORATION INC DATE OF NAME CHANGE: 19920703 10-K 1 a2082143z10-k.htm 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K


(Mark one)


ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2002

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 2-70145

PIONEER DRILLING COMPANY
(Exact name of registrant as specified in its charter)

TEXAS
(State or other jurisdiction
of incorporation or organization)		   74-2088619
(I.R.S. Employer
Identification Number)

9310 Broadway, Bldg. I
San Antonio, Texas
(Address of principal executive offices)
 
78217
(Zip Code)

Registrant's telephone number, including area code: (210) 828-7689

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
   Name of each exchange on which registered
Common Stock $0.10 par value   American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

        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 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 ý    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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $36,800,897 as of June 5, 2002.

        As of June 5, 2002, there were 15,922,459 shares of common stock, par value $0.10 per share, of the registrant issued and outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the proxy statement related to the registrant's 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.


TABLE OF CONTENTS

 
    
   Page
PART I

Items 1 and 2.
 
Business and Properties
 
1
Item 3.   Legal Proceedings   12
Item 4.   Submission of Matters to a Vote of Security Holders   12

PART II

Item 5.
 
Market for Registrant's Common Equity and Related Stockholder Matters
 
12
Item 6.   Selected Financial Data   14
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   14
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   21
Item 8.   Financial Statements and Supplementary Data   22
Item 9.   Change in and Disagreements with Accountants on Accounting and Financial Disclosure   41

PART III

Item 10.
 
Directors and Executive Officers of the Registrant
 
41
Item 11.   Executive Compensation   41
Item 12.   Security Ownership of Certain Beneficial Owners and Management   41
Item 13.   Certain Relationships and Related Transactions   41

PART IV

Item 14.
 
Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
41


PART I

        Statements we make in this Annual Report on Form 10-K which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks, uncertainties and assumptions, including those to which we refer under the heading "Cautionary Statement Concerning Forward-Looking Statements" following Items 1 and 2 of Part I of this report.


Items 1 and 2. Business and Properties

General

        Pioneer Drilling Company provides contract land drilling services to independent and major oil and gas exploration and production companies. In addition to our drilling rigs, we provide the drilling crews and most of the ancillary equipment needed to operate our drilling rigs. We have focused our operations in the natural gas production regions of South Texas and East Texas. Our company was incorporated in 1979 as the successor to a business that had been operating since 1968. We conduct our operations through our principal operating subsidiary, Pioneer Drilling Services, Ltd. Our common stock trades on the American Stock Exchange under the symbol "PDC."

        Over the past three fiscal years, we have significantly expanded our fleet of drilling rigs through acquisitions and the construction of new and refurbished rigs. The following table summarizes these acquisitions:

Date
   Acquisition
   Market
   Number of
Rigs Acquired
  
September 1999   Howell Drilling, Inc.—Assets   South Texas   2  
August 2000   Pioneer Drilling Co.—Stock   South Texas   4 (1)
March 2001   Mustang Drilling, Ltd.—Assets   East Texas   4  
May 2002   United Drilling Company—Assets   South Texas   2  
(1)
Includes one drilling rig under a lease agreement.

        As of June 5, 2002, our rig fleet consists of 22 drilling rigs, 15 of which are operating in South Texas and seven of which are operating in East Texas. During the fiscal year ended March 31, 2002, we added four rigs, including two newly constructed rigs (described in the following paragraph) and two refurbished rigs. In May 2002, we commissioned the building of two additional refurbished to like new rigs. We own all the rigs in our fleet except for one rig that we operate under a two year lease agreement expiring in February 2004. The lease agreement includes an option to acquire this rig.

        In fiscal 2002, we acquired the principal components of the two newly constructed rigs from National Oilwell, Inc., a leading manufacturer of drilling rigs and other equipment used in oil and gas drilling and production operations. Both of these rigs are capable of drilling wells as deep as 18,000 feet. In addition to their deep-drilling capabilities, these rigs employ several technological advancements that have been developed in recent years, including alternating-current drive motors to power their hoisting systems. With these technological advancements, we believe these rigs provide us the following advantages over other rigs operating in our markets:

    •
    greater mobility;

    •
    increased control, efficiency and reliability;

    •
    improved safety features; and

    •
    improved environmental characteristics.

1

        We conduct our operations primarily in South Texas and East Texas. We believe that these markets have historically experienced greater utilization rates and dayrates versus other domestic markets, due in large part to the heavy concentration of natural gas reserves located in these markets. During fiscal 2002, substantially all the wells we drilled for our customers were drilled in search of natural gas. Natural gas reserves are typically found in deeper geological formations and generally require premium equipment and quality crews to drill the wells.

        Our business strategy is to own and operate a high quality fleet of land drilling rigs in active drilling markets and position ourselves as the contractor of choice for our customers in order to maximize rig utilization and dayrates and enhance shareholder value. We intend to continue making additions to our drilling fleet, either through acquisitions of businesses or selected assets or through the construction of new or refurbished drilling rigs. As we add to our fleet, we intend to focus on the addition of rigs capable of performing deep drilling for natural gas.

        For many years, the United States contract land drilling services industry has been characterized by an oversupply of drilling rigs and a large number of drilling contractors. However, since 1996, there has been significant consolidation within the industry. We believe continued consolidation in the industry will generate more stability in dayrates, even during industry downturns. However, although consolidation in the industry is continuing in 2002, the industry is still highly fragmented and remains very competitive. For a discussion of market conditions in our industry, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Conditions in Our Industry" in item 7 of Part II of this report.


Drilling Equipment

General

        A land drilling rig consists of engines, a hoisting system, a rotating system, pumps and related equipment to circulate drilling fluid, blowout preventers and related equipment.

        Diesel or gas engines are typically the main power sources for a drilling rig. Power requirements for drilling jobs may vary considerably, but most land drilling rigs employ two or more engines to generate between 500 and 2,000 horsepower, depending on well depth and rig design. Most drilling rigs capable of drilling in deep formations, involving depths greater than 15,000 feet, use diesel-electric power units to generate and deliver electric current through cables to electrical switch gear, then to direct-current electric motors attached to the equipment in the hoisting, rotating and circulating systems.

        Drilling rigs use long strings of drill pipe and drill collars to drill wells. Drilling rigs are also used to set heavy strings of large-diameter pipe, or casing, inside the borehole. Because the total weight of the drill string and the casing can exceed 500,000 pounds, drilling rigs require significant hoisting and braking capacities. Generally, a drilling rig's hoisting system is made up of a mast, or derrick, a traveling block and hook assembly that attaches to the rotating system, a mechanism known as the drawworks, a drilling line and ancillary equipment. The drawworks mechanism consists of a revolving drum, around which the drilling line is wound, and a series of shafts, clutches and chain and gear drives for generating speed changes and reverse motion. The drawworks also houses the main brake, which has the capacity to stop and sustain the weights used in the drilling process. When heavy loads are being lowered, a hydraulic or electric auxiliary brake assists the main brake to absorb the great amount of energy developed by the mass of the traveling block, hook assembly, drill pipe, drill collars and drill bit or casing being lowered into the well.

        The rotating equipment from top to bottom consists of a swivel, the kelly cock, the kelly, the rotary table, drill pipe, drill collars and the drill bit. We refer to the equipment between the swivel and the drill bit as the drill stem. The swivel assembly sustains the weight of the drill stem, permits its

2


rotation and affords a rotating pressure seal and passageway for circulating drilling fluid into the top of the drill string. The swivel also has a large handle that fits inside the hook assembly at the bottom of the traveling block. Drilling fluid enters the drill stem through a hose, called the rotary hose, attached to the side of the swivel. The kelly is a triangular, square or hexagonal piece of pipe, usually 40 feet long, that transmits torque from the rotary table to the drill stem and permits its vertical movement as it is lowered into the hole. The bottom end of the kelly fits inside a corresponding triangle, square or hexagonal opening in a device called the kelly bushing. The kelly bushing, in turn, fits into a part of the rotary table called the master bushing. As the master bushing rotates, the kelly bushing also rotates, turning the kelly, which rotates the drill pipe and thus the drill bit. Drilling fluid is pumped through the kelly on its way to the bottom. The rotary table, equipped with its master bushing and kelly bushing, supplies the necessary torque to turn the drill stem. The drill pipe and drill collars are both steel tubes through which drilling fluid can be pumped. Drill pipe, sometimes called drill string, comes in 30 foot sections, or joints, with threaded sections on each end. Drill collars are heavier than drill pipe and are also threaded on the ends. Collars are used on the bottom of the drill stem to apply weight to the drilling bit. At the end of the drill stem is the bit, which chews up the formation rock and dislodges it so that drilling fluid can circulate the fragmented material back up to the surface where the circulating system filters it out of the fluid.

        Drilling fluid, often called mud, is a mixture of clays, chemicals and water or oil, which is carefully formulated for the particular well being drilled. Drilling mud accounts for a major portion of the equipment and cost of drilling a well. Bulk storage of drilling fluid materials, the pumps and the mud mixing equipment are placed at the start of the circulating system. Working mud pits and reserve storage are at the other end of the system. Between these two points the circulating system includes auxiliary equipment for drilling fluid maintenance and equipment for well pressure control. Within the system, the drilling mud is typically routed from the mud pits to the mud pump and from the mud pump through a standpipe and the rotary hose to the drill stem. The drilling mud travels down the drill stem to the bit, up the annular space between the drill stem and the borehole and through the blowout preventer stack to the return flow line. It then travels to a shale shaker for removal of rock cuttings, then back to the mud pits, which are usually steel tanks. The so-called reserve pits, usually one or two fairly shallow excavations, are used for waste material and excess water around the location.

        There are numerous factors that differentiate land drilling rigs, including their power generation systems and their drilling depth capabilities. The actual drilling depth capability of a rig may be less than or more than its rated depth capability due to numerous factors, including the size, weight and amount of the drill pipe on the rig. The intended well depth and the drill site conditions determine the amount of drill pipe and other equipment needed to drill a well. Generally, land rigs operate with crews of five to six persons.

Our Fleet of Drilling Rigs

        As of June 5, 2002, our rig fleet consists of 22 drilling rigs. We own all the rigs in our fleet except for one that we operate under a two year lease/purchase agreement expiring in February 2004.

        In fiscal 2002, we placed in service two newly constructed rigs from National Oilwell, Inc., a leading manufacturer of drilling rigs and other equipment used in oil and gas drilling and production operations. Both of these rigs are capable of drilling wells as deep as 18,000 feet. In addition to their deep-drilling capabilities, these rigs employ several technological advancements that have been developed in recent years. These advancements include alternating-current ("AC") motors, which provide an electric braking mechanism that gives the hoisting system the capability of holding a full load in a stationary position and eliminates the need for the drilling personnel to operate an auxiliary brake. The AC technology also provides significantly greater control in the drilling process and improves the efficiency in "tripping" operations when the drill stem is being lowered into or raised from the borehole for various reasons, including cleaning the borehole, changing the drill bit or coming

3


out of the hole to install casing. The AC technology also requires a reduced number of diesel engines, which can generate fuel savings and reduce maintenance requirements. These new rigs also employ computerized "auto-driller" technology that increases the rate of penetration into the formation by more closely monitoring the total weight on the drill bit and automatically lowering the drill stem to maintain a constant pressure on the drill bit. These rigs also have features that, as compared to other rigs, reduce the time and expense associated with transporting the rig, installing it on location and removing it when drilling operations are complete. They also require less land clearing for installation and operation and are equipped with drain lines that permit them to operate without discharging cuttings or other drilling material into the environment.

        With these technological advancements, we believe these rigs provide us the following advantages over other rigs operating in our markets:

    •
    greater mobility;

    •
    increased control, efficiency and reliability;

    •
    improved safety features; and

    •
    improved environmental characteristics.

        The following table sets forth information regarding utilization for our fleet of drilling rigs:

 
   Years ended March 31,
 
   2002
   2001
   2000
   1999
   1998
   1997
Average number of operational rigs for the period   18.0   10.5   6.6   6.0   6.0   4.0
Average utilization rate   82%   91%   66%   66%   86%   90%

4

        The following table sets forth information regarding our drilling fleet:

Rig
Number
   Rig Design
   Approximate
Drilling
Depth
Capability
(feet)
   Current
Location
   Type
   Horse Power
1   IRI Cabot 750E   11,500   South Texas   Electric   700
2   IRI Cabot 750E   11,500   South Texas   Electric   700
3   National 110-UE   18,000   South Texas   Electric   1500
  4(1)   RMI 1000E   16,000   South Texas   Electric   1000
5   Gardner-Denver 500M   10,000   South Texas   Mechanical   750
6   Brewster N4610   12,000   East Texas   Mechanical   900
7   IRI 1700E   18,000   South Texas   Electric   1700
8   IRI 1700E   18,000   South Texas   Electric   1700
9   Emsco 500   10,000   East Texas   Mechanical   500
10   Skytop Brewster N46   12,000   South Texas   Mechanical   950
11   Skytop Brewster N46   12,000   South Texas   Mechanical   950
12   IRI Cabot 900   10,500   South Texas   Mechanical   900
14   Skytop Brewster N46   12,000   South Texas   Mechanical   950
15   IRI Cabot 750   11,000   South Texas   Mechanical   700
16   IRI Cabot 750   11,000   South Texas   Mechanical   700
17   Ideco H-725   12,000   East Texas   Mechanical   750
18   Brewster N-75   12,500   East Texas   Mechanical   1000
19   Brewster N-75   12,500   East Texas   Mechanical   1000
20   BDW 800   13,500   East Texas   Mechanical   1000
21   National 110-UE   18,000   South Texas   Electric   1500
22   Ideco H-725   12,000   East Texas   Mechanical   750
23   Ideco H-725   12,000   South Texas   Mechanical   750
24   National 110-UE   18,000   Under Construction   Electric   1500
25   National 110-UE   18,000   Under Construction   Electric   1500
(1)
We are leasing this rig under a two year lease agreement which expires in February 2004 and has an option to purchase the rig between January 1, 2004 and February 1, 2004.

        We also own a fleet of 16 trucks and related transportation equipment that we use to transport our drilling rigs to and from drilling sites.

        We believe that our drilling rigs and other related equipment are in good operating condition. Our employees perform periodic maintenance and minor repair work on our drilling rigs. We rely on various oilfield service companies for major repair work and overhaul of our drilling equipment when needed. We also engage in periodic improvement of our drilling equipment. In the event of major breakdowns or mechanical problems, our rigs could be subject to significant idle time and a resulting loss of revenue if the necessary repair services were not immediately available. We have not experienced any substantial downtime as the result of repair or overhaul of our equipment in the past three years.

    Drilling Contracts

        We obtain our contracts for drilling oil and gas wells either through competitive bidding or through direct negotiations with customers. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms we offer generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used and the anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the customer to terminate on short notice, usually on payment of a fee.

        Daywork Contracts.    Under daywork drilling contracts, we provide a drilling rig with required personnel to our customer who supervises the drilling of the well. We are paid based on a negotiated

5


fixed rate per day while the rig is used. Daywork drilling contracts specify the equipment to be used, the size of the hole and the depth of the well. Under a daywork drilling contract, the customer bears a large portion of out-of-pocket costs of drilling and we generally bear no part of the usual risks associated with drilling, such as time delays and unanticipated costs.

        Turnkey Contracts.    Under a turnkey contract, we agree to drill a well for our customer to a specified depth and under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well. We often subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progress payments and are entitled to be paid by our customer only after we have performed the terms of the drilling contract in full. Turnkey contracts generally afford an opportunity to earn a higher return than would normally be available on daywork contracts if the contract can be completed successfully without complications.

        The risks to us under a turnkey contract are substantially greater than on a well drilled on a daywork basis, because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalations and personnel. We employ or contract for engineering expertise to analyze seismic, geologic and drilling data to identify and reduce some of the drilling risks assumed by us. We use the results of this analysis to evaluate the risks of a proposed contract and seek to account for such risks in our bid preparation. We believe that our operating experience, qualified drilling personnel, risk management program, internal engineering expertise and access to proficient third party engineering contractors have allowed us to reduce some of the risks inherent in turnkey drilling operations. We also maintain insurance coverage against some but not all drilling hazards. However, the occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey jobs could have a material adverse effect on our financial position and results of operations.

        Footage Contracts.    Under footage contracts, we are paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. We typically pay more of the out-of-pocket costs associated with footage contracts compared with daywork contracts. Similar to a turnkey contract, the risks to us on a footage contract are greater because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalation and personnel. As with turnkey contracts, we manage this additional risk through the use of engineering expertise and bid the footage contracts accordingly, and we maintain insurance coverage against some but not all drilling hazards. However, the occurrence of uninsured or under-insured losses or operating cost overruns on our footage jobs could have a material adverse effect on our financial position and results of operations.

        During the year ended March 31, 2002, we drilled 165 wells, with 90% of our contract drilling revenue attributable to daywork contracts, 7% attributable to turnkey contracts and 3% attributable to footage contracts. During the year ended March 31, 2001, we drilled 101 wells, with 42% of our contract drilling revenue attributable to daywork contracts, 57% attributable to turnkey contracts and 1% attributable to footage contracts. As of March 31, 2002, we had 20 rigs of which 10 were operating under daywork contracts, three under turnkey contracts, two under footage contracts and five were not under contract. Due to the current reduced demand for drilling rigs, we have returned to bidding on turnkey contracts in an effort to improve profitability and rig utilization. Consequently, the trend away from turnkey contracts to daywork contracts we experienced during fiscal 2002 may not continue.

6



Customers And Marketing

        Our contract drilling customers include independent and major oil and gas exploration production companies. We completed contracts for 48 customers in fiscal 2002 compared to 58 customers in fiscal 2001 and 38 customers in fiscal 2000. During the fiscal year ended March 31, 2002, our three largest customers, Dominion Exploration & Production, Inc., Kerr-McGee Oil & Gas Onshore L.L.C. and Pogo Producing Company, accounted for 13.7%, 12.2% and 11.1%, respectively, of our total contract drilling revenue.

        We primarily market our drilling rigs through employee marketing representatives. These marketing representatives use personal contacts and industry periodicals and publications to determine which operators are planning to drill oil and gas wells in the near future in our East Texas and South Texas market areas. Once we have been placed on the "bid list" for an operator, we will typically be given the opportunity to bid on most future wells for that operator in the areas we operate.

        From time to time we also enter into informal, nonbinding commitments with our customers to provide drilling rigs for future periods at specified rates plus fuel and mobilization charges, if applicable, and escalation provisions. This practice is customary in the contract land drilling services business during times of tightening rig supply.

        During late fiscal 2001, we entered into a number of term contracts with our customers ranging in length from six months to one year. The practical effect of these term contracts was to protect us for the duration of the contract from having the rig become idle and from unexpected declines in dayrates for our rigs. Conversely, our customers benefit from term contracts by the assured availability of a rig to meet their drilling schedule, and from contractual protection against exposure to rapid increases in dayrates. These term contracts are priced on a fixed dayrate basis which allow us to earn an acceptable rate of return on the capital we are employing. To the extent possible, we intend to continue entering into additional term contracts from time to time based on market conditions. Under current market conditions these term contracts are not being renewed at their expiration date. Most of our rigs are now being contracted on a well-by-well basis.


Competition

        We encounter substantial competition from other drilling contractors. Our primary market areas of South Texas and East Texas are highly fragmented and competitive. The fact that drilling rigs are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry.

        The drilling contracts we compete for are usually awarded on the basis of competitive bids. We believe pricing and rig availability are the primary factors our potential customers consider in determining which drilling contractor to select. In addition, we believe the following factors are also important:

    •
    the type and condition of each of the competing drilling rigs;

    •
    the mobility and efficiency of the rigs;

    •
    the quality of service and experience of the rig crews;

    •
    the safety records of the rigs;

    •
    the offering of ancillary services; and

    •
    the ability to provide drilling equipment adaptable to, and personnel familiar with, new technologies and drilling techniques.

7

        While we must be competitive in our pricing, our competitive strategy generally emphasizes the quality of our equipment, the safety record of our rigs and the experience of our rig crews to differentiate us from our competitors.

        Contract drilling companies compete primarily on a regional basis, and the intensity of competition may vary significantly from region to region at any particular time. If demand for drilling services improves in a region where we operate, our competitors might respond by moving in suitable rigs from other regions. An influx of rigs from other regions could rapidly intensify competition and make any improvement in demand for drilling rigs in a particular region short-lived.

        Many of our competitors have greater financial, technical and other resources than we do. Their greater capabilities in these areas may enable them to:

    •
    better withstand industry downturns;

    •
    compete more effectively on the basis of price and technology;

    •
    better retain skilled rig personnel; and

    •
    build new rigs or acquire and refurbish existing rigs so as to be able to place rigs into service more quickly than us in periods of high drilling demand.


Raw Materials

        The materials and supplies we use in our drilling operations include fuels to operate our drilling equipment, drilling mud, drill pipe, drill collars, drill bits and cement. We do not rely on a single source of supply for any of these items. While we are not currently experiencing any shortages, from time to time there have been shortages of drilling equipment and supplies during periods of high demand. Shortages could result in increased prices for drilling equipment or supplies that we may be unable to pass on to customers. In addition, during periods of shortages, the delivery times for equipment and supplies can be substantially longer. Any significant delays in our obtaining drilling equipment or supplies could limit drilling operations and jeopardize our relations with customers. In addition, shortages of drilling equipment or supplies could delay and adversely affect our ability to obtain new contracts for our rigs, which could have a material adverse effect on our financial condition and results of operations.


Operating Risks and Insurance

        Our operations are subject to the many hazards inherent in the contract land drilling business, including the risks of:

    •
    blowouts;

    •
    fires and explosions;

    •
    loss of well control;

    •
    collapse of the borehole;

    •
    lost or stuck drill strings; and

    •
    damage or loss from natural disasters.

        Any of these hazards can result in substantial liabilities or losses to us from, among other things:

    •
    suspension of drilling operations;

    •
    damage to, or destruction of, our property and equipment and that of others;

    •
    personal injury and loss of life;

8

    •
    damage to producing or potentially productive oil and gas formations through which we drill; and

    •
    environmental damage.

        We seek to protect ourselves from some but not all operating hazards through insurance coverage. However, some risks are either not insurable or insurance is available only at rates that we consider uneconomical. Those risks include pollution liability in excess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtain contractual protection against uninsured operating risks from our customers. However, customers who provide contractual indemnification protection may not in all cases maintain adequate insurance to support their indemnification obligations. We can offer no assurance that our insurance or indemnification arrangements will adequately protect us against liability or loss from all the hazards of our operations. The occurrence of a significant event that we have not fully insured or indemnified against or the failure of a customer to meet its indemnification obligations to us could materially and adversely affect our results of operations and financial condition. Furthermore, we may not be able to maintain adequate insurance in the future at rates we consider reasonable.

        Our current insurance coverages include property insurance on our rigs, drilling equipment and real property. Our insurance coverage for property damage to our rigs and to our drilling equipment is based on our estimate, as of October 2001, of the cost of comparable used equipment to replace the insured property. The policy provides for a deductible on rigs of $50,000 per occurrence. Our third party liability insurance coverage is $26 million per occurrence and in the aggregate, with a deductible of $60,000 per occurrence. 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 well disasters, extensive fire damage or damage to the environment.

        In addition, we generally carry insurance coverage to protect against certain hazards inherent in our turnkey and footage contract drilling operations. This insurance covers "control-of-well," including blowouts above and below the surface, re-drilling, seepage and pollution. This policy provides coverage of either $3 million or $5 million, depending on the area in which the well is drilled and its target depth. This policy also provides care, custody and control insurance, with a limit of $250,000.


Employees

        We currently have approximately 410 employees. Approximately 67 of these employees are salaried administrative or supervisory employees. The rest of our employees are hourly employees who operate or maintain our drilling rigs. The number of hourly employees fluctuates depending on the number of drilling projects we are engaged in at any particular time. None of our employment arrangements are subject to collective bargaining arrangements.

        Our operations require the services of employees having the technical training and experience necessary to obtain the proper operational results. As a result, our operations depend, to a considerable extent, on the continuing availability of such personnel. Although we have not encountered material difficulty in hiring and retaining qualified rig crews, shortages of qualified personnel are occurring in our industry. If we should suffer any material loss of personnel to competitors or be unable to employ additional or replacement personnel with the requisite level of training and experience to adequately operate our equipment, our operations could be materially and adversely affected. While we believe our wage rates are competitive and our relationships with our employees are satisfactory, a significant increase in the wages paid by other employers could result in a reduction in our workforce, increases in wage rates, or both. The occurrence of either of these events for a significant period of time could have a material and adverse effect on our financial condition and results of operations.

9



Facilities

        We own our headquarters building in San Antonio, Texas. We also own a 15-acre division office, rig storage and maintenance yard in Corpus Christi, Texas and lease a six-acre division office, storage and maintenance yard in Henderson, Texas, at a cost of $3,700 per month, pursuant to a lease extending through March 2006. We believe these facilities are adequate to serve our current and anticipated needs.


Governmental Regulation

        Our operations are subject to stringent laws and regulations relating to containment, disposal and controlling the discharge of hazardous oilfield waste and other nonhazardous waste material into the environment, requiring removal and cleanup under certain circumstances, or otherwise relating to the protection of the environment. In addition, our operations are often conducted in or near ecologically sensitive areas, such as wetlands, which are subject to special protective measures and which may expose us to additional operating costs and liabilities for accidental discharges of oil, natural gas, drilling fluids or contaminated water or for noncompliance with other aspects of applicable laws. We are also subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the Environmental Protection Agency "community right-to-know" regulations under Title III of the Federal Superfund Amendment and Reauthorization Act and comparable state statutes require us to organize and report information about the hazardous materials we use in our operations to employees, state and local government authorities and local citizens.

        Environmental laws and regulations are complex and subject to frequent change. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and can impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. We may also be exposed to environmental or other liabilities originating from businesses and assets which we purchased from others. Compliance with applicable environmental laws and regulations has not, to date, materially affected our capital expenditures, earnings or competitive position, although compliance measures have added to our costs of operating drilling equipment in some instances. We do not expect to incur material capital expenditures in our next fiscal year in order to comply with current environment control regulations. However, our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate.

        In addition, our business depends on the demand for land drilling services from the oil and gas industry and, therefore, is affected by tax, environmental and other laws relating to the oil and gas industry generally, by changes in those laws and by changes in related administrative regulations. It is possible that these laws and regulations may in the future add significantly to our operating costs or those of our customers or otherwise directly or indirectly affect our operations.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

        We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords.

        From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. Sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

        In addition, various statements this Annual Report on Form 10-K contains, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. Those forward-looking statements appear in Items 1 and 2—"Business and Properties" and Item 3—"Legal Proceedings" in Part I of this report and in Item 7—"Management's Discussion and Analysis of Financial Condition and Results of Operations," Item 7A—"Quantitative and Qualitative Disclosures About Market Risk" and in the Notes to Consolidated Financial Statements we have included in Item 8 of Part II of this report and elsewhere in this report. These forward-looking statements speak only as of the date of this report. We disclaim any obligation to update these statements, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

    •
    general economic and business conditions and industry trends;

    •
    the continued strength of the contract land drilling industry in the geographic areas where we operate;

    •
    decisions about onshore exploration and development projects to be made by oil and gas companies;

    •
    the highly competitive nature of our businesses;

    •
    our future financial performance, including availability, terms and deployment of capital;

    •
    the continued availability of qualified personnel; and

    •
    changes in, or our failure or inability to comply with, government regulations, including those relating to the environment.

        We believe the items we have outlined above are important factors that could cause our actual results to differ materially from those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises. We advise our security holders that they should (1) be aware that important factors not referred

11


to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

Item 3. Legal Proceedings

        As previously reported one of our former employees, Jesse J. Sanchez, filed a petition against us in the District Court for the 341st District in Webb County, Texas. The petition asserted a claim for injuries resulting from an accident involving one of our drilling rigs. On December 19, 2001, we settled this claim for $500,000. The cost of this settlement is included in our results of operations for the fiscal year ended March 31, 2002.

        On May 17, 2002, Deborah Sutton and other working interest owners in a well that we drilled in May 2000 filed an amended petition naming us as a defendant in the 37th Judicial District Court in Bexar County, Texas, Cause No. 2001-CI-06701. Other defendants included the operator, Sutton Producing Corp,; the casing installer, Jens' Oil Field Service, Inc.; the seller of the subject casing and collars, Exploreco, Ltd.; and the casing and collar manufacturer, Baoshan Iron & Steel Corp." The Plantiffs seek damages not to exceed $7,500,000 for loss of income from the well. We deny responsibility for any alleged loss sustained by the working interest owners as we were working in accordance with our contract under the operator's direct control and supervision at the time of the alleged loss. In addition, we believe the contract obligates the operator to indemnify and defend us against the loss alleged in this suit. Accordingly, we are making a demand upon the contractor under the contract's indemnity and defense provision. Otherwise, we plan to vigorously defend against this claim.

        In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment-related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

        We did not submit any matter to a vote of our security holders during the fourth quarter of fiscal 2002.


PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        As of June 5, 2002, 15,922,459 shares of our common stock were outstanding, held by approximately 626 shareholders of record. The number of record holders does not necessarily bear any relationship to the number of beneficial owners of our common stock.

        Our common stock began trading on the American Stock Exchange on March 8, 2001 under the symbol "PDC." Previously, our common stock was traded in the over-the-counter market and quoted in the National Quotation Bureau's "Pink Sheets" for more than 10 years. The following table sets forth, for each of the periods indicated, the high and low closing prices per share as reported in the Pink

12


Sheets for the period through March 7, 2001 and the high and low sales prices per share on the American Stock Exchange since that date:

 
   Low
   High
Fiscal Year Ended March 31, 2002:          
  First Quarter   $ 4.2000   6.3000
  Second Quarter     3.1000   5.3500
  Third Quarter     2.9000   4.0000
  Fourth Quarter     3.1000   4.1000

Fiscal Year Ended March 31, 2001:
 
 
 
 
 
  First Quarter   $ 1.3120   2.5310
  Second Quarter     1.9680   3.1250
  Third Quarter     1.7700   2.8750
  Fourth Quarter     2.3750   5.1880

        The last reported sales price for our common stock on the American Stock Exchange on June 5, 2002 was $4.70 per share. The Pink Sheets quotations reflect interdealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

        We have not paid or declared any dividends on our common stock and currently intend to retain earnings to fund our working capital needs and growth opportunities. Any future dividends will be at the discretion of our board of directors after taking into account various factors it deems relevant, including our financial condition and performance, cash needs, income tax consequences and the restrictions Texas and other applicable laws and our credit facilities then impose. Our debt arrangements include provisions that generally prohibit us from paying dividends, other than dividends on our preferred stock. In October 2000, we paid $160,614 in dividends to the sole holder of our Series A preferred stock. The holder of those shares then converted them into 800,000 shares of our common stock in accordance with the terms of the Series A preferred stock. In May and August of 2001, we paid a total of $859,395 in dividends to the holders of our Series B preferred stock. In August 2001, the holders of those shares converted them into 1,199,038 shares of our common stock in accordance with the terms of the Series B preferred stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" in Item 7 of this report.

Recent Sales of Unregistered Securities

        On March 30, 2001, we issued and sold for cash a $9,000,000 principal amount, 4.86% subordinated debenture to WEDGE Energy Services, L.L.C. The debenture had a maturity date of March 29, 2002 and was subordinated to all our outstanding bank debt or debt incurred under our then current bank credit facilities or any extension or renewal of any of those facilities. If we had obtained shareholder approval of the conversion feature, the debenture would have become convertible at our option or at the option of WEDGE into 2,400,000 shares of our common stock, at a conversion price of $3.75 per share. We did not engage an underwriter and did not pay any commission to any third party in connection with that sale. We used the proceeds from that sale to partially fund our acquisition of the contract drilling assets of Mustang Drilling, Ltd. We sold the debenture to WEDGE without registration under the Securities Act in reliance on the exemption Section 4(2) of the Securities Act provides for transactions not involving any public offering. We repurchased this debenture on May 18, 2001. We funded the repayment of the $9,000,000 face amount of the debenture, together with the payment of $59,535 of accrued interest, with a short-term bank borrowing. We then sold an additional 2,400,000 shares of our common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share. We used the proceeds from this sale to fund the repayment of the short-term bank borrowing.

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See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" in Item 7 of this report.

        On May 31, 2001, San Patricio Corporation exercised an option to acquire 150,000 shares of our common stock at a price of $1.50 per share. We issued that option in connection with our acquisition of the contract land drilling operations of San Patricio in fiscal 1998. We issued that option, and the shares of common stock on exercise of that option, without registration under the Securities Act in reliance on the exemption Section 4(2) of the Securities Act provides for transactions not involving any public offering.

        On October 9, 2001, we issued a 6.75% convertible subordinated debenture, Series A, in the principal amount of $18,000,000 to WEDGE for $18,000,000 in cash. The debenture is due and payable on October 9, 2006, and is subordinated to our outstanding bank debt. The debenture is convertible, at the option of the holder of the debenture, into 4,500,000 shares of our common stock, at a conversion price of $4.00 per share. We issued the debenture without registration under the Securities Act in reliance on the exemption Section 4(2) of the Securities Act provides for transactions not involving any public offering. We used approximately $9,000,000 of the proceeds from the sale of the debenture for the construction and refurbishment of two drilling rigs and approximately $6,000,000 of the proceeds to reduce a $12,000,000 credit facility with our primary bank lender to $6,000,000. We used the balance of the proceeds for drilling equipment and working capital requirements.

Item 6. Selected Financial Data

        The following information derives from our audited financial statements. You should review this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this report and the historical financial statements and related notes this report contains.

 
   Years Ended March 31,
 
   2002
   2001
   2000
   1999
   1998
 
   (In thousands, except per share amounts)
Total operating revenues   $ 68,242   $ 50,205   $ 19,483   $ 12,908   $ 17,091
Earnings before taxes, depreciation and amortization and other income (expense)     19,699     7,612     2,050     725     2,236
Earnings (loss) before income taxes     9,737     3,838     (65 )   (1,278 )   894
Preferred dividends     93     275     304     304     109
Net earnings (loss) applicable to common stockholders     6,225     2,428     (384 )   (1,612 )   722
Earnings (loss) per common share—basic     0.41     0.22     (0.06 )   (0.27 )   0.13
Earnings (loss) per common share—diluted     0.35     0.19     (0.06 )   (0.27 )   0.11
Long-term debt, excluding current installments     25,830     9,728     267     2,354     2,697
Shareholders' equity     33,343     17,827     6,783     5,322     6,816
Total assets     83,450     56,493     15,670     10,007     12,502
Capital expenditures     27,597     41,628     5,069     856     3,561

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the heading "Cautionary Statement Concerning Forward-Looking Statements" following Items 1 and 2 of Part I of this report.

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Market Conditions in Our Industry

        The United States contract land drilling services industry is highly cyclical. Volatility in oil and gas prices can produce wide swings in the levels of overall drilling activity in the markets we serve and affect the demand for our drilling services and the dayrates we can charge for our rigs. Past trends in oil and gas prices and the outlook for future oil and gas prices strongly influence the number of wells oil and gas exploration and production companies decide to drill.

        Beginning in 1998 and extending into 1999, the domestic contract land drilling industry was adversely affected by an extended period of low oil and gas prices and a domestic natural gas surplus. The price of West Texas Intermediate crude dropped to a low of $10.76 in December 1998 and the price of natural gas dropped to a low of $1.66 in February 1999. These conditions led to significant reductions in the overall level of domestic land drilling activity resulting in an historical low domestic land rig count of 393 rigs on April 23, 1999. Prior to this industry downturn, during 1997, the contract land drilling industry experienced a significant level of drilling activity, with a domestic land rig count of 899 rigs on December 26, 1997. Also in 1997, the average price of natural gas delivered at Henry Hub, Louisiana was approximately $2.48 per mmbtu and the average price of West Texas Intermediate crude was approximately $20.59 per barrel.

        Oil and natural gas prices rose sharply in calendar year 2000 and through mid 2001. The average price of natural gas for 2000 was $4.32 per mmbtu and for the period from January 1, 2001 through May 31, 2001 was $5.70. The average price of West Texas Intermediate crude for 2000 was $30.38 per barrel and for the period from January 1, 2001 through May 31, 2001 was $28.46. The average prices of natural gas and crude oil for the fiscal year ended March 31, 2002 were $3.00 per mmbtu and $24.00 per barrel, respectively. Natural gas prices began falling in mid 2001 to a low of approximately $2.00 per mmbtu before returning to current levels of $3.25 to $3.75 per mmbtu. Oil prices are currently in the $24.00 to $26.00 per barrel range.

        Primarily as a result of the increase in oil and natural gas prices, exploration and production companies increased their capital spending budgets in 2000 and early 2001. These increased spending budgets increased the demand for contract drilling services. The domestic land rig count climbed to 1,105 on May 31, 2001, representing an increase in the domestic land rig count of 181% since the low in April 1999 and of 23% since December 31, 1997. While market conditions improved in 2000 and into mid 2001, demand for contract land drilling services has declined since mid 2001 and into the Spring 2002, along with natural gas prices leading to a substantial reduction in the rates land drilling companies have been able to obtain for their services. The domestic land rig count was 731 as of May 24, 2002, a 34% decrease from May 31, 2001. While natural gas prices have firmed up in recent months, we exepect dayrates and rig utilization rates to remain depressed in our industry until demand for land drilling services begins to recover from current levels.

Critical Accounting Policies

        Revenue and cost recognition—We earn our revenues by drilling oil and gas wells for our customers under daywork, turnkey or footage contracts, which usually provide for the drilling of a single well. See "Business and Properties—Drilling Contracts" in item 1 of Part I of this report for a general description of these contracts. We recognize revenues on daywork contracts for the days completed based on the dayrate each contract specifies. We recognize revenues from our turnkey and footage contracts on the percentage-of-completion method based on our estimate of the number of days to complete each well. Contract drilling in progress represents revenues we have recognized in excess of amounts billed on contracts in progress. Individual wells are usually completed in less than 60 days. The risks to us under a turnkey contract, and to a lesser extent under footage contracts, are substantially greater than on a well drilled on a daywork basis, because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including

15


the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalations and personnel operations.

        We accrue estimated contract costs on turnkey and footage contracts for each day of work completed based on our estimate of the total cost to complete the contract divided by our estimate of the number of days to complete the contract. Contract costs include labor, materials, supplies, repairs and maintenance and operating overhead allocations. Changes in job performance, job conditions and estimated profitability on uncompleted contracts may result in revisions to costs and income, including losses, which we recognize in the period in which we determine the revisions. In addition, the occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey and footage contracts could have a material adverse effect on our financial position and results of operations. Therefore, our actual results could differ significantly if our cost estimates are later revised significantly from our original estimates.

        Asset impairments—We assess the impairment of assets such as receivables and drilling equipment whenever events or circumstances indicate that the carrying value may not be recoverable. Factors which we consider important and which could trigger an impairment review would be our customers' financial condition and any significant negative industry or economic trends. If a review of our drilling rigs indicates that our carrying value exceeds the estimated undiscounted future cash flows, we are required under accounting standards to write-down the drilling equipment to its fair market value.

        Deferred taxes—We provide deferred taxes for the basis difference in our property and equipment between financial reporting and tax reporting purposes. Basis differences arise from differences in depreciation periods and methods and the value of assets acquired in a business acquisition where we acquire an entity rather than just its assets. For financial reporting purposes we depreciate drilling rigs over 12 to 15 years, while federal income tax rules require that we depreciate drilling rigs over five years. Therefore, in the first five years of our ownership of a drilling rig our tax depreciation exceeds our financial reporting depreciation, resulting in our providing deferred taxes on this depreciation difference. After five years, financial reporting depreciation exceeds tax depreciation and the deferred tax liability begins to reverse.

Liquidity and Capital Resources

        Our cash and cash equivalents at March 31, 2002 were $5,383,045, compared to $2,492,934 at March 31, 2001. Our current ratio, which we calculate by dividing our current assets by our current liabilities, at March 31, 2002 was 0.98, compared to 0.35 at March 31, 2001. Our working capital deficit decreased to $301,273 at March 31, 2002 from $15,179,194 at March 31, 2001. The primary reasons for the improvement in our current ratio and the decrease in our working capital deficit were (1) the $6,000,000 reduction in borrowings from the $12,000,000 in outstanding borrowings as of March 30, 2001 relating to our acquisition of the contract drilling assets of Mustang Drilling, Ltd., (2) an increase of approximately $7,000,000 in cash and receivables at March 31, 2002 and (3) the reduction in accounts payable of approximately $800,000 relating to equipment purchases for a new rig. Our trade accounts receivable increased to $6,160,797 at March 31, 2002 from $2,777,167 at March 31, 2001, and contract drilling in progress increased to $3,120,252 at March 31, 2002 from $2,331,112 at March 31, 2001. The substantial increases in accounts receivable and contract drilling in progress were due to the additional drilling rigs in 2002 and the related increase in the number of drilling contracts at our fiscal year end.

        Our cash flows from operating activities for the year ended March 31, 2001 were $11,044,889 compared to $8,433,850 for 2001 and $3,532,145 for 2000. Our cash flows from operating activities are affected by a number of factors. Some of the significant factors that affect our cash flows from operations are rig utilization rates, the types of contracts we are able to obtain and revenue rates we are able to obtain for our services.

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        On August 21, 2000, we acquired all the outstanding stock of Pioneer Drilling Co., a Corpus Christi, Texas-based land drilling contractor. Pioneer Drilling Co.'s assets included four land drilling rigs and associated machinery and equipment. Pioneer Drilling Co. owned three of its rigs and leased the fourth rig. The consideration we paid for the acquisition was $11,500,000, consisting of a cash payment of $10,731,456 and the issuance of 341,576 restricted shares of our common stock at $2.25 per share. We accounted for this acquisition as a purchase, and we have included the results of operations of Pioneer Drilling Co. in our statement of operations since the date of acquisition. We allocated the purchase price plus assumed net liabilities and a deferred tax liability of $4,214,195 to working capital and property and equipment based on their relative fair values.

        On March 30, 2001, we acquired all the contract drilling assets of Mustang Drilling, Ltd., a land drilling contractor based in Henderson, Texas. These assets included four land drilling rigs and associated equipment. We paid $12,000,000 in cash for these assets. We accounted for this acquisition as a purchase, and we have included the results of operations of these assets in our statement of operations since the date of acquisition. We allocated the purchase price to the assets based on their relative fair values.

        Since March 31, 2001, the additions to our property and equipment were $27,597,265. Additions consisted of the following:

• Drilling rigs   $ 18,893,502
• Other drilling equipment     7,837,782
• Transportation equipment     686,812
• Other     179,169
   
    $ 27,597,265
   

        Our debt obligations in the form of notes payable increased by a net of $10,542,884 from March 31, 2001 to March 31, 2002. This increase principally resulted from our issuance of a new convertible subordinated debenture in the principal amount of $18,000,000 partially offset by our repayment of $7,457,116 of debt to our lenders. In addition, we repaid the $9,000,000 of subordinated debt, included on our March 31, 2001 balance sheet, on May 18, 2001 with a short-term bank borrowing that we subsequently repaid with the proceeds from our May 18, 2001 issuance and sale of 2,400,000 shares of common stock to WEDGE Energy Services, L.L.C., our largest shareholder, at a purchase price of $3.77 per share. Notes payable at March 31, 2002 includes a $6,000,000 bridge loan facility with our primary lender due September 29, 2002. Interest is payable monthly at prime (4.75% at March 31, 2002) plus one percent. We intend to either extend the maturity date of this bridge loan facility or to convert it to a term loan payable in monthly installments.

        In August 2000, we obtained two bank loans of $9,000,000 and $3,000,000 each in connection with our acquisition of Pioneer Drilling Co. The $9,000,000 bank debt is payable in monthly principal payments of $107,143, based on a seven-year amortization, plus interest at prime (4.75% at March 31, 2002) plus one percent. The final maturity of this debt is August 11, 2003. The $3,000,000 bank debt is payable in 87 monthly installments, the first three installments being for interest only, with interest at prime (4.75% at March 31, 2002) plus one percent; the fourth through 86th installments are in the amount of $50,585 each, including interest; and the final installment, due on November 15, 2007, will be in the amount of the remaining principal balance plus accrued interest. Our bank loans contain various covenants pertaining to leverage ratios, cash flow coverage ratios and capitalization or net worth ratios. Under these credit arrangements, we determine compliance with the ratios on an annual basis, except for the capitalization and net worth ratios, which we determine on a quarterly basis. As of March 31, 2002, we were in compliance with all covenants applicable to our outstanding debt.

        On October 9, 2001, we issued a 6.75% five year $18,000,000 convertible subordinated debenture, Series A, to WEDGE. The debenture is convertible into 4,500,000 shares of our common stock at a

17


conversion price of $4.00 per share. We used approximately $9,000,000 of the proceeds for the construction and refurbishment of two drilling rigs and approximately $6,000,000 to reduce a $12,000,000 credit facility with our primary bank lender to $6,000,000. Our primary bank lender then released a $6,000,000 letter of credit that WEDGE had provided as additional collateral for our credit facility. The balance of the proceeds have been used for drilling equipment and working capital.

        We have a $1,000,000 line of credit with our primary bank lender. Draws are limited to 75% of eligible accounts receivable. Therefore, if our eligible accounts receivable should fall below $1,333,334 our ability to draw under this line would be reduced. At March 31, 2002, there was no balance outstanding on this line and eligible accounts receivable were $4,253,132. In addition, our primary bank lender has issued on our behalf two letters of credit totaling $1,450,000 to two workers' compensation insurance companies to secure possible future claims under the deductibles on these policies. It is our practice to pay any amounts due under these deductibles as they are incurred. Therefore, we do not anticipate the lender will be required to fund these letters of credit. We increased the deductibles on our workers' compensation insurance policies to better manage the overall cost of workers' compensation insurance. We feel our safety policies and procedures justify our assumption of additional risks with regard to workers' compensation insurance.

        Our long-term debt and capital and operating lease obligations maturing each year subsequent to March 31, 2002 are as follows:

 
   Long term debt
   Capital Leases
   Operating Leases
2003   $ 1,836,860   $ 109,129   $ 355,296
2004     6,224,738     116,995     312,296
2005     559,038     122,026     55,296
2006     571,386     41,376     53,297
2007     18,406,960     8,594     —
After 2007     67,488     —     —
   
 
 
    $ 27,666,470   $ 398,120   $ 776,185
   
 
 

        Events of default in our bank loan agreements, which could trigger an early repayment requirement, include among others:

    •
    our failure to make required payments;

    •
    our failure to comply with financial covenants;

    •
    our incurrence of any additional indebtedness in excess of $2,000,000; and

    •
    any payment of cash dividends on our common stock.

        In February 2000, we completed a private placement of our common stock to WEDGE. WEDGE paid us an aggregate of $1,500,000 for 1,153,846 shares of common stock, or $1.30 per share. We used the proceeds from that sale for general corporate purposes and to better position our company for future growth. In May 2000, we completed a second private placement of our common stock to WEDGE. WEDGE paid us an aggregate of $8,000,000 for 3,678,161 shares of common stock, or $2.175 per share. We used the proceeds from that sale to partially fund the construction of the two new-build rigs and to partially fund the purchase of Pioneer Drilling Co. As we discussed above, in May 2001, we sold an additional 2,400,000 shares of our common stock to WEDGE for $9,048,000, or $3.77 per share.

        In October 2000, the sole holder of our Series A preferred stock converted those shares into 800,000 shares of our common stock in accordance with the terms of the Series A preferred stock agreement. In August 2001, the holders of our Series B preferred stock converted those shares into

18


1,199,038 shares of our common stock in accordance with the terms of an agreement between us and the holder of the Series B preferred stock.

        Subsequent to the end of fiscal 2002, we acquired the land contract drilling assets of United Drilling Company and U-D Holdings, L.P.. The assets included two land drilling rigs, associated spare parts and equipment and vehicles. We paid $7,000,000 in cash for these assets. We accounted for the acquisition as a purchase and allocated the purchase price to the assets based on their relative fair values. We financed the acquisition of United Drilling's and U-D Holding's assets with a $7,000,000 loan with our primary bank lender due November 24, 2002. Interest on the loan is payable monthly at prime. The loan is collateralized by the assets that we purchased and a $7,000,000 letter of credit that WEDGE provided.

        In addition to purchasing the rigs and related assets from United Drilling and U-D Holdings, we commissioned the building of two National 110-UE 18,000 foot capacity, premium quality SCR (electric) rigs. The first rig will be ready to commence operations by October 2002 and the second by January 2003. Each of these rigs will be similar to the new build rigs and refurbished rigs we added to our fleet during fiscal 2002. To finance the purchase of the two 18,000 foot capacity rigs and to refinance our primary bank lenders short term loan, we plan a private placement of debt or equity securities. In additions, we plan to continue adding rigs and/or purchase companies which fit our strategic objectives.

Results of Operations

        Our rig utilization rates for the years ended March 31, 2002, 2001and 2000 were 82%, 91% and 66%, respectively. In fiscal 2002, we completed 5,384 revenue days, as compared to 3,463 revenue days in fiscal 2001, an increase of 55%. This increase reflects the increased demand for drilling rigs we experienced in the first half of fiscal 2002 and the increase in our drilling rig fleet from 16 to 20 rigs by the end of fiscal 2002.

        During the years ended March 31, 2002, 2001 and 2000, 7%, 57% and 77%, respectively, of our drilling revenues were derived from turnkey contracts, 3%, 1% and 1%, respectively, from footage contracts and 90%, 42% and 22%, respectively, from daywork contracts. Costs associated with the drilling of turnkey wells include items such as drilling fluids, casing, cementing, fuel and drill bits which are not provided under daywork contracts. Much more of these types of costs are reflected in revenues and drilling costs in our 2001 and 2000 fiscal years as compared to fiscal 2002. Because these costs are in both revenues and costs, our drilling margin percentage will be lower in years in which a greater percentage of our revenues are from turnkey contracts. Due to the current reduced demand for drilling rigs, we have returned to bidding on turnkey contracts in an effort to improve our profitability and rig utilization.

        During fiscal 2002, our drilling margin increased to approximately $22,009,000 from $8,459,000 in fiscal 2001 and $2,575,000 in fiscal 2000. The increases in fiscal 2002 over fiscal 2001 and 2001 over 2000, principally resulted from the 55% and 117% increases in the number of revenue days we completed in fiscal 2002 and 2001, respectively, and an increase in drilling rates we charged under our drilling contracts. As a percentage of contract drilling revenue, our drilling margin was 32%, 17% and 13% in fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The margins in the 2001 and 2000 fiscal years are affected by the additional costs associated with turnkey contracts as described in the previous paragraph. Consequently, the additional costs associated with turnkey contracts may negatively affect our margin percentage for future periods.

        Contract drilling costs for the year ended March 31, 2002 include a charge of $500,000 related to the settlement of a lawsuit from 1998 involving an injury to a former employee and a $275,000 charge related to severance costs for a corporate officer. For more information about the lawsuit see "Legal Proceedings" in Item 3 of Part I of this report.

19


        We market our rigs to a number of customers. In fiscal 2002, we drilled wells for 48 different customers, compared to 58 customers in fiscal 2001 and 38 customers in fiscal 2000. Twenty five of our customers in fiscal 2002 were customers for whom we had not drilled any wells in fiscal 2001. During the fiscal year ended March 31, 2002, our three largest customers accounted for 13.7%, 12.2% and 11.1%, respectively, of our total contract drilling revenue. Two of these customers were customers of ours in fiscal 2001. In fiscal 2001, our three largest customers accounted for 13.6%, 8.8% and 6.3%, respectively, of our total contract drilling revenue. None of those customers were customers of ours in fiscal 2000. In fiscal 2000, our largest customers accounted for 7.4%, 7.2% and 7.0%, respectively, of our total contract drilling revenue.

        Our depreciation and amortization expense in fiscal 2002 increased to approximately $8,426,000 from $3,738,000 and $1,809,000 in fiscal years 2001 and 2000, respectively. The increase in fiscal 2002 resulted from a combination of increased depreciation expense due to the Pioneer Drilling Co. and Mustang Drilling, Ltd. acquisitions, the major refurbishment of four rigs in 2001 and the acquisition of four rigs in 2002.

        Our general and administrative expenses increased to approximately $2,428,000 in fiscal 2002 from $1,117,000 in fiscal 2001 and $658,000 in fiscal 2000. The increase in fiscal 2002 resulted from increased payroll costs, legal and other professional fees and investor relations costs. The increase in fiscal 2001 resulted from increased payroll costs, expenses related to our acquisitions and our re-listing on the American Stock Exchange.

        Our contract land drilling operations are subject to various federal and state laws and regulations designed to protect the environment. Maintaining compliance with these regulations is part of our day-to-day operating procedures. We are not aware of any potential clean-up obligations that would have a material adverse effect on our financial condition or results of operations.

Accounting Matters

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. We are required to adopt the provisions of SFAS No. 143 beginning April 1, 2003. In that connection, we must identify all our legal obligations relating to asset retirements and determine the fair value of these obligations on the date of adoption. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.

        In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 provides that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead must be tested for impairment at least annually using a fair-value based approach. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." We are required to apply these new standards beginning April 1, 2002, except that for any business combinations initiated after June 30, 2001 the new standards were already effective. We do not expect the adoption of SFAS Nos. 141 and 142 to have a material effect on our financial position or results of operations.

20


        In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." However, it retains the fundamental provisions of Statement 121 for (1) recognition and measurement of the impairment of long-lived assets to be held and used and (2) measurement of long-lived assets to be disposed of by sale. We will be required to apply this standard beginning April 1, 2002. We do not expect the adoption of SFAS No. 144 to have a material effect on our financial position or results of operations.

Inflation

        As a result of the relatively low levels of inflation during the past three fiscal years, inflation did not significantly affect our results of operations in any of those years.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        We are subject to market risk exposure related to changes in interest rates on most of our outstanding debt. At March 31, 2002, we had outstanding debt of $15,516,000 that was subject to variable interest rates, in each case based on an agreed percentage-point spread from the lender's prime interest rate. An increase or decrease of 1% in the interest rate would have a corresponding decrease or increase in our net income of approximately $101,000 annually. We did not enter into these debt arrangements for trading purposes.

21


    Item 8.    Financial Statements and Supplementary Data


PIONEER DRILLING COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
   Page
Independent Auditors' Report   23

Consolidated Balance Sheets as of March 31, 2002 and 2001
 
24

Consolidated Statements of Operations for the Years Ended March 31, 2002, 2001 and 2000
 
25

Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended March 31, 2002, 2001 and 2000
 
26

Consolidated Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000
 
27

Notes to Consolidated Financial Statements
 
28

22


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Pioneer Drilling Company:

        We have audited the accompanying consolidated balance sheets of Pioneer Drilling Company and subsidiaries as of March 31, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended March 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Drilling Company and subsidiaries as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

San Antonio, Texas
May 24, 2002

23


PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
   March 31,
  
 
   2002
   2001
  
ASSETS              
Current assets:              
  Cash and cash equivalents   $ 5,383,045   $ 2,492,934  
  Securities available for sale     337,309     338,395  
  Receivables:              
    Trade     6,160,797     2,777,167  
    Contract drilling in progress     3,120,252     2,331,112  
    Employees and officers     —     300  
  Federal income tax receivable     880,068     —  
  Prepaid expenses     634,747     312,276  
   
 
 
Total current assets     16,516,218     8,252,184  
   
 
 
Property and equipment, at cost:              
  Drilling rigs and equipment     77,149,043     57,527,976  
  Transportation, office, land and other     3,203,979     2,781,750  
   
 
 
      80,353,022     60,309,726  
Less accumulated depreciation and amortization     13,621,396     12,115,268  
   
 
 
Net property and equipment     66,731,626     48,194,458  
Other assets     201,914     46,322  
   
 
 
Total assets   $ 83,449,758   $ 56,492,964  
   
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY              
Current liabilities:              
  Notes payable   $ 6,329,925   $ 3,030,000  
  Subordinated debenture     —     9,000,000  
  Current installments of long-term debt     1,836,860     1,695,839  
  Current installments of capital lease obligations     109,129     83,307  
  Accounts payable     6,507,169     7,606,982  
  Federal income tax     —     50,198  
  Current deferred income taxes     56,366     56,750  
  Accrued expenses:              
    Payroll and payroll taxes     792,805     736,195  
    Dividends payable     —     766,581  
    Other     1,185,237     405,526  
   
 
 
Total current liabilities     16,817,491     23,431,378  
Long-term debt, less current installments     25,829,610     9,727,672  
Capital lease obligations, less current installments     288,991     327,949  
Deferred income taxes     7,170,661     5,179,203  
   
 
 
Total liabilities     50,106,753     38,666,202  
   
 
 
Shareholders' equity:              
  Preferred stock, Series B, 8%, cumulative, convertible, $16.25 redemption and liquidation value; 184,615 shares authorized; issued and outstanding at March 31, 2001     —     2,999,994  
  Common stock $.10 par value; 100,000,000 shares authorized; 15,922,459 shares and 12,145,921 shares issued and outstanding at March 31, 2002 and March 31, 2001, respectively     1,592,245     1,214,592  
  Additional paid-in capital     38,783,731     26,869,916  
  Accumulated deficit     (7,142,387 )   (13,367,858 )
  Accumulated other comprehensive income-unrealized gain on securities available for sale     109,416     110,118  
   
 
 
Total shareholders' equity     33,343,005     17,826,762  
   
 
 
Total liabilities and shareholders' equity   $ 83,449,758   $ 56,492,964  
   
 
 

See accompanying notes to consolidated financial statements.

24


PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
   Years Ended March 31,
  
 
   2002
   2001
   2000
  
Revenues:                    
  Contract drilling   $ 68,123,538   $ 49,935,853   $ 19,391,025  
  Other     118,137     269,546     92,086  
   
 
 
 
  Total operating revenues     68,241,675     50,205,399     19,483,111  
   
 
 
 
Costs and expenses:                    
  Contract drilling     46,114,337     41,476,824     16,816,516  
  Depreciation and amortization     8,426,082     3,737,533     1,808,557  
  General and administrative     2,428,394     1,116,727     658,174  
   
 
 
 
  Total operating costs and expenses     56,968,813     46,331,084     19,283,247  
   
 
 
 
Earnings from operations     11,272,862     3,874,315     199,864  
   
 
 
 
Other income (expense):                    
  Interest expense     (1,616,984 )   (888,863 )   (350,606 )
  Interest income     80,932     316,025     85,407  
  Gain on sale of securities     —     536,486     —  
   
 
 
 
  Total other income (expense)     (1,536,052 )   (36,352 )   (265,199 )
   
 
 
 
Earnings (loss) before income taxes     9,736,810     3,837,963     (65,335 )
Income taxes     3,418,525     1,135,174     14,283  
   
 
 
 
Net earnings (loss)     6,318,285     2,702,789     (79,618 )
Preferred stock dividend requirement     92,814     274,630     303,999  
   
 
 
 
Net earnings (loss) applicable to common shareholders   $ 6,225,471   $ 2,428,159   $ (383,617 )
   
 
 
 
Earnings (loss) per common share—Basic   $ 0.41   $ 0.22   $ (0.06 )
   
 
 
 
Earnings (loss) per common share—Diluted   $ 0.35   $ 0.19   $ (0.06 )
   
 
 
 
Weighted average number of shares outstanding—Basic     15,112,272     11,137,171     6,242,140  
   
 
 
 
Weighted average number of shares outstanding—Diluted     19,221,256     13,901,101     6,242,140  
   
 
 
 

See accompanying notes to consolidated financial statements.

25


PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

 
   Shares
Common
   Shares
Preferred
   Amount
Common
   Preferred
   Additional
Paid In
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive
Income
   Total
Shareholders'
Equity
  
Balance as of March 31, 1999   6,100,784   584,615   $ 610,078   $ 3,799,994   $ 16,324,031   $ (15,412,400 )   —   $ 5,321,703  
Comprehensive income:                                              
  Net Loss   —   —     —     —     —     (79,618 )   —     (79,618 )
  Net unrealized change in securites available for sale   —   —     —     —     —     —     328,478     328,478  
                                         
 
Total comprehensive income   —   —     —     —     —     —     —     248,860  
                                         
 
Issuance of common stock for:                                              
  Sale   1,153,846   —     115,385     —     1,384,615     —     —     1,500,000  
  Exercise of options   5,000   —     500     —     1,375     —     —     1,875  
  Employee compensation   15,054   —     1,505     —     13,548     —     —     15,053  
Preferred stock dividend   —   —     —     —     —     (303,999 )   —     (303,999 )
   
 
 
 
 
 
 
 
 
Balance as of March 31, 2000   7,274,684   584,615     727,468     3,799,994     17,723,569     (15,796,017 )   328,478     6,783,492  
Comprehensive income:                                              
  Net earnings   —   —     —     —     —     2,702,789     —     2,702,789  
  Net unrealized change in securites available for sale, net of tax of $56,750   —   —     —     —     —     —     (218,360 )   (218,360 )
                                         
 
Total comprehensive income   —   —     —     —     —     —     —     2,484,429  
                                         
 
Issuance of common stock for:                                              
  Sale   3,678,161   —     367,816     —     7,632,184     —     —     8,000,000  
  Acquisition   341,576   —     34,158     —     734,387     —     —     768,545  
  Conversion of preferred   800,000   (400,000 )   80,000     (800,000 )   720,000     —     —     —  
  Exercise of options   51,500   —     5,150     —     59,776     —     —     64,926  
Preferred stock dividend   —   —     —     —     —     (274,630 )   —     (274,630 )
   
 
 
 
 
 
 
 
 
Balance as of March 31, 2001   12,145,921   184,615     1,214,592     2,999,994     26,869,916     (13,367,858 )   110,118     17,826,762  
Comprehensive income:                                              
  Net earnings   —   —     —     —     —     6,318,285     —     6,318,285  
  Net unrealized change in securites available for sale, net of tax of $384   —   —     —     —     —     —     (702 )   (702 )
                                         
 
Total comprehensive income   —   —     —     —     —     —     —     6,317,583  
                                         
 
Issuance of common stock for:                                              
  Sale   2,400,000   —     240,000     —     8,808,000     —     —     9,048,000  
  Conversion of preferred   1,199,038   (184,615 )   119,903     (2,999,994 )   2,880,091     —     —     —  
  Exercise of options   177,500   —     17,750     —     225,724     —     —     243,474  
Preferred stock dividend   —   —     —     —     —     (92,814 )   —     (92,814 )
   
 
 
 
 
 
 
 
 

Balance as of March 31, 2002
 
15,922,459
 
—
 
$
1,592,245
 
 
—
 
$
38,783,731
 
$
(7,142,387
)
$
109,416
 
$
33,343,005
 
   
 
 
 
 
 
 
 
 

See accompanying notes to consolidated financial statements.

26


PIONEER DRILLING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   Years Ended March 31,
  
 
   2002
   2001
   2000
  
Cash flows from operating activities:                    
  Net earnings (loss)   $ 6,318,285   $ 2,702,789   $ (79,618 )
    Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:                    
    Depreciation and amortization     8,426,082     3,737,533     1,808,557  
    Stock issued to directors and employees     —     —     15,054  
    Gain on sale of securities           (536,486 )      
    Loss (gain) on sale of properties and equipment     (2,237 )   —     41,408  
    Change in deferred income taxes     1,991,458     965,008     —  
    Changes in current assets and liabilities:                    
      Receivables     (4,172,470 )   (3,157,961 )   (632,670 )
      Prepaid expenses     (322,471 )   177,676     (335,361 )
      Accounts payable     (1,099,813 )   3,642,048     2,715,851  
      Federal income taxes     (930,266 )   50,198     —  
      Accrued expenses     836,321     853,045     (1,076 )
   
 
 
 
  Net cash provided by operating activities     11,044,889     8,433,850     3,532,145  
   
 
 
 

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
    Proceeds from notes payable     19,556,286     15,547,477     1,776,645  
    Proceeds from subordinated debenture     18,000,000     9,000,000     —  
    Increase in other assets     (195,000 )   (46,322 )   —  
    Payment of preferred dividends     (859,395 )   (160,614 )   —  
    Proceeds from exercise of options and warrants     243,474     64,926     1,875  
    Proceeds from common stock     9,048,000     8,000,000     1,500,000  
    Payments of debt     (27,026,538 )   (6,336,803 )   (593,857 )
   
 
 
 
Net cash provided by financing activities     18,766,827     26,068,664     2,684,663  
   
 
 
 

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
    Purchases of property and equipment:                    
      Acquisitions     —     (22,806,456 )   (2,513,000 )
      Other     (27,597,265 )   (12,165,178 )   (2,556,138 )
    Purchase of securities available for sale     —     —     (674,638 )
    Proceeds from sale of marketable securities     —     1,039,597     —  
    Proceeds from sale of property and equipment     675,660     —     37,932  
   
 
 
 
Net cash used in investing activities     (26,921,605 )   (33,932,037 )   (5,705,844 )
   
 
 
 
Net increase in cash and cash equivalents     2,890,111     570,477     510,964  
Beginning cash and cash equivalents     2,492,934     1,922,457     1,411,493  
   
 
 
 
Ending cash and cash equivalents   $ 5,383,045   $ 2,492,934   $ 1,922,457  
   
 
 
 

Supplementary disclosure:
 
 
 
 
 
 
 
 
 
 
    Interest paid   $ 1,046,943   $ 760,821   $ 351,126  
    Income taxes paid     2,342,006     140,655     13,883  
    Dividends accrued     92,814     274,630     303,999  
    Conversion of preferred stock     2,999,994     800,000     —  
    Pioneer Drilling Co. acquisition:                    
      Common Stock issued     —     768,545     —  
      Debt assumed     —     1,673,533     —  
      Deferred taxes assumed     —     4,214,195     —  

See accompanying notes to consolidated financial statements.

27


PIONEER DRILLING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Business and Principles of Consolidation

        Pioneer Drilling Company provides contract land drilling services to oil and gas exploration and production companies in the South Texas and East Texas markets. We conduct our operations through our principal operating subsidiary, Pioneer Drilling Services, Ltd. The accompanying consolidated financial statements include our accounts and the accounts of our wholly owned subsidiaries. We have eliminated significant intercompany accounts and transactions in consolidation.

        We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In preparing the financial statements, we make various estimates and assumptions that affect the amounts of assets and liabilities we report as of the dates of the balance sheets and income and expenses we report for the periods shown in the income statements and statements of cash flows. Our actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of depreciation and amortization expense.

Income Taxes

        Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," we follow the asset and liability method of accounting for income taxes, under which we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure our deferred tax assets and liabilities by using the enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. Under SFAS No. 109, we reflect in income the effect of a change in tax rates on deferred tax assets and liabilities in the period during which the change occurs.

Earnings (Loss) Per Common Share

        We compute and present earnings (loss) per common share in accordance with SFAS No. 128 "Earnings per Share." This standard requires dual presentation of basic and diluted earnings (loss) per share on the face of our statement of operations. For fiscal 2000, we did not include the effect of preferred stock on loss per common share because it was antidilutive.

Stock-based Compensation

        We have adopted SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows a company to adopt a fair value based method of accounting for a stock-based employee compensation plan or to continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." We have elected to continue accounting for stock-based compensation under the intrinsic value method. Under this method, we record no compensation expense for stock option grants when the exercise price of the options granted is equal to the fair market value of our common stock on the date of grant. We have disclosed the pro forma effects of our adoption of SFAS No. 123 in Note 8.

Revenue and Cost Recognition

        We earn our contract drilling revenues under daywork, turnkey and footage contracts. We recognize revenues on daywork contracts for the days completed based on the dayrate each contract

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specifies. We recognize revenues from our turnkey and footage contracts on the percentage-of-completion method based on our estimate of the number of days to complete each well. Individual wells are usually completed in less than 60 days.

        We accrue estimated contract costs on turnkey and footage contracts for each day of work completed based on our estimate of the total cost to complete the contract divided by our estimate of the number of days to complete the contract. Contract costs include labor, materials, supplies, repairs and maintenance and operating overhead allocations. We charge general and administrative expenses to expense as we incur them. Changes in job performance, job conditions and estimated profitability on uncompleted contracts may result in revisions to costs and income, including losses, which we recognize in the period in which we determine the revisions.

        The asset "contract drilling in progress" represents revenues we have recognized in excess of amounts billed on contracts in progress.

Prepaid Expenses

        Prepaid expenses include items such as insurance and licenses. We routinely expense these items in the normal course of business over the periods these expenses benefit.

Property and Equipment

        We provide for depreciation of our drilling, transportation and other equipment using the straight-line method over useful lives that we have estimated and that range from three to 15 years. During the fiscal year ended March 31, 2000, we increased the estimated useful lives of our drilling rigs to reflect our historical experience with regard to our drilling rigs. The change in estimated useful lives reduced our depreciation expense in fiscal 2000 by approximately $144,000 and our loss per common share, basic and diluted, by $0.02.

        We charge our expenses for maintenance and repairs to operations. We charge our expenses for renewals and betterments to the appropriate property and equipment accounts. Our gain and losses on the sale of our property and equipment are recorded in drilling costs. During fiscal 2002 and 2001, we capitalized $328,285 and $55,896, respectively, of interest costs incurred during the construction periods of certain drilling equipment.

        We review our long-lived assets and intangible assets for impairment whenever events or circumstances provide evidence that suggests that we may not recover the carrying amounts of any of these assets. In performing the review for recoverability, we estimate the future cash flows we expect to obtain from the use of each asset and its eventual disposition. If the sum of these estimated future cash flows is less than the carrying amount of the asset, we recognize an impairment loss.

Cash Equivalents

        For purposes of the statements of cash flows, we consider all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents. Cash equivalents consist of investments in corporate and government money market accounts and seven day tax exempt municipal preferred securities. Cash equivalents at March 31, 2002 and 2001 were $4,435,000 and $2,405,000, respectively.

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Investment Securities

        We carry our available-for-sale investment securities at their fair values. Investment securities consist of common stock. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. As of March 31, 2002, these securities had an aggregate cost of $171,527, a gross unrealized gain of $165,782 and an aggregate fair value of $337,309. As of March 31, 2001, these securities had an aggregate cost of $171,527, a gross unrealized gain of $166,868 and a fair value of $338,395. We sold all of our investment securities in April 2002, realizing a gain of $203,887.

Other Assets

        Other assets consist of cash deposits related to the deductibles on our workers compensation insurance policies and loan fees net of amortization. Loan fees are amortized over the terms of the related debt.

Derivative Instruments and Hedging Activities

        We do not have any derivative instruments and we do not engage in hedging activities.

Recently Issued Accounting Standards

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. We are required to adopt the provisions of SFAS No. 143 beginning April 1, 2003. In that connection, we must identify all our legal obligations relating to asset retirements and determine the fair value of these obligations on the date of adoption. We do not expect the adoption of SFAS No. 143 to have a material effect on our financial position or results of operations.

        In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 provides that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead must be tested for impairment at least annually using a fair-value based approach. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." We are required to apply these new standards beginning April 1, 2002, except that for any business combinations initiated after June 30, 2001 the new standards were already effective. We do not expect the adoption of SFAS Nos. 141 and 142 to have a material effect on our financial position or results of operations.

        In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and

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reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." However, it retains the fundamental provisions of Statement 121 for (1) recognition and measurement of the impairment of long-lived assets to be held and used and (2) measurement of long-lived assets to be disposed of by sale. We will be required to apply this standard beginning April 1, 2002. We do not expect the adoption of SFAS No. 144 to have a material effect on our financial position or results of operations.

Reclassifications

        Certain amounts in the financial statements for the prior years have been reclassified to conform with the current year's presentation.

2. Acquisitions

        On September 29, 1999, we acquired the drilling operations of Howell Drilling, Inc., a San Antonio, Texas-based land drilling contractor. The acquisition included two drilling rigs, a Cabot 900 and a Cabot 750, drill pipe and drill collars, assorted spare drilling equipment, transportation equipment and office furniture and fixtures. We paid $2,513,000 for the Howell Drilling assets, including related professional fees, of which we financed $1,750,000 with a commercial loan. We accounted for the transaction as a purchase, and we have included the results of operations of the Howell Drilling assets in our statement of operations since the acquisition date. We allocated the purchase price to property and equipment based on its relative fair market values at the date of acquisition.

        On August 21, 2000, we acquired all the outstanding stock of Pioneer Drilling Co., a Corpus Christi, Texas-based land drilling contractor. Pioneer Drilling Co.'s assets included four land drilling rigs and associated machinery and equipment. Pioneer Drilling Co. owned three of its rigs and leased the fourth rig. The consideration we paid for the acquisition, after giving effect to a purchase price adjustment, was $11,500,000, consisting of a cash payment of $10,731,456, which we financed with long-term debt as described in note 3, and the issuance of 341,576 restricted shares of our common stock at $2.25 per share. We accounted for this acquisition as a purchase, and we have included the results of operations of Pioneer Drilling Co. in our statement of operations since the date of acquisition. We allocated the purchase price plus assumed liabilities and deferred tax liability of $4,214,195 to working capital and property and equipment based on their relative fair values at the date of acquisition.

        On March 30, 2001, we acquired all the contract drilling assets of Mustang Drilling, Ltd., a land drilling contractor based in Henderson, Texas. These assets included four land drilling rigs and associated equipment. We paid $12,000,000 in cash for these assets. We financed this acquisition with $3,000,000 of the bank debt and the $9,000,000 subordinated debt described in note 3. We accounted for this acquisition as a purchase, and we have included the results of operations of these assets in our statement of operations since the date of acquisition. We allocated the purchase price to property and equipment based on its relative fair values at the date of acquisition.

        The following pro forma financial information gives effect to the Pioneer Drilling Co. and Mustang Drilling, Ltd. acquisitions as though they were effective as of the beginning of fiscal 2001. The information reflects our historical data and historical data from these acquired businesses for the twelve months ended March 31, 2001. The pro forma information may not be indicative of the results we would have achieved had we completed these acquisitions on April 1, 2000, or of the results that we

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may achieve in the future. The pro forma information should be read in conjunction with the accompanying historical financial statements and the other notes to these financial statements.

 
   Pro Forma (Unaudited)
Year Ended March 31,
 
   2001
Total revenues   $ 71,362,826
Net earnings     2,544,362
Net earnings applicable to common shareholders     2,269,732
Earnings per common share—Basic     .17
Earnings per common share—Diluted     .15

        On May 28, 2002, we acquired all the land contract drilling assets of United Drilling Company and U-D Holdings, L.P. The assets included two land drilling rigs, associated spare parts and equipment and vehicles. We paid $7,000,000 in cash for these assets. The acquisition will be accounted for as a purchase and the purchase price will be allocated to property and equipment based on its relative fair values at the date of acquisition. We financed the acquisition of United Drilling's and U-D Holding's assets with a $7,000,000 loan with our primary bank lender due November 24, 2002. Interest on the loan is payable monthly at prime. The loan is collateralized by the assets that we purchased and a letter of credit that WEDGE provided.

3. Long-term Debt, Subordinated Debt and Note Payable

        Our long-term debt is described below:

 
   March 31,
  
 
   2002
   2001
  
Convertible subordinated debenture due October 2006 at 6.75%   $ 18,000,000   $ —  
Note payable, secured by drilling equipment, due in monthly payments of $107,143 plus interest at prime (4.75% at March 31, 2002) plus 1.00%, due August 2003     6,963,603     8,250,000  
Note payable, secured by drilling equipment, land and improvements, due in monthly payments of $50,585, including interest at prime (4.75% at March 31, 2002) plus 1%, due November 2007     2,483,411     2,895,511  
Note payable to bank, secured by land and improvements, due in monthly payments of $1,900 including interest at the bank's prime rate (5.75% at March 31, 2002) plus 0.5%, due in September 2005     52,249     68,283  
Note payable to Small Business Administration, secured by second lien on land and improvements, due in monthly payments of $912 including interest at 7.41%, due November 2015     92,201     96,227  
Notes payable, secured by vehicles, due in monthly payments of $2,150 including interest, due through December 2004     50,006     28,490  
Note payable to seller, secured by drilling equipment, due in monthly installments of $5,000 plus interest at 10%, due June 2002     25,000     85,000  
   
 
 
      27,666,470     11,423,511  
Less current installments     (1,836,860 )   (1,695,839 )
   
 
 
    $ 25,829,610   $ 9,727,672  
   
 
 

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        Long-term debt maturing each year subsequent to March 31, 2002 is as follows:

Year Ended
March 31,
    
2003   $ 1,836,860
2004     6,224,738
2005     559,038
2006     571,386
2007 and thereafter     18,474,448

        On March 30, 2001, we issued a $9,000,000, 4.86% subordinated debenture to WEDGE Energy Services, L.L.C. (WEDGE). We repaid this debenture on May 18, 2001 with short-term bank debt that we subsequently repaid with the proceeds from a sale of common stock to WEDGE. See Note 7.

        On October 9, 2001, we issued a 6.75% five year $18,000,000 convertible subordinated debenture, Series A, to WEDGE. The debenture is convertible into 4,500,000 shares of our common stock at a conversion price of $4.00 per share. We used approximately $9,000,000 of the proceeds to complete our second IRI 1700E rig and another rig which we accepted delivery of in October 2001. Approximately $6,000,000 was used to reduce a $12,000,000 credit facility provided by our bank lender. Our bank lender then released a $6,000,000 letter of credit that WEDGE had provided as additional collateral for our credit facility. The balance of the proceeds have been used for drilling equipment and working capital.

        The notes payable at March 31, 2002 include a $6,000,000 bank credit facility due September 29, 2002. Interest is at prime (4.75% at March 31, 2002) plus 1% due monthly.

        We have a $1,000,000 line of credit available from a bank. Any borrowings under this line of credit are secured by our trade receivables and bear interest at a rate of prime (4.75% at March 31, 2002) plus 1.0%. At March 31, 2002, we had no outstanding advances under this line of credit.

        At March 31, 2002, we were in compliance with all covenants applicable to our outstanding debt. Those covenants include, among others, the maintenance of ratios of debt to net worth, leverage, cash flow and capitalization. The covenants also restrict the payment of dividends on common stock.

        In addition, our primary bank lender has issued on our behalf two letters of credit totaling $2,100,000 as of March 31, 2002 (subsequently reduced to $1,450,000 in May 2002) to two workers' compensation insurance companies to secure possible future claims under the deductibles on these policies. It is our practice to pay any amounts due under these deductibles as they are incurred. As a result, we do not anticipate the lender will be required to fund these letters of credit.

4. Leases

        We are obligated under capital leases covering several trucks that expire at various dates through November 2007. At March 31, 2002 and 2001, the gross amount of transportation equipment and related amortization recorded under capital leases were as follows:

 
   2002
   2001
Transportation   $ 519,363   $ 443,901
Less accumulated amortization     136,435     42,605
   
 
    $ 382,928   $ 401,296
   
 

        Amortization of assets held under capital leases is included with depreciation expense.

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        In February 2002, we renewed for two years an operating lease on one of our drilling rigs. This lease includes an option to acquire the rig which we can exercise between January 1, 2004 and February 1, 2004. If we exercise the option, approximately 50% of the rentals we pay during the lease term can be applied to the purchase price. We also lease real estate in Henderson, Texas and various equipment under noncancelable operating leases expiring through 2006.

        Rent expense under these operating leases for the years ended March 31, 2002, 2001 and 2000 was $208,150, $20,000 and $0 respectively

        Future lease obligations and minimum capital lease payments as of March 31, 2002 were as follows:

Year Ended
March 31,
   Operating
Leases
   Capital
Leases
  
2003   $ 355,296   $ 142,126  
2004     312,296     142,126  
2005     55,296     135,291  
2006     53,298     30,599  
2007 and thereafter     —     8,901  
   
 
 
Total minimum lease payments   $ 776,186   $ 459,043  
   
       
Less amounts representing interest (at rates ranging from 5.8% to 9.5%)           (60,923 )
         
 
Present value of net minimum capital lease payments           398,120  
Less current installments of capital lease obligations           (109,129 )
         
 
Capital lease obligations, excluding current installments         $ 288,991  
         
 

5. Income Taxes

        Our provision for income taxes consisted of the following:

 
   Years Ended March 31,
 
   2002
   2001
   2000
Current tax—federal   $ 1,427,067   $ 49,593   $ —
Current tax—state     —     120,573     14,283
Deferred tax—federal     1,991,458     965,008     —
   
 
 
    $ 3,418,525   $ 1,135,174   $ 14,283
   
 
 

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        In fiscal years 2002, 2001 and 2000, our expected tax, which we compute by applying the federal statutory rate of 34% to income (loss) before income taxes, differs from our income tax expense as follows:

 
   Years Ended March 31,
  
 
   2002
   2001
   2000
  
Expected tax expense (benefit)   $ 3,310,515   $ 1,304,907   $ (22,214 )
Net operating loss carry forwards and valuation allowances     —     (335,422 )   22,214  
State taxes     —     79,578     14,283  
Other     108,010     86,111     —  
   
 
 
 
    $ 3,418,525   $ 1,135,174   $ 14,283  
   
 
 
 

        Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The components of our deferred income tax liabilities were as follows:

 
   March 31,
 
   2002
   2001
Deferred tax asset—            
  Workers compensation accruals   $ 32,795   $ —
   
 
Deferred tax liabilities:            
  Property and equipment, principally due to differences in depreciation     7,203,456     5,179,203
  Unrealized gain on securities available for sale     56,366     56,750
   
 
  Total deferred tax liabilities     7,259,822     5,235,953
   
 
  Net deferred tax liabilities   $ 7,227,027   $ 5,235,953
   
 

        In assessing the realizability of deferred tax assets, we consider 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 depends on the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences.

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6. Earnings (Loss) Per Common Share

        The following table presents a reconciliation of the numerators and denominators of the basic EPS and diluted EPS comparisons as required by SFAS 128:

 
   Years Ended March 31,
  
 
   2002
   2001
   2000
  
Basic                    
Net earnings (loss)   $ 6,318,285   $ 2,702,789   $ (79,618 )
Less: Preferred stock dividends     92,814     274,630     303,999  
   
 
 
 
Earnings (loss) applicable to common shareholders   $ 6,225,471   $ 2,428,159   $ (383,617 )
   
 
 
 
Weighted average shares     15,112,272     11,137,171     6,242,140  
   
 
 
 
Earning (loss) per share   $ 0.41   $ 0.22   $ (0.06 )
   
 
 
 

Diluted
 
 
 
 
 
 
 
 
 
 
Earnings (loss) applicable to common shareholders   $ 6,225,471   $ 2,428,159   $ (383,617 )
Effect of dilutive securities:                    
  Convertible subordinated debenture     385,358     —     —  
  Preferred stock     92,814     274,630     —  
   
 
 
 
Earnings (loss) available to common shareholders and assumed conversion   $ 6,703,643   $ 2,702,789   $ (383,617 )
   
 
 
 
Weighted average shares:                    
  Outstanding     15,112,272     11,137,171     6,242,140  
  Options     1,500,589     1,771,864     —  
  Convertible subordinated debenture     2,145,205     —     —  
  Preferred stock     463,190     992,066     —  
   
 
 
 
      19,221,256     13,901,101     6,242,140  
   
 
 
 
Earnings (loss) per share   $ 0.35   $ 0.19   $ (0.06 )
   
 
 
 

7. Equity Transactions

        In February 2000, we sold in a private placement, 1,153,846 shares of common stock to WEDGE for $1,500,000, or $1.30 per share. In May 2000, we completed a second private placement of 3,678,161 shares of common stock to WEDGE for $8,000,000, or $2.175 per share.

        In August 2000, we issued 341,576 shares of common stock at $2.25 per share as part of the consideration we paid in connection with our acquisition of Pioneer Drilling Co.

        In October 2000, the T.L.L. Temple Foundation converted its 400,000 shares of Series A convertible preferred stock into 800,000 shares of common stock at $1.00 per share.

        In accordance with the terms of our Series B Preferred Stock Agreement, the conversion price was revised from $3.25 per share to $2.50 per share as of January 20, 2001, the third anniversary of the date we entered into the Preferred Stock Agreement. This revision was based on the average trading price of our common stock for the 30 trading days preceding that anniversary date. In August 2001, the holders converted all of their 184,615 shares of our Series B convertible preferred stock into 1,199,038 shares of common stock at $2.50 per share.

        On May 18, 2001, we retired the 4.86% subordinated debenture we issued to WEDGE on March 30, 2001 in connection with the Mustang Drilling, Ltd. acquisition. We funded the repayment of

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the $9,000,000 face amount of the debenture, together with the payment of $59,535 of accrued interest, with a short-term bank borrowing. We then sold an additional 2,400,000 shares of our common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share. We used the proceeds from this sale to fund the repayment of the short-term bank borrowing.

        On May 31, 2001, San Patricio Corporation exercised its option to acquire 150,000 shares of our common stock for $225,000 ($1.50 per share).

        Directors and employees exercised stock options and warrants for the purchase of 27,500 shares of common stock at prices ranging from $.0375 to $1.00 per share during the year ended March 31, 2002, 51,500 shares of common stock at prices ranging from $0.15 to $2.50 per share during the year ended March 31, 2001 and 5,000 shares of common stock at $0.375 per share during the year ended March 31, 2000.

8. Stock Options, Warrants and Stock Option Plan

        Under our stock option plans, employee stock options generally become exercisable over three to five-year periods, and all options generally expire 10 years after the date of grant. Our plans provide that all options must have an exercise price not less than the fair market value of our common stock on the date of grant. Accordingly, as we discussed in Note 1, we do not recognize any compensation expense relating to these options in our results of operations.

        The following table provides information relating to our outstanding stock options and warrants at March 31, 2002, 2001 and 2000:

 
   2002
   2001
   2000
 
   Shares
Issuable on
Exercise of
Options
   Exercise
Price per
Share
   Shares
Issuable on
Exercise of
Options
   Exercise
Price per
Share
   Shares
Issuable on
Exercise of
Options
   Exercise
Price per
Share
Balance Outstanding                              
  Beginning of year   2,177,500   $ 0.375-4.60   1,759,000   $ 0.15-1.50   1,694,000   $ 0.15-1.50
    Granted   585,000   $ 3.00-5.15   515,000   $ 2.25-4.60   720,000   $ 0.625-1.50
    Exercised   (177,500 ) $ 0.375-1.50   (51,500 ) $ 0.15-2.50   (5,000 ) $ 0.375
    Canceled   (265,000 ) $ 2.25   (45,000 ) $ 0.375-1.50   (650,000 ) $ 0.75
   
 
 
 
 
 
Balance Outstanding                              
  End of year   2,320,000   $ 0.375-5.15   2,177,500   $ 0.375-4.60   1,759,000   $ 0.15-1.50
   
 
 
 
 
 
Options Exercisable                              
  End of year   1,734,000         1,172,500         1,175,500      
   
       
       
     

        As of March 31, 2002, there are no outstanding warrants.

        At March 31, 2002, the weighted average exercise price of our outstanding options was $1.47 per share and the weighted average exercise price of our exercisable options was $0.92 per share.

        We have adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, we have not recognized any compensation expense attributable to our stock option plan. If we had elected to recognize compensation cost based on the fair value of the options we granted at their respective grant dates as SFAS No. 123 prescribes, our net earnings (loss)

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and net earnings (loss) per share would have been reduced to the pro forma amounts the table below indicates:

 
   Year Ended March 31,
  
 
   2002
   2001
   2000
  
Net earnings (loss)—as reported   $ 6,318,285   $ 2,702,789   $ (79,618 )
Net earnings (loss)—pro forma     5,736,027     2,343,565     (232,664 )
Net earnings (loss) per share—as reported—basic     0.41     0.22     (0.06 )
Net earnings (loss) per share—as reported—diluted     0.35     0.19     (0.06 )
Net earnings (loss) per share—pro forma—basic     0.38     0.19     (0.09 )
Net earnings (loss) per share—pro forma—diluted     0.32     0.17     (0.09 )
Weighted-average fair value of options, granted during the year     3.11     2.29     0.47  

        We estimate the fair value of each option grant on the date of grant using a Black-Scholes options-pricing model. This model assumed expected volatility of 90%, 117% and 72% and weighted average risk-free interest rates of 4.5%, 5.4% and 6.0% for grants in 2002, 2001 and 2000, respectively, and an expected life of five years. As we have not declared dividends since we became a public company, we did not use a dividend yield. In each case, the actual value that will be realized, if any, will depend on the future performance of our common stock and overall stock market conditions. There is no assurance the value an optionee actually realizes will be at or near the value we have estimated using the Black-Scholes model.

9. Benefit Plan

        During October 1999, we adopted a 401(k) retirement plan for our eligible employees. We may contribute, on a discretionary basis, a percentage of an eligible employee's annual contribution, which we determine annually. Our contributions for fiscal 2002, 2001 and 2000 were approximately $153,000, $101,000 and $18,000, respectively.

10. Business Segments and Supplementary Earnings Information

        Substantially all our operations relate to contract drilling of oil and gas wells. Accordingly, we classify all our operations in a single segment.

        During the fiscal year ended March 31, 2002, our three largest customers accounted for 13.7%, 12.2% and 11.1%, respectively, of our total contract drilling revenue. Two of these customers were customers of ours in fiscal 2001. In fiscal 2001, our three largest customers accounted for 13.6%, 8.8% and 6.3%, respectively, of our total contract drilling revenue. None of those customers were customers of ours in fiscal 2000. In fiscal 2000, our three largest customers accounted for 7.4%, 7.2% and 7% of our total contract drilling revenue.

11. Fair Value of Financial Instruments

    Cash and cash equivalents, trade receivables and payables and short-term debt:

        The carrying amounts of our cash and cash equivalents, trade receivables, payables and short-term debt approximate their fair values.

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    Long-term debt:

        The carrying amount of our long-term debt approximates its fair value, as supported by the recent issuance of the debt and because the rates and terms currently available to us approximate the rates and terms on the existing debt.

12. Commitments and Contingencies

        On May 17, 2002, the working interest owners in a well that we drilled in May 2000 filed a petition, in the 37th Judicial District Court in Bexar County, Texas, against us, the operator and several of the operator's vendors working at the well location at the time of the alleged loss. The Plantiffs seek damages not to exceed $7,500,000 for loss of income from the well. We deny responsibility for any alleged loss sustained by the working interest owners as we were working in accordance with our contract under the operator's direct control and supervision at the time of the alleged loss. In addition, we believe the contract obligates the operator to indemnify and defend us against the loss alleged in this suit. Accordingly, we are making a demand upon the contractor and contract's indemnity and defense provision. Otherwise, we plan to vigorously defend against this claim. Accordingly, as of March 31, 2002, no provision has been recorded in connection with this matter.

        Subsequent to March 31, 2002, we commissioned the building of two National 110-UE 1500HP diesel electric rigs from IDM Equipment, Ltd for approximately $6,000,000 each. We anticipate that the first rig will be available by October 2002 and the second by January 2003.

        In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment-related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition or results of operations.

        We have increased the deductibles on our workers' compensation insurance policies to better manage the overall cost of workers' compensation insurance.

39


13. Quarterly Results of Operations (unaudited)

        The following table summarizes quarterly financial data for our fiscal years ended March 31, 2002 and 2001 (in thousands, except per share data):

 
   First
Quarter
   Second
Quarter
   Third
Quarter
   Fourth
Quarter
   Total
2002                              
Revenues   $ 18,367   $ 17,702   $ 16,539   $ 15,634   $ 68,242
Earnings from operations     5,292     4,232     1,293     456     11,273
Net earnings     3,174     2,612     551     (19 )   6,318
Net earnings applicable to common shareholders     3,114     2,579     551     (19 )   6,225
Earnings per share:                              
  Basic     0.23     0.17     0.03     (0.00 )   0.41
  Diluted     0.20     0.15     0.03     (0.00 )   0.35

2001
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues   $ 8,868   $ 12,215   $ 14,682   $ 14,440   $ 50,205
Earnings from operations     684     491     665     2,034     3,874
Net earnings     649     383     258     1,413     2,703
Net earnings applicable to common shareholders     573     307     196     1,352     2,428
Earnings per share                              
  Basic     0.06     0.03     0.02     0.11     0.22
  Diluted     0.05     0.03     0.02     0.09     0.19

        The sum of the quarterly earnings per share amounts do not necessarily agree with the year end amounts due to the dilutive effects of convertible instruments.

40

Item 9.    Change in and Disagreements with Accountants on Accounting and Financial Disclosure

        Not applicable.


PART III

        In Items 10, 11, 12 and 13 below, we are incorporating by reference the information we refer to in those Items from the definitive proxy statement for our 2002 Annual Meeting of Shareholders. We intend to file that definitive proxy statement with the SEC by July 29, 2002.

Item 10.    Directors and Executive Officers of the Registrant

        Please see the information appearing under the headings "Proposal No. 1—Election of Directors" and "Executives and Executive Compensation" in the definitive proxy statement for our 2002 Annual Meeting of Shareholders for the information this Item 10 requires.

Item 11.    Executive Compensation

        Please see the information appearing under the heading "Executives and Executive Compensation" in the definitive proxy statement for our 2002 Annual Meeting of Shareholders for the information this Item 11 requires.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

        Please see the information appearing under the heading "Security Ownership of Certain Beneficial Owners and Management" in the definitive proxy statement for our 2002 Annual Meeting of Shareholders for the information this Item 12 requires.


Item 13.    Certain Relationships and Related Transactions

        Please see the information appearing under the heading "Certain Transactions" in the definitive proxy statement for our 2002 Annual Meeting of Shareholders for the information this Item 13 requires.


PART IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)
(1) Financial Statements.

      See Index to Consolidated Financial Statements on page 18.

    (2)
    Financial Statement Schedules:

      Financial statement schedules are omitted because they are not required or the required information is shown in our consolidated financial statements or the notes thereto.

    (3)
    Exhibits. The following exhibits are filed as part of this report:

Exhibit
Number
    
   Description
2.1*   —   Asset Purchase Agreement dated September 29, 1999 between Howell Drilling, Inc. and Pioneer Drilling Company (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 2.1).

41

2.2*   —   Asset Purchase Agreement dated February 14, 2001 between Mustang Drilling, Ltd., Michael T. Wilhite, Sr., Andrew D. Mills and Michael T. Wilhite, Jr. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 2.2).
2.3*   —   Stock Purchase Agreement dated July 21, 2000 between Pioneer Drilling Company and the Shareholders of Pioneer Drilling Co., Inc. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 2.3).
2.4     —   Purchase Agreement dated the 30th of April 2001 by and between Pioneer Drilling Co., Ltd. (now known as Pioneer Drilling Services, Ltd.) and IDM Equipment, Ltd.
2.5     —   Asset Purchase Agreement dated the 28th of May, 2002 by and between United Drilling Company, U-D Holdings, L.P. and Pioneer Drilling Services, Ltd., a Texas limited partnership.
3.1*   —   Articles of Incorporation of Pioneer Drilling Company, as amended. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 3.1).
3.2*   —   Bylaws of Pioneer Drilling Company (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 3.2).
4.1*   —   Loan Agreement dated August 11, 2000 between Pioneer Drilling Company and The Frost National Bank. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.1).
4.2*   —   First Amendment to Loan Agreement dated December 31, 2000 between South Texas Drilling Co., Ltd. and The Frost National Bank. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.2).
4.3*   —   Loan Agreement dated March 30, 2001 between Pioneer Drilling Co., Ltd. and The Frost National Bank. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.3).
4.4*   —   Promissory Note dated June 18, 1997 between Pioneer Drilling Company and San Patricio Corporation. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.4).
4.5 *   —   Debenture Purchase Agreement dated March 30, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.5).
4.6*   —   Debenture Agreement dated March 30, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.6).
4.7*   —   Subordination Agreement dated March 30, 2001 between Pioneer Drilling Company and American Bank, N.A. regarding loan of $3,000,000. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.7).

42

4.8*   —   Subordination Agreement dated March 30, 2001 between Pioneer Drilling Company and The Frost National Bank regarding loans of $1,000,000 and $9,000,000. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.8).
4.9*   —   Subordination Agreement dated March 30, 2001 between Pioneer Drilling Company and The Frost National Bank regarding loans of $12,000,000. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.9).
4.10*   —   Agreement dated May 18, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 4.10).
4.11     —   First Amendment to Loan Agreement dated March 19, 2002 between Pioneer Drilling Service, Ltd. and The Frost National Bank.
4.12*   —   Debenture Purchase Agreement dated October 9, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 8-K dated October 22, 2001 (File No. 2-70145, Exhibit 4.2)
4.13*   —   Debenture Agreement dated October 9, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 8-K dated October 22, 2001 (File No. 2-70145, Exhibit 4.1)
4.14     —   Loan Agreement dated May 24, 2002 between Pioneer Drilling Services, Ltd. and The Frost National Bank.
4.15     —   Promissory Note dated March 29, 2002 between Pioneer Drilling Services, Ltd. And The Frost National Bank.
        Pioneer Drilling Company and some of its subsidiaries are parties to debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of Pioneer Drilling Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, Pioneer Drilling Company agrees to furnish a copy of those instruments to the SEC on request.
9.1*   —   Voting Agreement dated June 18, 1997 between Robert R. Marmor, William D. Hibbetts, Wm. Stacy Locke, Alvis L. Dowell, Charles B Tichenor and Richard Phillips. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 9.1).
9.2*   —   Voting Agreement dated May 11, 2000 between Wm. Stacey Locke, Michael E. Little, Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 9.2).
9.3     —   Voting Agreement dated October 9, 2001 between Pioneer Drilling Company and WEDGE Energy Service, L.L.C. (See Section 1.3 of the Debenture Purchase Agreement referenced above as Exhibit 4.5)

43

10.1+*   —   Executive Employment Agreement dated May 1, 1995 between Pioneer Drilling Company and Wm. Stacy Locke. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.1+).
10.2+*   —   First Amendment to Executive Employment Agreement dated November 16, 1998 between Pioneer Drilling Company and Wm. Stacy Locke. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.2+).
10.3+*   —   Executive Employment Agreement dated November 16, 1998 between Pioneer Drilling Company and Michael E. Little. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.3+).
10.4+*   —   Second Amendment to Executive Employment Agreement dated August 21, 2000 between Pioneer Drilling Company and Wm. Stacy Locke. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.4+).
10.5+*   —   Pioneer Drilling Company's 1995 Stock Plan and form of Stock Option Agreement. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.5+).
10.6+*   —   Non-Statutory Stock Option Agreement dated June 18, 1997 between Pioneer Drilling Company and San Patricio Corporation. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.6+).
10.7+*   —   Pioneer Drilling Company's 1999 Stock Plan and form of Stock Option Agreement. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.7+).
10.8*   —   Subscription Agreement dated February 17, 2000 between WEDGE Energy Services, L.L.C. and Pioneer Drilling Company (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.8).
10.9*   —   Common Stock Purchase Agreement dated May 11, 2000 between WEDGE Energy Services, L.L.C. and Pioneer Drilling Company (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.9).
10.10*   —   Common Stock Purchase Agreement dated May 18, 2001 between Pioneer Drilling Company and WEDGE Energy Services, L.L.C. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.10).
10.11*   —   Registration Rights Agreement dated May 18, 2001 between WEDGE Energy Services, L.L.C. and Pioneer Drilling Company. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.11).
10.12*   —   Contract dated May 5, 2000 between IRI International Corporation and Pioneer Drilling Company for the purchase of two drilling rigs. (Form 10-K for the year ended March 31, 2001 (File No. 2-70145, Exhibit 10.12).
10.13     —   Equipment Lease dated effective the 8th of February, 2002 between Pioneer Drilling Services, Ltd. and International Drilling Services, Inc.
21.1     —   Subsidiaries of Pioneer Drilling Company

44

23.1     —   Consent of KPMG LLP.
*
Incorporated by reference to the filing indicated.

+
Management contract or compensatory plan or arrangement.

(b)
Reports on Form 8-K.

        We did not file any current reports on Form 8-K during the last quarter of the fiscal year covered by this report.

45



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    PIONEER DRILLING COMPANY

June 10, 2002
 
By:
 
/s/  MICHAEL E. LITTLE      
Michael E. Little
 Chairman of the Board and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
   Title
   Date

 
 
 
 
 
/s/  MICHAEL E. LITTLE      
Michael E. Little		   Chairman, Chief Executive Officer and
Director (Principal Executive Officer)		   June 10, 2002

/s/  WM. STACY LOCKE      
Wm. Stacy Locke
 
President, Chief Financial Officer and Director (Principal Financial Officer)
 
June 10, 2002

/s/  WILLIAM D. HIBBETTS      
William D. Hibbetts
 
Vice President, Chief Accounting Officer, Secretary and Director (Principal Accounting Officer)
 
June 10, 2002

/s/  C. JOHN THOMPSON      
C. John Thompson
 
Director
 
June 10, 2002

/s/  JAMES M. TIDWELL      
James M. Tidwell
 
Director
 
June 10, 2002

/s/  WILLIAM H. WHITE      
William H. White
 
Director
 
June 10, 2002

/s/  DEAN A. BURKHARDT      
Dean A. Burkhardt
 
Director
 
June 10, 2002

46



QuickLinks

DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
PART II
PIONEER DRILLING COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
PIONEER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
PIONEER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
PIONEER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
PIONEER DRILLING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
PIONEER DRILLING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART III
PART IV
SIGNATURES
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M,R]93T'!,2='`:RQ6*$HM3BUJ"PU!2CJG)^7EIF2FE<"=*T>3H?C]A$#`Y.& M)2-C.R,#,R,C2W3#]SZ^7WF_@_=\G/]C]_P/>QEW'OSTX\:G@R)\[W\JB/Y< M]G?=WV5LH3\?B/X3_"7T2Y#];^G?4-%U:=\G?Y_^?=+OZ>LW_)[\?1J(EPYD M_9[^>]+WZ1EI0)EIK'R_&#UV_(S>P;AQQ\^8'Q_.^-$ M?\;\C?X;P\97-^-G[!0VN<4I_WDXY116M/WGDG-9+O*?&\R64UJJ^I^'1\YX MN>5_.8&5I?]Y>`$"#`"8W+R[#0IE;F1S=')E86T-"F5N9&]B:@T*,38Q(#`@ M;V)J#0H\/`T*+U1Y<&4@+T9O;G1$97-C7!E("]4>7!E,0T*+TYA;64@+T8U#0HO M1FER7!E M("]&;VYT#0HO4W5B='EP92`O5'EP93$-"B].86UE("]&-PT*+T9I7!E("]086=E#0HO4&%R96YT(#@@,"!2#0HO4F5S;W5R8V5S(#$T M(#`@4@T*+T-O;G1E;G1S(#$S(#`@4@T*/CX-"F5N9&]B:@T*,38@,"!O8FH- M"CP\#0HO5'EP92`O4&%G90T*+U!A7!E("]086=E#0HO4&%R96YT(#@@,"!2#0HO4F5S;W5R8V5S M(#(U(#`@4@T*+T-O;G1E;G1S(#(T(#`@4@T*/CX-"F5N9&]B:@T*,C8@,"!O M8FH-"CP\#0HO5'EP92`O4&%G90T*+U!A7!E("]086=E#0HO4&%R96YT(#@@,"!2#0HO4F5S;W5R M8V5S(#,T(#`@4@T*+T-O;G1E;G1S(#,S(#`@4@T*/CX-"F5N9&]B:@T*,S4@ M,"!O8FH-"CP\#0HO5'EP92`O4&%G90T*+U!A7!E("]086=E#0HO4&%R96YT(#0R(#`@4@T* M+U)E7!E("]086=E#0HO4&%R96YT(#0R M(#`@4@T*+U)E7!E("]086=E#0HO4&%R M96YT(#0R(#`@4@T*+U)E7!E("]086=E M#0HO4&%R96YT(#7!E M("]086=E#0HO4&%R96YT(#7!E("]086=E#0HO4&%R96YT(#7!E("]086=E7!E("]086=E M7!E("]086=E M"!;,"`P(#4Y-"`W-S1=#0H^ M/@T*96YD;V)J#0HQ-C4@,"!O8FH-"CP\#0HO5'EP92`O0V%T86QO9PT*+U!A M9V5S(#0Q(#`@4@T*/CX-"F5N9&]B:@T*,38V(#`@;V)J#0H\/`T*+T-R96%T M:6]N1&%T92`H1#HQ.3$P,C`V,3,Q,30P,3,I#0HO4')O9'5C97(@*%PS-S9< M,S EX-2.4 4 a2082143zex-2_4.htm EXHIBIT 2.4
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EXHIBIT 2.4


PURCHASE AND SALE AGREEMENT

        THIS AGREEMENT is made and entered into on the 30th day of April, 2001, by and between IDM EQUIPMENT, LTD., 11616 Galayda, Houston, Texas 77086 (the "Seller"), and PIONEER DRILLING CO., LTD., 9310 Broadway, Building 1, San Antonio, Texas 78217, (the "Purchaser").


RECITALS:

        The Seller owns and is desirous of selling a certain drilling rig and related equipment being generally described as a 1500 HP Diesel Electric Rig, known as Pioneer Rig 21 ("the Rig"), together with all related equipment and modifications thereto, as more fully described in the quotation number Q2803E from Seller to Purchaser dated April 24, 2001, ("the Quotation") described in Exhibit "A" attached hereto and incorporated herein for all purposes;

        The Purchaser desires to purchase the Rig;

        NOW, THEREFORE, for and in consideration of the premises, mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party hereto, the parties do hereby agree as follows:

        1.    Sale. Subject to the assembly, rig up, testing of the Rig, and rig down, by Seller in accordance with the Quotation ("the Work"), and Purchaser's acceptance of the Rig by execution and delivery of a Rig Acceptance Certificate as defined herein, and subject to the terms and conditions set forth herein, the Seller hereby agrees to sell, assign and convey to the Purchaser, and the Purchaser hereby agrees to purchase from the Seller, all of the items of personal property and the drilling rig components, together with all modifications and substitutions thereto, as more fully described in Exhibit "A".

        2.    Purchase Price and Payment Schedule. The total purchase price for the Rig, shall be Four Million One Hundred Twenty-Three Thousand Five Hundred and no/100 Dollars ($4,123,500.00) (the "Purchase Price"), together with any applicable state or local taxes, if any, to be paid as follows:

    a.
    upon the execution of this Agreement, a deposit in an amount which is equal to ten percent (10%) of the Purchase Price, $412,350.00 (the "First Deposit") will be made by Purchaser, which will be held by Seller in constructive trust and applied to the Purchase Price upon Delivery and Acceptance of the Rig; and

    b.
    at the time forty-five (45) days from the date of execution of this Agreement, a second deposit in the amount of ten percent (10%) of the Purchase Price, $412,350.00 (the "Second Deposit") will be made by Purchaser, which will be held by Seller in constructive trust and applied to the Purchase Price upon Deliver and Acceptance of the Rig; and

    c.
    the balance of the Purchase Price, together with any and all applicable state or local taxes, if any, due on the Purchase Price, will be paid by Purchaser to Seller via wire transfer to Seller's designated bank account upon Delivery and Acceptance of the Rig as hereinafter defined, and such approval and payment shall not be unreasonably withheld by the Purchaser.

        3.    Performance of the Work. Seller shall perform the Work in accordance with specifications set forth in the Quotation.

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        4.    Inspection and Acceptance of the Rig and Work. Seller shall notify Purchaser promptly upon completion of the Work, and Purchaser shall inspect the Rig within three business days after receipt of such notice. If the Rig and the Work are approved by Purchaser, Purchaser shall immediately issue and deliver to Seller a Rig Acceptance Certificate in the form attached hereto as Exhibit "B". The Rig Acceptance Certificate issued by Purchaser to Seller shall not be unreasonably withheld by the Purchaser.

        5.    Delivery. The Seller shall deliver the Rig and Equipment to the Purchaser on terms Ex works, at Seller's facility in Houston, Texas, on or before September 1, 2001, except as otherwise set forth herein. Contemporaneously with the delivery, rig up, testing of the Rig, and rig down, Seller shall provide Purchaser with a Bill of Sale for the Rig in the form attached hereto as Exhibit "C". The Rig shall be deemed to be delivered once it has been rigged up, tested, rigged down, and is accepted by the Purchaser pursuant to paragraph 4 herein. Acceptance of the Rig for purposes of delivery shall not be unreasonably withheld by the Purchaser.

        6.    Title Representations. The Seller agrees to deliver to the Purchaser, good and marketable title to the Rig and related equipment, free and clear of all liens, debts, and encumbrances whatsoever. Prior to delivery of the Rig, Seller will provide Purchaser with evidence satisfactory to the Purchaser that all liens and encumbrances affecting the Rig have been properly released.

        7.    Representations of the Seller. The Seller represents to the Purchaser the following:

    a.
    that it is a Texas limited partnership organized and existing under the laws of the State of Texas and authorized to do business in the State of Texas;

    b.
    that it has full power, authority and ability to perform all of the obligations of the Seller hereunder; and

    c.
    that the execution of this Agreement and all obligations hereunder have been duly authorized by all necessary legal action and shall constitute valid and binding obligations as to the Seller, enforceable in accordance with their terms, and further that the representative of the Seller executing this Agreement has full authority to bind the Seller, and that the joinder of no person or entity, other than those set out herein, will be necessary to create a binding obligation upon the Seller pursuant to this Agreement.

        8.    Representations of the Purchaser. The Purchaser represents to the Seller the following:

    a.
    that it is a Texas limited partnership organized and existing under the laws of the State of Texas and authorized to do business in the State of Texas;

    b.
    that it has full power, authority and ability to perform all of the obligations of the Purchaser hereunder; and

    c.
    that the execution of this Agreement and all obligations hereunder have been duly authorized by all necessary legal action and shall constitute valid and binding obligations as to the Purchaser, enforceable in accordance with their terms, and further that the representative of the Purchaser executing this Agreement has full authority to bind the Purchaser, and that the joinder of no person or entity, other than those set out herein, will be necessary to create a binding obligation upon the Purchaser pursuant to this Agreement.

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        9.    Change Orders. Any change orders pertaining to scope of the Work or labor shall be charged at Seller's prevailing rates, or as otherwise agreed to by the parties in writing, and paid to Seller via wire transfer upon Purchaser's receipt of Seller's invoice for said charges. Any change orders must be mutually agreed to by both parties in writing and signed by Purchaser or its authorized representative prior to performance of the change order. Any approval of change orders shall not be unreasonably withheld. In addition, the anticipated delivery date shall be extended for all purposes, for each change order that creates additional time for performance of the Work, for the same period of time caused by any such change order ("Change Order Delay").

        10.  Default of the Purchaser and Seller's Remedies. The Purchaser shall be deemed to be in default upon the occurrence of any one or more of the following events; provided, that the Seller has given Purchaser, written notice of such default and Purchaser has failed to cure: (i) within ten (10) calendar days of such notice, any default with respect to payment, as described in Article 10(a) herein; and (ii) within fifteen (15) working days of such notice, any default with respect to obligations or warranties described in Article 10(b), (c), and (d) herein:

    a.
    the Purchaser fails to make any payment as and when required pursuant to this Agreement or any other agreement pertaining to this transaction;

    b.
    the Purchaser fails to meet or comply with or perform any covenant, agreement or obligation on its part required within the time limits and in the manner required in this Agreement, or any other agreement pertaining to this transaction;

    c.
    any warranty, representation made by the Purchaser which is set forth in this Agreement and which is material to the performance of this Agreement, proves to be false in any material respect; or

    d.
    the dissolution or termination of the Purchaser's legal existence (except to the extent the business of Purchaser is continued by a successor entity), insolvency, business failure, appointment of a receiver, assignment for the benefit of creditors, or the commencement of any proceedings under any bankruptcy or insolvency law of, by, or against the Purchaser.

        In the event the Purchaser shall be deemed to be in default hereunder, the Seller may exercise any such right or remedy as Seller may have, at law or in equity, by reason of such default, including, but not limited to, suspension of performance, termination of this Agreement, cover as defined by the applicable Uniform Commercial Code, enforcement of specific performance, and recovery of reasonable attorney's fees incurred by the Seller in connection therewith. UNDER NO CIRCUMSTANCES HOWEVER SHALL PURCHASER BE LIABLE TO SELLER FOR CONSEQUENTIAL OR LOST PROFIT DAMAGES

        11.  Default of the Seller and Purchaser's Remedies. The Seller shall be deemed to be in default upon the occurrence of any one or more of the following events: provided, that Purchaser has given Seller written notice of such default and Seller has failed to cure within fifteen (15) working days of such notice, any default with respect to obligations or warranties described in Article 11(a), (b), and (c) herein:

    a.
    the Seller fails to meet or comply with or perform any covenant, agreement or obligation on its part required within the time limits and in the manner required in this Agreement, or any other agreement pertaining to this transaction;

    b.
    any warranty, representation or statement made or furnished to the Purchaser by or on behalf of the Seller proves to be false in any material respect when made or furnished; or

    c.
    the dissolution or termination of the Seller's legal existence, insolvency, business failure, appointment of a receiver, assignment for the benefit of creditors, or the commencement of any proceedings under any bankruptcy or insolvency law of, by, or against the Seller.

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        In the event the Seller shall be deemed to be in default hereunder, the Purchaser may exercise any such right or remedy as Purchaser may have, at law or in equity, by reason of such default, including, but not limited to, termination of this Agreement or enforcement of specific performance, and recovery of reasonable attorney's fees incurred by the Purchaser in connection therewith. In addition, at the Purchaser's instruction, upon Purchaser's demand, the Seller shall return to Purchaser the First and Second Deposit which is held for the benefit of Purchaser pending Delivery and Acceptance of the Rig.

        12.  Proprietary and Confidential Information. The parties agree that the information and data at each other's disposal during the term of the operation and enforcement of this Agreement is considered proprietary information and confidential, but only to the extent such information and material is clearly marked CONFIDENTIAL. Such information, if disseminated to third parties, would be detrimental to the owner of the proprietary information. Accordingly, each party agrees to take any and all reasonable precautions to restrict the dissemination of such information by its employees, agents or subcontractors.

        Information provided by the parties shall not be deemed proprietary information and confidential if such information:

    a.
    is already known by the parties;

    b.
    is, or becomes publicly known, through no wrongful act of a party, but only to the extent made public;

    c.
    is rightly received by a party from a third party without a similar restriction and without breach of this Agreement;

    d.
    is independently developed by a party without breach of this Agreement;

    e.
    is approved for release by a party's written communication; or

    f.
    is required to be disclosed pursuant to court order or order of a governmental agency of by operation of law.

        During the term of this Agreement or any extension of this Agreement, neither party shall permit access by any nonaffiliated employee or person to the proprietary and confidential information, without the other party's written permission.

        13.  Force Majeure. In the event that performance by either party of any of its obligations under the terms of this Agreement shall be interrupted by an act of God, by an act of war, riot, or a civil disturbance, by an act of state, by strikes, fire, flood, hurricane, or by the occurrence of any other event beyond the reasonable control of either party hereto, and which by the exercise of due diligence could not reasonably be prevented, such party shall be excused from such performance for an equal amount of time as such occurrence shall have existed. In the further event that, during any period of Force Majeure the goods are damaged or destroyed in Seller's yard, the Seller bears all related expenses pursuant to Article 18 of this Agreement. A party claiming an event of Force Majeure shall notify the other party in writing of such event and the anticipated duration of such event. The above notwithstanding, unless the written consent of the Purchaser is obtained, the Delivery Date of the Rig shall not be extended beyond November 1, 2001 as a result of an event of Force Majeure.

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        14.  Permissible Delays. In addition to Force Majeure events described herein, delivery may be delayed for an equal amount of time caused by any such delay if (a) the Purchaser changes its specifications or time of delivery of the Rig or (b) Seller's inability to obtain materials or (c) any inspections or tests are required for certifications which are not included or contemplated in this Agreement or (d) there is a delay in Purchaser furnished equipment, if any, not caused in whole or in part by Seller (collectively "Permissible Delays" including "Rain Delays"). In addition, Seller shall have the time for any performance extended as a result of a Rain Delay, as hereinafter defined, for the same period of time caused by any such Rain Delay. A Rain Delay is defined for purposes of this Agreement, as a delay caused by weather conditions which render the Work unsafe, impracticable, or unperformable in the determination of the job superintendent and verified by the Purchaser. The Seller shall maintain a written log of the weather conditions which pertain to this issue and shall promptly provide the Purchaser with written notice of any Rain Delay. Acceptance of any delays defined as Permissible Delays, including but not limited to Rain Delays, or Force Majeure shall not be unreasonably withheld by the Purchaser. Notwithstanding anything herein to the contrary, all purchaser furnished equipment must be at Seller's facility no later than July 1, 2001. In addition, without the consent of the Purchaser, under no circumstances shall the Delivery Date be extended beyond October 1, 2001 as a result of Permissible Delays.

        15.  Warranty.

    a.
    the Seller represents and warrants the proper construction of all of the work performed hereunder. The Seller further warrants the merchantability, condition, and workmanship of the Rig and the fitness thereof for the purpose for which it is intended, and further that the Rig complies with the specifications set out in the Quotation.

    b.
    when new parts or components are purchased, the Seller shall pass on to the Purchaser any warranties that accrue to the Seller from any original manufacturer. The warranty period for all other parts and components provided by the Seller which include, but are not limited to the items contained in the Quotation are warranted for a period of one hundred twenty (120) days from spud-in of the Rig, not to exceed six (6) months from Delivery.

    c.
    the warranty period for all refurbished and remanufactured parts and components, if any, provided by the Seller are warranted for a period of one hundred twenty (120) days from spud-in of the Rig, not to exceed six (6) months from Delivery.

    d.
    all general warranties as to workmanship and condition of the equipment provided by the Seller, as well as warranties of merchantability and fitness shall be for a period of six (6) months from delivery of the Rig.

    e.
    provided that Seller, replaces (or makes available a replacement part or component) any defective part, component, within a commercially reasonable period of time after Purchaser notifies Seller of a condition that does not comply with the warranties set forth herein, the Seller will not be liable for any special, incidental, consequential or indirect damages which arise as a result of the delay in the operation of the Rig, notwithstanding any provision to the contrary contained in this Agreement. However, in the event of a breach of the warranties set forth herein, Seller will pay all shipping and transportation costs incurred incident to any warranty claim.

        16.  Indemnity by the Purchaser. The Purchaser agrees to indemnify and hold the Seller, and the property of Seller, including, but not limited to the Rig and its related equipment, free and harmless from any and all claims, charges, liens, mortgages, lis pendens, attachments, security interests, causes of action, judgments, or any other encumbrances, with respect to and resulting from (i) any breach of this Agreement by the Purchaser, and, (ii) any liability of Purchaser.

5


        17.  Indemnity by the Seller. The Seller agrees to indemnify and hold the Purchaser, and the property of Purchaser, including, but not limited to the Rig and its related equipment, free and harmless from any and all claims, charges, liens, mortgages, lis pendens, attachments, security interests, causes of action, judgments, or any other encumbrances, with respect to and resulting from any breach of this Agreement by the Seller, and (ii) any liability of Seller.

        18.  Insurance. The Seller shall keep the Rig and equipment, except Purchaser supplied equipment, if any, insured for all risks customary for this type of Rig, including liability coverage, from the date of execution of this Agreement until Delivery. The Seller shall provide Purchaser with proof of insurance and all renewals thereof. The Purchaser shall be named as an additional insured on such policies and an joint loss payee as its interests appear.

        19.  Notices. For purposes of this Agreement and notices required hereunder, Purchaser shall be required to designate a local on site representative. All notices required or permitted hereunder shall be given and received if personally delivered to each parties designated on site representative or if sent by certified or registered mail, postage prepaid, return receipt requested, addressed as follows:

    a.
    to IDM Equipment, Ltd.:
    Mr. David L. Huntington
    11616 Galayda
    Houston, Texas 77086

    b.
    to South Texas Drilling & Exploration, Inc.:
    Mr. Stacy Locke
    9310 Broadway, Building 1
    San Antonio, Texas 78217

        20.  Miscellaneous.

    a.
    All obligations hereunder shall be performed in Harris County, Texas;

    b.
    this Agreement shall be governed, construed and interpreted in accordance with the laws of the State of Texas;

    c.
    regardless of whether the transactions contemplated hereby are consummated, each party hereto shall pay its own expenses incident to this Agreement;

    d.
    this Agreement contains the entire agreement between the parties and supersedes all prior agreements and understandings, if any, relating to the sale and purchase of the Rig and may be amended or supplemented only by instrument in writing executed by both parties.

    e.
    in the event of any conflict between this Agreement and the Quotation, the provisions of this Agreement shall prevail;

    f.
    this Agreement shall be binding upon and inure to the benefit of the Seller and the Purchaser and their respective successors and assigns;

    g.
    if any one or more of the provisions contained in this Agreement or in any other document delivered pursuant hereto shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such document, and other provisions and the entirety of this Agreement shall remain in full force and effect unless the removal of the invalid, illegal or unenforceable provision destroys the legitimate purposes of this Agreement, in which event this Agreement shall be terminated;

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    h.
    this Agreement may be executed in several counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute but one and the same Agreement;

    i.
    the failure or delay of either party in the enforcement of its rights set out in this Agreement shall not constitute a waiver of the rights nor shall it be considered as a basis for estoppel either at law or in equity; and

    j.
    time is of the essence of this Agreement.

        EXECUTED THE            day of                        , 2001.

SELLER   PURCHASER

IDM EQUIPMENT, LTD.
a Texas Limited Partnership
 
PIONEER DRILLING CO., LTD.
EXPLORATION, INC.

By:
 
Huntington/IDM GP, LLC
a Texas LLC, its General Partner
 
 
 
 

By:
 
David L. Huntington
 President
 
By:
 
Stacy Locke President, SOTEX Exploration Company its General Partner

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EX-2.5 5 a2082143zex-2_5.htm EXHIBIT 2.5
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EXHIBIT 2.5


ASSET PURCHASE AGREEMENT

        THIS ASSET PURCHASE AGREEMENT (the "Agreement"), is made this 28th day of May, 2002 (the "Effective Date"), by and between United Drilling Company, an Oklahoma corporation ("United"), U-D Holdings, L.P., at Texas limited partnership ("U-D") (United and U-D are collectively referred to herein as the "Sellers") and Pioneer Drilling Services, Ltd., a Texas limited partnership ("Purchaser"). The individuals listed on Exhibit A attached hereto (the "Principals") are made parties to this Agreement only with respect to the representation and warranty set forth in paragraph (d) of Section 6 below, and agree to be jointly and severally liable for any breach of paragraph (d) of Section 6 below.

WITNESSETH:

        WHEREAS, United has engaged in the land contract drilling business using rigs owned by U-D (the "Business") and United and U-D have decided to sell all of the operating assets of the Business, including the rigs owned by U-D; and

        WHEREAS, the operating assets of the Business consist of the two (2) drilling rigs and related equipment (individually a "Rig" and collectively "the "Rigs") and the vehicles described on Exhibit B attached hereto (collectively, the "Assets"); and

        WHEREAS, Purchaser is desirous of purchasing the Assets from Sellers;

        NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:

        1.    Purchase and Sale of the Assets. On and subject to the terms and conditions of this Agreement, Sellers shall sell, transfer and assign to Purchaser and Purchaser shall purchase and acquire from Sellers on the Closing Date (as hereinafter defined), all of Sellers' right, title, interest and benefit in and to the Assets, free and clear and expressly excluding all debts, liabilities, obligations, taxes, liens and encumbrances of any kind, character or description. Exhibit B specifies those Assets which are owned by United and those as Assets which are owned by U-D.1.

        2.    Assumption of Liabilities. Except as specifically provided for in Section 11(a) below, Purchaser does not and shall not assume or be responsible for any obligation or liability of Sellers whatsoever.

        3.    Consideration.

            (a)  Based on the representations, warranties and agreements contained herein and subject to the terms and conditions set forth herein, Purchaser shall purchase, and Sellers agree to sell, assign and transfer to Purchaser, the Assets for the total consideration of Seven Million Dollars ($7,000,000.00) (the "Purchase Price"), payable in cash by wire transfer or certified check of immediately available funds. Not more than $200,000 of the Purchase Price will be allocated and paid to United, with the remainder being allocated and paid to U-D.

            (b)  Within 60 days after the Closing, Purchaser shall prepare the allocation of the Purchase Price amongst the Assets, with the express understanding that such allocation shall be consistent with the division of the Purchase Price between U-D and United. The parties agree that such allocation shall be reported on Internal Revenue Service Form 8594.

        4.    Closing. In the event that Purchaser and Sellers satisfy those conditions set forth in this Agreement, or the conditions unsatisfied are waived in writing, the consummation of the transactions contemplated by this Agreement (the "Closing") shall take place at 10:00 A.M., local time on or before the May 28, 2002, or such other date as the parties mutually agree. The time and date of the Closing shall be referred to herein as the "Closing Date." The Closing shall take place at the offices of Matthews & Branscomb, P.C., 112 E. Pecan St., Suite 1100, San Antonio, Texas, or such other time and place as the parties mutually agree.

            (a)  Sellers' Obligations at Closing. At the Closing, Sellers agree to deliver to Purchaser the following:

                (i)  To the Purchaser, a form of General Bill of Sale and Assignment in the form attached hereto as Exhibit "C", pursuant to which Sellers shall convey the Assets to Purchaser;

              (ii)  To the Purchaser, title transfer documents promulgated by the State of Texas to transfer the Assets which are comprised of motor vehicles;

              (iii)  To the Purchaser, certificates as to the existence of U-D (as of a date not earlier than ten (10) days prior to the Closing) in the State of Texas and as to the existence of United in the State of Oklahoma (as of a date not earlier than ten (10) days prior to the Closing);

              (iv)  To the Purchaser, (A) resolutions of the general partner of U-D evidencing the authorization of the execution, delivery and performance of this Agreement by U-D and the consummation of the transactions contemplated hereby, certified by the highest ranking officer or manager of the General Partner of U-D, and (B) resolutions of the board of directors and shareholders of United evidencing the authorization of the execution, delivery and performance of this Agreement by United and the consummation of the transactions contemplated hereby, certified by the president of the United;

              (v)  To the Purchaser, a certificate dated as of the Closing Date and signed by the president of United and the highest ranking officer or manager of the General Partner of U-D to the effect that the representations and warranties of Sellers set forth in this Agreement, as of the date of this Agreement and as of the Closing, are true and correct in all material respects and that all covenants, agreements and conditions required by this Agreement to be performed or complied with prior to or at the Closing have been so performed or complied with;

              (vi)  To the Purchaser, a certified search of the UCC records of the Secretary of State of the State of Texas and the State of Oklahoma and the applicable counties (which searches shall include a search of judgements and abstracts) where Sellers reside, showing that the Assets are free and clear of any liens or encumbrances, or executed UCC-3 termination statements (or such other releases which are necessary to release such liens, judgements and security interests) releasing any security interest, lien or judgement that are reflected in such searches;

            (vii)  To the Purchaser, such additional certificates, proceedings, instruments and other documents as Purchaser may reasonably request to evidence compliance by Sellers with this Agreement and applicable legal requirements and the performance and satisfaction by Sellers, at or prior to the time of Closing, of all agreements then to be performed and all conditions then to be satisfied by Sellers;

            (b)  Purchaser's Obligations at Closing. At the Closing, Purchaser agrees to deliver to Sellers, the following:

                (i)  To the Sellers, an aggregate amount of Seven Million Dollars ($7,000,000.00) less $16,915 (for personal property tax pro-ration) by wire transfer to an account or accounts designated by Sellers at or prior to the Closing or by certified check(s);

              (ii)  To the Sellers, resolutions of the general partner of Purchaser evidencing the authorization of the execution, delivery and performance of this Agreement by Purchaser and the consummation of the transactions contemplated hereby, certified by the Secretary of the general partner of Purchaser;

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              (iii)  To the Sellers, a certificate dated as of the Closing Date and signed by the President of the general partner of Purchaser to the effect that the representations and warranties of Purchaser set forth in this Agreement, as of the date of this Agreement and as of the Closing, are true and correct in all material respects and that all covenants, agreements and conditions required by this Agreement to be performed or complied with prior to or at the Closing have been so performed or complied with;

              (iv)  To the Sellers, such additional certificates, proceedings, instruments and other documents as Sellers may reasonably request to evidence compliance by Purchaser with this Agreement and applicable legal requirements and the performance and satisfaction by Purchaser, at or prior to the time of Closing, of all agreements then to be performed and all conditions then to be satisfied by Purchaser.

              (v)  To the Seller, certificates of insurance showing the Sellers and Continental Resources as additional insured on Purchaser's liability insurance policies.

        5.    Delivery of Assets.

            (a)  At the Closing, Sellers shall deliver and transfer title to the Assets to Purchaser free, clear and discharged of and from any and all liens, charges, equities, security interests, encumbrances, claims and demands of every kind and character whatsoever. The Rigs are stacked near Driscoll, Texas ("Yard") and shall remain at such location until consummation of the transactions contemplated hereby, or the termination of this Agreement pursuant to Section 14 hereof. All of the Assets are currently located at the Yard and shall remain at the Yard until Closing. Delivery of the Assets shall occur at the Yard.

            (b)  Risk of Loss. It is expressly agreed that the title to, and the risk of loss of, all of the Assets shall pass to Purchaser at Closing and not before.

        6.    Covenants, Representations and Warranties of Sellers. Sellers, jointly and severally, covenant, represent and warrant to Purchaser as follows and acknowledges that Purchaser is relying upon such representations and warranties in entering into this Agreement:

            (a)  Legal Existence of Sellers. United is an Oklahoma corporation duly organized and, validly existing under the laws of the State of Oklahoma and has the power to carry on its business as now being conducted. United is qualified to do business in the State of Texas. U-D is a Texas limited partnership duly organized and, validly existing under the laws of the State of Texas and has the power to carry on its business as now being conducted. U-D is not qualified as a foreign limited partnership in any jurisdiction.

            (b)  Legal Authority. The execution, delivery and performance of this Agreement, and the obligations undertaken by Sellers herein, have been duly authorized and approved by all of the general and limited partners of U-D, and all of the shareholders and directors of United.

            (c)  No Violation of Agreements, Etc. This Agreement constitutes a valid and binding obligation of Sellers enforceable against Sellers in accordance with its terms, and this Agreement and all transactions contemplated hereby will not result in the violation of any terms of the agreement of limited partnership of U-D, or the articles or bylaws of United, any law applicable to Sellers, or any agreement to which Sellers are a party or by which they are bound.

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            (d)  Title to Assets/Sale of all of the Operating Assets of a Business/Principals. Sellers presently own the Assets free and clear of all liens, charges, equities, pledges, mortgages, leases, options, assessments, security interests, restrictions and other encumbrances of any kind whatsoever, including but not limited to liens arising in Peru, any liens by any taxing authority (including the Texas Comptroller), liens created as a result of a lending or business transaction, or any liens arising from labor claims ("Liens"), and Sellers have, and on the Closing Date will have, full right, power, title and authority to sell, transfer and convey the Assets to Purchaser, free and clear of all Liens, and therefore, at Closing the Sellers will transfer the Assets to the Purchaser free and clear of all Liens. Sellers have paid any and all sales and use taxes associated with the Assets or the Business which arose or were due prior to Closing. The Assets constitute the entire operating assets of the Business. Those Assets owned by U-D constitute all of the assets owned by U-D. Those Assets owned by United constitute all of the operating assets of United. Within the past twelve months, Sellers have not made any other sale of any of the assets relating to the Business. It is expressly agreed that the representations and warranties contained in this paragraph are made jointly and severally by the Sellers and the Principals. Those persons listed on Exhibit A, who are the "Principals" under the terms of this Agreement, constitute all of the shareholders of United and all of the partners of U-D (to the extent that any partner of U-D is an entity, the persons owning the interest in such entity are also listed on Exhibit A and are included as Principals).

            (e)  No Litigation. Except as described on Schedule 6(e), there presently exists no litigation, proceeding, action, claim, arbitration, or investigations at law, in equity or otherwise, pending or threatened against Sellers which relates to the Assets and Sellers have no knowledge of any facts or circumstances that would indicate that any such claim exists. Sellers are not subject to any notice, writ, injunction, order, or decree of any court, agency, or other governmental authority affecting the Assets and in which it is a named party. Sellers have not been served with process or otherwise received formal notice with respect to, nor has Sellers been threatened with, any litigation or judicial, administrative, arbitration or other proceeding affecting the Assets.

            (f)    Brokers. If Sellers have retained any broker in connection with the transaction contemplated by this Agreement, Sellers shall be solely responsible for the payment of any compensation due such broker by Sellers.

            (g)  Known Defects. Except as set forth in Schedule 6(g), Sellers know of no defect in the Assets that would prevent them from being used in the normal course of Purchaser's business after the Closing. "Knowledge" and similar references in this Agreement shall mean for all purposes in this Agreement, the actual knowledge of the Principals and the officers and managers of the Sellers.

            (h)  Personal Property. Sellers has delivered or will deliver at Closing all support, maintenance, warranty, and similar agreements related to the Assets. To the knowledge of the Sellers the Assets are in good operating condition for Assets of their respective ages, subject to ordinary wear and tear. Except as to known defects of which the Sellers are aware but have not disclosed to Purchaser, the Assets are purchased in an "AS IS", "WHERE IS" condition. SELLERS HEREBY DISCLAIM ALL WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY, AND ANY OTHER WARRANTIES, EXPRESSED OR IMPLIED (OTHER THAN THOSE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS AGREEMENT), WITH RESPECT TO THE ASSETS OWNED BY THEM. Sellers take no responsibility whatsoever with respect to any change in the condition of the Assets after Closing.

            (i)    Taxes. The Assets are not in any manner encumbered by any liens arising out of unpaid taxes except for liens for current taxes not yet due and payable.

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            (j)    Disclosure. There is no state of facts or circumstances known to Sellers and not disclosed to Purchaser which (i) should be disclosed to Purchaser in order not to make any of the warranties and representations contained herein not false or misleading or, (ii) which otherwise might reasonably be expected to materially affect the Assets or affect Purchaser's decision to enter into this Agreement.

        7.    Covenants, Representations and Warranties of Purchaser. Purchaser covenants, represents and warrants to Sellers as follows and acknowledges that Sellers are relying upon such representations and warranties in entering into this Agreement:

            (a)  Legal Existence of Purchaser. Purchaser is a limited partnership duly organized and validly existing under the laws of Texas and has the power to carry on its business as now being conducted.

            (b)  Legal Authority of Purchaser. The execution, delivery and performance of this Agreement, and the obligations undertaken by Purchaser herein have been duly authorized and approved by the general partner of Purchaser.

            (c)  No Violation of Agreements. This Agreement constitutes a valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms and this Agreement and all transactions contemplated hereby will not result in the violation of any terms of the Agreement of Limited Partnership of Purchaser or any law or agreement to which Purchaser is a party or by which either is bound.

            (d)  Brokers. If Purchaser has retained any broker in connection with the transactions contemplated by this Agreement, Purchaser shall be solely responsible for the payment of any compensation due such broker by Purchaser.

            (e)  Consents and Approvals. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby will violate, result in a breach of any of the terms or provisions of, constitute a default (or any event that, with the giving of notice or the passage of time or both, would constitute a default) under, result in the acceleration of any indebtedness under, or performance required by, any agreement, indenture or other instrument to which the Purchaser is a party or by which any of its respective property is bound, its partnership agreement or corporate documents, as applicable, or any judgment, decree, order or award of any court, governmental body or arbitrator applicable to the Purchaser. Subject to the foregoing, all consents, approvals and authorizations of, and declarations, filings and registrations with, any governmental or regulatory authority or any other legal entity or person (either governmental or private) required in connection with the execution and delivery by the Purchaser of this Agreement or the consummation of the transactions contemplated hereby have been obtained, made and satisfied.

        8.    Actions Before Closing.

            (a)  Access. Between the date hereof and the Closing Date, Sellers shall afford Purchaser and its counsel and other representatives reasonable access during normal business hours to inspect the Assets, and Sellers shall instruct its officers, employees, accountants and agents to fully cooperate with Purchaser and its counsel, accountants, lenders and other representatives in its investigation and to furnish such additional information as Purchaser and its counsel and other representatives may from time to time reasonably request. Sellers specifically covenants that Sellers will permit Purchaser to conduct such tests and investigations of the Assets as Purchaser may reasonably request. In addition, Purchaser shall be permitted to make abstracts from, or take copies of, such documentation relating to the Assets as may be reasonably required by Purchaser. Sellers shall provide documentation and narrative information regarding the Assets which will assist Purchaser with its due diligence.

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            (b)  Schedule Updates. Sellers and Purchaser shall update by amendment or supplement each of the Schedules referred to herein and any other disclosure in writing from either party required by this Agreement to be disclosed by Sellers or Purchaser promptly upon any change in the information set forth in such Schedules or other disclosures. Each party hereby represents and warrants to the other that such Schedules and such written disclosures, as so amended or supplemented by them, shall be true and correct as of the dates thereof; provided however, that the inclusion of any information in any such amendment or supplement, not included in the original Schedule or other disclosure at or prior to the date of this Agreement, shall not limit or impair any right that either party might otherwise have respecting the representations and warranties of Sellers originally contained in this Agreement.

        9.    Conditions Precedent to Closing by Purchaser. Except as expressly waived in writing by the Purchaser, the obligation of Purchaser to purchase the Assets is subject to the following conditions:

            (a)  Approvals. All corporate and other proceedings or actions to be taken by Sellers in connection with the transactions contemplated by this Agreement and all documents incidental thereto shall be reasonably satisfactory in form and substance to Purchaser and Purchaser's counsel.

            (b)  Title. Transfer of title on the Closing Date, by Sellers to Purchaser, of the Assets free and clear of all Liens, and delivery of the Assets on the Closing Date free and clear of all Liens.

            (c)  Covenants. The fulfillment and/or performance of all agreements, conditions and covenants of Sellers contained herein on or prior to the Closing Date.

            (d)  Representations. The representations and warranties of Sellers shall be true, accurate, and complete in all material respects as of the date hereof and as of Closing.

            (e)  Documents. Delivery on the Closing Date, by Sellers to Purchaser, of all such instruments of transfer, bills of sale, endorsements, assignments, and other instruments of transfer and conveyance, in form and substance reasonably satisfactory to Purchaser, as are necessary to vest in Purchaser good and indefeasible title to the Assets free and clear of all Liens.

            (f)    Damage to Assets. In the event that any of the Assets are materially damaged or destroyed before the Closing Date, Purchaser may, at its option and as its sole remedy, terminate this Agreement, or close the transactions contemplated by this Agreement, in which latter event Purchaser shall receive all of the insurance proceeds resulting from such damage or destruction.

            (g)  Litigation. There shall not have been issued and in effect any injunction or similar legal order prohibiting or restraining consummation of any of the actions herein contemplated and no legal action or governmental investigation which might reasonably be expected to result in any such injunction or order shall be pending or threatened.

            (h)  Deliveries Required by Sellers. Sellers shall have delivered to Purchaser all of the items enumerated in Section 4(a).

            (i)    No Adverse Change. No material adverse change in the Assets shall have occurred after the date of this Agreement and prior to Closing.

            (j)    Completion of Due Diligence. Completion of Purchaser's due diligence investigation of the Assets during which Purchaser shall not have become aware of any material adverse fact or information not previously disclosed in writing to Purchaser, with regard to the Assets.

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        10.  Conditions Precedent to Closing by Sellers. The obligation of Sellers to sell the Assets is subject to the following conditions:

            (a)  Deliveries Required by Purchaser. Purchaser shall have delivered to Sellers all items enumerated in Section 4(b).

            (b)  Approvals. All corporate and other proceedings or actions to be taken by Purchaser in connection with the transactions contemplated by this Agreement and all documents incidental thereto shall be satisfactory in form and substance to Sellers and Sellers' counsel.

            (c)  Covenants. The fulfillment and/or performance of all agreements, conditions and covenants of Purchaser contained herein on or prior to the Closing Date.

            (d)  Representations. The representations and warranties of Purchaser shall be true, accurate, and complete in all material respects as of the date hereof and as of Closing.

            (e)  Documents. Delivery on the Closing Date, by Purchaser to Sellers, of all such instruments of transfer, bills of sale, endorsements, assignments, and other instruments of transfer and conveyance, in form and substance reasonably satisfactory to Sellers.

            (f)    Litigation. There shall not have been issued and in effect any injunction or similar legal order prohibiting or restraining consummation of any of the actions herein contemplated and no legal action or governmental investigation which might reasonably be expected to result in any such injunction or order shall be pending or threatened.

        11.  Additional Covenants.

            (a)  Proration of Taxes and Other Items. All personal property taxes applicable to the Assets shall be prorated to the Closing Date, and after giving effect to such proration adjustments Purchaser shall assume the obligation to pay such taxes for the current tax year. The parties have estimated that the personal property taxes for the Assets for 2002 will be $42,000 and therefore, the agreed proration is $16,915, which amount will be reduced from the Purchase Price. To the extent that the actual personal property taxes are more or less than $42,000, a post-closing adjustment shall be made between Sellers and Purchaser to reflect the actual pro-ration of such taxes and the Sellers and Purchaser agree to make any payment to the other as required as a result of such adjustment. Purchaser and Sellers do not believe that the transactions contemplated by this Agreement are subject to sales tax, however, if they are incorrect, Purchaser shall pay any sales, use tax or transfer tax that may become due or payable in connection with this Agreement and the transactions contemplated hereby.

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            (b)  Public Disclosure; No Trading in Stock. Until the Closing, Sellers agree to keep the existence of this Agreement and the terms thereof confidential and only to disclose the existence of this Agreement and its terms on an as needed basis. Purchaser acknowledges that Sellers are required to disclose the existence of this Agreement and the terms hereof to their partners and shareholders for purposes of obtaining their consideration and approval of this Agreement and Sellers agrees to obtain their agreement, for the benefit of the Purchaser, to comply with the terms of this section. Sellers recognize and acknowledge that Purchaser's parent entity, Pioneer Drilling Company, is a publicly traded company, and agrees that the relationship represented by this Agreement, or any non-public material information regarding Pioneer Drilling Company which may be disclosed to Sellers, will not be publicly disclosed, nor facts relating thereto in any manner disseminated by them to any third party, without Pioneer Drilling Company's prior written consent. Further, Sellers further agree not to trade in any securities of Pioneer Drilling Company during the pendency of this Agreement and the transaction contemplated hereby, whether in a public or private transaction(s), or thereafter, so long as Sellers are in possession of any material non-public information regarding Pioneer Drilling Company. Sellers acknowledge and understand that any breach of the terms of this paragraph may result in its violation of applicable securities laws.

            (c)  Further Consents and Conveyances. After the Closing, Sellers shall, without further cost or expense to Purchaser, execute and deliver to Purchaser such additional instruments of conveyance, and take such other and further actions as Purchaser might reasonably request to more completely sell, transfer, and assign to Purchaser the Assets, free and clear of all liens and encumbrances.

            (d)  Use of the Yard. It is expressly agreed that the Purchaser may keep the Assets at the Yard after Closing (without any requirement for payment for use of the Yard) for a reasonable period of time which may exceed ninety (90) days, so long as the Sellers and the owner of the Yard (Continental Resources) are named as additional insureds on Purchaser's liability insurance policies.

        12.  Indemnification.

            (a)  Indemnification of the Parties. Each party, whether the Sellers (who shall be jointly and severally liable for such indemnity obligation) or the Purchaser ("Indemnifying Party"), shall defend, indemnify and hold harmless the other party, its directors, officers, employees and shareholders, and its successors and assigns (the "Indemnified Parties") from and against any and all costs, losses, claims, liabilities, fines, expenses, penalties, and damages (excluding any punitive damages, but including, without limitation, interest, reasonable legal and accounting fees, court costs and fees and costs on appeal, costs of arbitration and disbursements of counsel) ("Damages") reasonably incurred by an Indemnified Party as a proximate result of:

                (i)  Any breach, violation, falsification, failure to satisfy, or other default in any respect of any warranty, covenant or representation provided herein by the Indemnifying Party.

              (ii)  Any liability or claim arising out of the ownership, use or operation by the Indemnifying Party of the Assets, including, without limitation, the violation of any environmental law, rule or regulation.

            (b)  Claims for Indemnification. The Indemnified Parties shall give notice to the Indemnifying Party of an event giving rise to the obligation to indemnify, allow the Indemnifying Party to assume and conduct the defense of the claim or action, and shall cooperate with the Indemnifying Party in the defense thereof. An Indemnified Party shall not enter into a settlement of any claim or action subject to indemnification without the consent of the Indemnifying Party, which consent shall not unreasonably be withheld.

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            (c)  Limitations on Indemnification. No claim, demand, suit or cause of action shall be brought against an Indemnifying Party by an Indemnified Party under this Agreement unless and until the aggregate amount of claims by such Indemnified Party exceeds $20,000.00, in which case the Indemnified Party shall be entitled to indemnification from the Indemnified Party only with respect to claims in excess of such amount. In no event shall the obligations of the Sellers or the Purchaser exceed $7,000,000.

        13.  Survival of Covenants, Representations and Warranties. Except with respect to (i) the covenants of the Sellers and Purchaser which are intended to survive the Closing, which include but are not limited to the indemnity obligations of the parties contained in Section 12, and (ii) Sellers' representations provided for in Section 6(b), (c) (d) and (i) which shall survive indefinitely, and the Principal's representations provided for in Section 6(d) which shall survive indefinitely, the representations and warranties of each of the parties hereto, whether set forth in this Agreement, or in any document, exhibit or schedule delivered in connection with this Agreement shall survive the Closing for a period of two years (2) years following the Closing Date and then expire and, in the event of the dissolution and liquidation of Sellers or either of them, or Purchaser shall survive such dissolution and liquidation and continue, notwithstanding such dissolution and liquidation, to be performable by, and actionable and enforceable against, any person, or persons, to whom, or to which, any of the property of Sellers or Purchaser shall have been distributed as a result of such dissolution and liquidation, but only to the extent of the value of any such property distributed to such person(s).

        14.  Termination and Effect of Termination.

            (a)  Termination. This Agreement may, by notice given prior to or at the Closing, be terminated:

                (i)  by either party if a material breach of any provision of this Agreement has been committed by the other party and such breach has not been waived or cured to the reasonable satisfaction of the non-breaching party, after the receipt of written notice of such breach and a ten (10) day opportunity to cure;

              (ii)  by Purchaser if any of the material conditions under Section 9 hereof have not been satisfied as of the Closing Date, or if satisfaction of such a material condition is or becomes impossible (other than the willful and intentional failure of Purchaser to comply with its obligation under this Agreement) and Purchaser has not waived such condition on or before the Closing Date;

              (iii)  by Sellers, if any of the material conditions in Section 10 hereof have not been satisfied as of the Closing Date, or if satisfaction of such a material condition is or becomes impossible (other than the willful and intentional failure of Sellers to comply with its obligation under this Agreement) and Sellers have not waived such condition on or before the Closing Date;

              (iv)  by mutual consent of the Purchaser and Sellers; or

              (v)  by either the Purchaser or Sellers if the Closing has not occurred (other than through the willful and intentional failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before the Closing Date, or such later date as the parties may agree upon.

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            (b)  Effect of Termination. Each party's right of termination under this Section 14 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 14(a) (ii-v), all further obligations of the parties under this Agreement will terminate, save and except confidentiality obligations under Section 11(c); provided however, that if this Agreement is terminated by a party pursuant to Section 14(a)(i) because of a material breach of the Agreement by the other party or because one or more of the conditions to the terminating party's obligations under this Agreement is not satisfied as a result of the other party's failure to comply with its obligations under this Agreement, the terminating party's right to pursue all legal remedies will survive such termination unimpaired but only to the extent of the value of any such property distributed to such person(s).

        15.  Specific Performance; Remedies. Each of the parties hereby agrees that the transactions contemplated by this Agreement are unique, and that each party shall have, in addition to any other legal or equitable remedy available to it, the right to enforce this Agreement by decree of specific performance.    If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding in addition to any other remedies to which it, he or they may be entitled at law or equity. The rights and remedies granted herein are cumulative and not exclusive of any other right or remedy granted herein or provided by law.

        16.  Miscellaneous.

            (a)  Entire Agreement and Amendment. This Agreement and the attached exhibits, schedules and other documents delivered hereunder contain the entire agreement between the parties with respect to the matters described herein and are a completely integrated and exclusive statement as to the terms thereof and supersede all previous agreements. This Agreement may not be altered or modified except by a writing signed by the parties hereto.

            (b)  Notices. Any notice, demand or other writing of any kind whatsoever which may or shall be given pursuant to this Agreement shall be deemed given if personally delivered or on the third succeeding business day after being mailed by registered or certified mail, postage prepaid and return receipt requested, addressed as follows (or at such address as shall be specified by notice given hereunder):

If to Sellers:   U-D Holdings, L.P.
Attn: Peter Dillingham
P.O. Box 1669
Enid, Oklahoma 73072

 
 
United Drilling Company
Attn: Steve Dyche
P.O. Box 1146
Enid, Oklahoma 73072

with copy to:
 
McAfee & Taft
Tenth Floor
211 N. Robinson
Oklahoma City, Oklahoma 73102
Attn: Robert L. Garbrecht, Esq.

 
 
 

10


If to Purchaser:
 
Wm. Stacy Locke
Pioneer Drilling Services, Ltd.
9310 Broadway, Building 1
San Antonio, Texas 78217

with copy to:
 
Daniel M. Elder
Matthews & Branscomb, P.C.
112 E. Pecan, Suite 1100
San Antonio, Texas 78205

              (c)    Headings. The background section and all Section and paragraph headings contained herein are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

              (d)  Assignment. No party shall assign, transfer, pledge, hypothecate or encumber this Agreement, or any interest herein or hereunder, without the prior written consent of the other party.

              (e)    Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

              (g)    Waiver. The failure of any party at any time to require performance by any other party of any provision of this Agreement shall not be deemed a continuing waiver of that provision or a waiver of any other provision of this Agreement and shall in no way affect the full right to require such performance from the other party at any time thereafter.

              (h)  Payment of Expenses. Except as specifically described herein, each of the parties shall pay all of the costs which each incurs incident to the preparation, execution and delivery of this Agreement and the performance of the obligations hereunder, including, without limitation, the fees and disbursements of counsel, accountants and consultants, whether or not the transactions contemplated by this Agreement shall be consummated.

              (i)    Invalidity. The invalidity of any provision of this Agreement shall not affect the validity of the remainder of any such provision or the remaining provisions of this Agreement.

              (j)    Severability. This Agreement and the transactions contemplated herein constitute one sale and shall not be divisible in any manner. A breach of any portion of this Agreement shall be deemed a breach of the whole Agreement.

              (k)    Governing Law and Choice of Forum. This Agreement is executed and performable in Bexar County, Texas. Texas law shall govern the construction and enforceability of this Agreement. Any and all actions concerning any dispute arising hereunder shall be filed and maintained only in a court sitting in San Antonio, Bexar County, Texas and all parties expressly consent to the jurisdiction of such courts.

11


              (l)    Further Assurances. Sellers and Purchaser each agree that they shall execute and deliver any and all additional writings, instruments and other documents contemplated hereby or referred to herein and shall take such further action as shall be reasonably required in order to effectuate the terms and conditions of this Agreement.

(SIGNATURE PAGES FOLLOW)

12

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.


 
 
SELLERS:
U-D Holdings, L.P., a Texas limited partnership

 
 
By:
 
U-D Management Company, L.L.C., a Texas limited liability company, General Partner

 
 
By:
 

 
 
Its:
 

 
 
United Drilling Company, an Oklahoma corporation

 
 
By:
 

 
 
Its:
 

 
 
PURCHASER:

 
 
PIONEER DRILLING SERVICES, LTD., a Texas limited partnership

 
 
BY: PDC Mgmt. Co., its sole general partner

 
 
By:
 
Michael E. Little, Chief Executive Officer

SIGNATURE PAGE OF PRINCIPALS ON FOLLOWING PAGE(S)

13

SIGNATURE PAGE FOR PRINCIPALS

 
 
PRINCIPALS:

 
 
U-D MANAGEMENT COMPANY, L.L.C., a Texas limited liability company

 
 
By:
 
Name: Peter C. Dillingham
Title: Sole Manager

 
 
William M. Kallop

 
 
Jerry L. Suits, as trustee of the Jerry L. Suits Revocable Trust

 
 
Jerry L. Suits

 
 
Jeanne G. Dillingham, as trustee of the Jeanne Dillingham Trust

 
 
Jeanne G. Dillingham

 
 
Dana D. Hutton, as trustee of the Dana D. Hutton Revocable Trust

 
 
Dana D. Hutton

 
 
Jeanne G. Dillingham, as trustee of the Brady Dillingham Trust

 
 
Jeanne G. Dillingham

14


 
 
Leslie D. Ballew

 
 
Elizabeth G. Dillingham

 
 
Peter C. Dillingham, as trustee of the Peter C. Dillingham Revocable Trust

 
 
Peter C. Dillingham

 
 
DILCO, LLC, a Oklahoma limited liability company

 
 
Dan L. Dillingham, manager

 
 
Steven L. Dyche

15


EXHIBIT "A"
PRINCIPALS

United Drilling Company

William M. Kallop

Jerry L. Suits Revocable Trust

U-D Holdings, L.P.

U-D Management Company

William M. Kallop

Jerry L. Suits Revocable Trust

Jeanne Dillingham Trust

Brady Dillingham Trust

Dana D. Hutton Revocable Trust

Leslie D. Ballew

Elizabeth G. Dillingham

Peter C. Dillingham Revocable Trust

Dilco, LLC (Dan L. Dillingham)

Steven L. Dyche


EXHIBIT B

ASSETS


SCHEDULE 6(e)

LITIGATION

None.


SCHEDULE 6(g)

KNOWN DEFECTS

1.
Spare rotary table needs to be rebuilt.

2.
There is some light wiring which needs to be replaced.

3.
The 5" drill pipe is No. 2 pipe and has some history of washouts. We had planned on replacing this pipe.


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ASSET PURCHASE AGREEMENT
EXHIBIT "A" PRINCIPALS
EXHIBIT B ASSETS
SCHEDULE 6(e) LITIGATION
SCHEDULE 6(g) KNOWN DEFECTS
 EX-4.11 6 a2082143zex-4_11.htm EXHIBIT 4.11
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EXHIBIT 4.11


FIRST AMENDED AND RESTATED LOAN AGREEMENT

    Between    

PIONEER DRILLING SERVICES, LTD.
9310 Broadway, Building 1
San Antonio, Texas 78217
 
and
 
THE FROST NATIONAL BANK
100 W. Houston Street
San Antonio, Texas 78205

 
 
March 19, 2002
 
 

        THIS FIRST AMENDED AND RESTATED LOAN AGREEMENT (the "Loan Agreement") will serve to set forth the terms of the financing transactions by and between PIONEER DRILLING SERVICES, LTD., a Texas limited partnership (formerly known as Pioneer Drilling Co., Ltd.) ("Borrower"), and THE FROST NATIONAL BANK, a national banking association ("Lender"). This Loan Agreement hereby amends and restates that certain Loan Agreement dated March 20, 2001, executed by and between Bank and Borrower.

        1.    Credit Facilities. Subject to the terms and conditions set forth in this Loan Agreement and the other agreements, instruments and documents evidencing, securing, governing, guaranteeing and/or pertaining to the Loans, as hereinafter defined (collectively, together with the Loan Agreement, referred to hereinafter as the "Loan Documents"), Lender hereby agrees to provide to Borrower the credit facility or facilities hereinbelow (whether one or more, the "Credit Facilities"):

            (a)  Borrowing Base Line of Credit. Subject to the terms and conditions set forth herein, Lender agrees to lend to Borrower, on a revolving basis from time to time during the period commencing on the date hereof and continuing through the maturity date of the promissory note evidencing this Credit Facility from time to time, such amounts as Borrower may request hereunder; provided, however, the total principal amount outstanding at any time shall not exceed the lesser of (i) an amount equal to the Borrowing Base (as such term is defined hereinbelow), or (ii) $1,000,000.00 (the "Borrowing Base Line of Credit"). If at any time the aggregate principal amount outstanding under the Borrowing Base Line of Credit shall exceed an amount equal to the Borrowing Base, Borrower agrees to immediately repay to Lender such excess amount, plus all accrued but unpaid interest thereon. The sums advanced under the Borrowing Base Line of Credit shall be used for support of short term operating cash needs.

        As used in this Loan Agreement, the term "Borrowing Base" shall have the meaning set forth hereinbelow:

    An amount equal to seventy-five percent 75% of the Borrower's Eligible Accounts.

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      As used herein, the term "Eligible Accounts" shall mean at any time, an amount equal to the aggregate net invoice or ledger amount owing on all trade accounts receivable of Borrower for goods sold or leased or services rendered in the ordinary course of business, in which the Lender has a perfected, first priority lien, after deducting (without duplication): (i) each such account that is unpaid sixty (60) days or more after the original invoice date thereof, (ii) the amount of all discounts, allowances, rebates, credits and adjustments to such accounts, (iii) the amount of all contra accounts, setoffs, defenses or counterclaims asserted by or available to the account debtors, (iv) all accounts with respect to which goods are placed on consignment or subject to a guaranteed sale or other terms by reason of which payment by the account debtor may be conditional, (v) all accounts with respect to which Borrower has furnished a payment and/or performance bond and that portion of any account for or representing retainage, if any, until all prerequisites to the immediate payment of retainage have been satisfied, (vi) all accounts owing by account debtors for which there has been instituted a proceeding in bankruptcy or reorganization under the United States Bankruptcy Code or other law, whether state or federal, now or hereafter existing for relief of debtors, (vii) all accounts owing by any affiliates of Borrower, (viii) all accounts in which the account debtor is the United States or any department, agency or instrumentality of the United States, except to the extent an acknowledgment of assignment to Lender of such account in compliance with the Federal Assignment of Claims Act and other applicable laws has been received by Lender, (ix) all accounts due Borrower by any account debtor whose principal place of business is located outside the United States of America and its territories, (x) all accounts subject to any provision prohibiting assignment or requiring notice of or consent to such assignment, (xi) any other accounts deemed unacceptable by Lender in its sole and absolute discretion; provided, however, if more than twenty percent (20%) of the then balance owing by any single account debtor does not qualify as an Eligible Account under the foregoing provisions, then the aggregate amount of all accounts owing by such account debtor shall be excluded from Eligible Accounts.

All advances under the Credit Facilities shall be collectively called the "Loans". Lender reserves the right to require Borrower to give Lender not less than one (1) business day prior notice of each requested advance under the Credit Facilities, specifying (i) the aggregate amount of such requested advance, (ii) the requested date of such advance, and (iii) the purpose for such advance, with such advances to be requested in a form satisfactory to Lender.

        2.    Promissory Notes. The Loans shall be evidenced by one or more promissory notes or an Application (whether one or more, together with any renewals, extensions and increases thereof, the "Notes") duly executed by Borrower and payable to the order of Lender, in form and substance acceptable to Lender. Interest on the Notes shall accrue at the rate set forth therein. The principal of and interest on the Notes shall be due and payable in accordance with the terms and conditions set forth in the Notes and in this Loan Agreement.

        3.    Collateral. As collateral and security for the indebtedness evidenced by the Notes and any and all other indebtedness or obligations from time to time owing by Borrower to Lender, Borrower has granted to Lender, its successors and assigns, Security Agreement dated as of March 20, 2001, executed by and between Borrower and Lender (the "Security Agreement") a first and prior lien and security interest in and to the property described hereinbelow, together with any and all PRODUCTS AND PROCEEDS thereof (the "Collateral"):

    All present and future accounts, chattel paper, documents, instruments, deposit accounts and general intangibles (including any right to payment for goods sold or services rendered arising out of the sale or delivery of personal property or work done or labor performed by Borrower), now or hereafter owned, held, or acquired by Borrower, together with any and all books of account, customer lists and other records relating in any way to the foregoing.

2

The term "Collateral" shall also include all records and data relating to any of the foregoing (including, without limitation, any computer software on which such records and data may be located). Borrower agrees to execute such security agreements, assignments, deeds of trust and other agreements and documents as Lender shall deem appropriate and otherwise require from time to time to more fully create and perfect Lender's lien and security interests in the Collateral.

        Borrower hereby expressly acknowledges that the lien and security interest granted pursuant to the Security Agreement is a valid and subsisting lien and security interest against the Collateral, and it is expressly agreed that the lien is hereby renewed, extended and continued in full force and effect to secure payment of the indebtedness evidenced by the Notes and all other indebtedness or obligations from time to time owing by Borrower to Lender.

        4.    Intentionally Omitted.

        5.    Representations and Warranties. Borrower hereby represents and warrants, and upon each request for an advance under the Credit Facilities further represents and warrants, to Lender as follows:

            (a)  Existence. Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas and all other states where it is doing business, and has all requisite power and authority to execute and deliver the Loan Documents.

            (b)  Binding Obligations. The execution, delivery, and performance of this Loan Agreement and all of the other Loan Documents by Borrower have been duly authorized by all necessary action by Borrower, and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by Bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles.

            (c)  No Consent. The execution, delivery and performance of this Loan Agreement and the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, do not (i) conflict with, result in a violation of, or constitute a default under (A) any provision of its partnership agreement, any provision of the articles or certificate of incorporation or bylaws of Borrower's general or limited partner, or any agreement or other instrument binding upon Borrower, its general or limited partner, or (B) any law, governmental regulation, court decree or order applicable to Borrower, or (ii) require the consent, approval or authorization of any third party.

            (d)  Financial Condition. Each financial statement of Borrower supplied to the Lender truly discloses and fairly presents Borrower's financial condition as of the date of each such statement. There has been no material adverse change in such financial condition or results of operations of Borrower subsequent to the date of the most recent financial statement supplied to Lender.

            (e)  Litigation. Except as set forth in the Securities and Exchange Commission filings of PIONEER DRILLING COMPANY, a Texas corporation ("Pioneer"), copies of which have been made available to the Lender, there are no actions, suits or proceedings, pending or, to the knowledge of Borrower, threatened against or affecting Borrower or the properties of Borrower, before any court or governmental department, commission or board, which, if determined adversely to Borrower, would have a material adverse effect on the financial condition, properties, or operations of Borrower.

3


            (f)    Taxes; Governmental Charges. Borrower has filed all federal, state and local tax reports and returns required by any law or regulation to be filed by it and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected.

        6.    Conditions Precedent to Advances. Lender's obligation to make any advance under this Loan Agreement and the other Loan Documents shall be subject to the conditions precedent that, as of the date of such advance and after giving effect thereto (i) all representations and warranties made to Lender in this Loan Agreement and the other Loan Documents shall be true and correct, as of and as if made on such date, (ii) no material adverse change in the financial condition of Borrower since the effective date of the most recent financial statements furnished to Lender by Borrower shall have occurred and be continuing, (iii) no event has occurred and is continuing, or would result from the requested advance, which with notice or lapse of time, or both, would constitute an Event of Default (as hereinafter defined), and (iv) Lender's receipt of all Loan Documents appropriately executed by Borrower and all other proper parties.

        7.    Affirmative Covenants. Until (i) the Notes and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower agrees and covenants that it will, unless Lender shall otherwise consent in writing:

            (a)  Accounts and Records. Maintain its books and records in accordance with generally accepted accounting principles.

            (b)  Right of Inspection. Permit Lender to visit its properties and installations and to examine, audit and make and take away copies or reproductions of Borrower's books and records, at all reasonable times.

            (c)  Right to Additional Information. Furnish Lender with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time.

            (d)  Compliance with Laws. Conduct its business in an orderly and efficient manner consistent with good business practices, and perform and comply in all material respects with all statutes, rules, regulations and/or ordinances imposed by any governmental unit upon Borrower and its businesses, operations and properties (including without limitation, all applicable environmental statutes, rules, regulations and ordinances).

            (e)  Taxes. Pay and discharge when due all of its indebtedness and obligations, including without limitation, all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (i) the legality of the same shall be contested in good faith by appropriate judicial, administrative or other legal proceedings, and (ii) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien or claim in accordance with generally accepted accounting principles, consistently applied.

            (f)    Insurance. Maintain insurance, including but not limited to, fire insurance, comprehensive property damage, public liability, worker's compensation and other insurance deemed necessary or otherwise required by Lender.

4


            (g)  Notice of Indebtedness. Promptly inform Lender of the creation, incurrence or assumption by Borrower of any actual or contingent liabilities not permitted under this Loan Agreement.

            (h)  Notice of Litigation. Promptly after the commencement thereof, notify Lender of all actions, suits and proceedings before any court or any governmental department, commission or board affecting Borrower or any of its properties which, if determined adversely to Borrower, would have a material adverse effect on the financial condition, properties, or operations of Borrower.

            (i)    Notice of Material Adverse Change. Promptly inform Lender of (i) any and all material adverse changes in Borrower's financial condition, and (ii) all claims made against Borrower which could materially affect the financial condition of Borrower.

            (j)    Additional Documentation. Execute and deliver, or cause to be executed and delivered, any and all other agreements, instruments or documents which Lender may reasonably request in order to give effect to the transactions contemplated under this Loan Agreement and the other Loan Documents.

        8.    Negative Covenants. Until (i) the Notes and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, neither Borrower nor Pioneer will, without the prior written consent of Lender:

            (a)  Nature of Business. Make any material change in the nature of its business as carried on as of the date hereof.

            (b)  Liquidations, Mergers, Consolidations. Liquidate, merge or consolidate with or into any other entity.

            (c)  Sale of Assets. Sell, transfer or otherwise dispose of (1) any of the Collateral, or (2) any of its assets or property, other than any asset of property valued not more than $500,000.00 and disposed of in the ordinary course of business.

            (d)  Liens. Create or incur any lien or encumbrance on any of its assets, other than (i) liens and security interests securing indebtedness owing to Lender, (ii) liens for taxes, assessments or similar charges that are (1) not yet due or (2) being contested in good faith by appropriate proceedings and for which such entity has established adequate reserves, (iii) liens and security interests existing as of the date hereof which have been disclosed to and approved by Lender in writing, and (iv) liens or encumbrances securing indebtedness which would not otherwise violate the terms of this Loan Agreement.

            (e)  Indebtedness. Create, incur or assume any indebtedness for borrowed money or issue or assume any other note, debenture, bond or other evidences of indebtedness, or guarantee any such indebtedness or such evidences of indebtedness of others, other than (i) borrowings from Lender, (ii) borrowings from lenders other than Lender, except that during the term of the Loan, Borrower shall be permitted to incur or have outstanding indebtedness to other lenders provided that the aggregate principal balance of all such debt outstanding at any time shall not exceed $5,000,000.00 (exclusive of the subordinated debt described in 1(a)2. above) and (iii) the subordinated debt described in 1.(a)2. above (whether or not such subordinated debt is prohibited by other currently existing agreements between Lender and Pioneer or Borrower).

            (f)    Transfer of Ownership. Permit the sale, pledge or other transfer of any of the ownership interests in Borrower.

5


            (g)  Change in Management. Permit a change in the senior management of Pioneer (as used herein, "a change in senior management" shall mean that Michael E. Little shall have ceased to hold the titles of Chairman and Chief Executive Officer or William Stacey Locke shall have ceased to hold the titles of Chief Financial Officer and President); provided, however, should Michael E. Little or William Stacey Locke die, become disabled or be terminated for cause (an "Involuntary Change of Management"), Borrower shall not be in default hereunder if and only if Pioneer shall (i) immediately, but in no event more than thirty days following such Involuntary Change of Management, name a replacement reasonably acceptable to Lender to exercise the duties and hold the office(s) and positions held by Michael E. Little and William Stacey Locke on an interim basis; and (ii) as soon as practical, but in no event more than (270) days following such Involuntary Change of Management, name a replacement acceptable to Lender in it reasonable discretion to exercise the duties and hold the office(s) and positions held by Michael E. Little and William Stacey Locke.

            (h)  Loans. Make any loans to any person or entity, other than, in the loans made in the ordinary course of business to entities affiliated with Borrower or Pioneer and not exceeding $250,000.00 principal outstanding to all borrowers in the aggregate at any time.

            (i)    Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate (as hereinafter defined) of Borrower or Pioneer, except in the ordinary course of and pursuant to the reasonable requirements of the business of either of them and upon fair and reasonable terms no less favorable to Borrower and/or Pioneer as the case may be than would be obtained in a comparable arm's-length transaction with a person or entity not an Affiliate of Borrower or Pioneer. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by, or under common control with, another individual or entity.

            (j)    Distributions. Borrower agrees not to declare or pay any distributions on any of Borrower's partnership interests, make any other distributions with respect to any payment on account of the purchase, redemption, or other acquisition or retirement of any of Borrower's partnership interests, or make any other distribution, sale, transfer or lease of any of Borrower's assets other than in the ordinary course of business, unless any such amounts are directly utilized for the payment of principal or interest on indebtedness and obligations owing from time to time by Borrower to Lender. The above notwithstanding, the Borrower may make distributions with respect to Borrower's partnership interests, for the purposes of (i) providing funds to pay taxes (including federal income taxes and franchise taxes) of the partners of Borrower attributable to ownership of an interest in Borrower, (ii) providing operating capital to Pioneer in an amount not exceeding $250,000.00 distributed in any one fiscal year, and (iii) providing sufficient funds for the retirement of term bank debt owed by Pioneer to American Bank.

            (k)  Dividends. Pioneer agrees not to declare or pay any dividends on any shares of its capital stock, make any other distributions with respect to any payment on account of the purchase, redemption, or other acquisition or retirement of any shares of it capital stock, or make any other distribution, sale, transfer or lease of any of it assets other than in the ordinary course of business, unless any such amounts are directly utilized for the payment of principal or interest on indebtedness and obligations owing from time to time by it to Lender and other than Preferred Dividends which Pioneer is contractually obligated to pay pursuant to agreements in existence on the date hereof.

        9.    Financial Covenants. Until (i) the Notes and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower will maintain the following financial covenants (on a consolidated basis with Pioneer):

6

            (a)  Leverage Ratio. Beginning with the fiscal year ending on March 31, 2002, Borrower will maintain, a Leverage Ratio not to exceed 3.0 to 1.0, to be tested annually during the term of Loan. Defined as:

Funded Bank Debt
Net Income + Interest + Taxes + Depreciation + Amortization

        As used herein, "Funded Bank Debt" shall mean: all outstanding principal due to Lender and other non-equity lenders.

        Compliance with the foregoing covenant shall begin with the fiscal year ending on March 31, 2002 notwithstanding the terms of any Loan Agreement previously executed between Lender and Borrower or Pioneer.

            (b)  Cash Flow Coverage Ratio. Beginning with the fiscal year ending on March 31, 2002, Borrower will maintain, as of the end of each fiscal year, a cash flow coverage ratio of not less than 1.25 to 1.0—defined as:

Net Income + Interest + Taxes + Depreciation + Amortization—Distributions or
Dividends—Maintenance Capital Expenditures
Current Portion of Long-Term Debt + Interest Expense

      As used herein, "Maintenance Capital Expenditures" shall mean: Amounts actually paid for the routine maintenance of the equipment serving as collateral for the Loans to the extent such maintenance is required to keep that equipment in operating condition.

Compliance with the foregoing covenant shall begin with the fiscal year ending on March 31, 2002 notwithstanding the terms of any Loan Agreement previously executed between Lender and Borrower or Pioneer.

            (c)  Debt to Worth Ratio. Borrower will maintain, at all times, to be tested quarterly on the last day of each fiscal quarter of Borrower, a ratio of (a) total liabilities (excluding any Subordinated Debt), to (b) Tangible Net Worth of not greater than 1.75 to 1.0.

As used herein, the term "Tangible Net Worth" means, as of any date, Borrower's total assets excluding all intangible assets, less total liabilities excluding any Subordinated Debt. As used herein, the term "Subordinated Debt" means any indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender.

        10.  Reporting Requirements. Until (i) the Notes and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower will, unless Lender shall otherwise consent in writing, furnish to Lender (all on a consolidated basis with Pioneer):

            (a)  Interim Financial Statements. As soon as available, and in any event within forty-five (45) days after the end of each month of each fiscal year of Borrower, (i) a balance sheet, income statement and statement of cash flows of Borrower as of the end of such fiscal month; (ii) an accounts receivable aging report; (iii) a Borrowing Base Certificate; and (iv) a Rig Schedule/Utilization Report; each in form and substance and in reasonable detail satisfactory to Lender and duly certified (as to item (i), subject to year-end review adjustments) by the President and/or Chief Financial Officer of Borrower and/or Chief Accounting Officer (A) as being true and correct in all material aspects to the best of his or her knowledge and (B) (as to item (i) only), as having been prepared in accordance with generally accepted accounting principles, consistently applied.

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            (b)  Quarterly Statements. Within sixty (60) days after the end of each quarter of each fiscal year of Borrower, a copy of the 10-Q Report of Pioneer, as filed with the Securities Exchange Commission.

            (c)  Annual Reporting. As soon as available and in any event within one hundred twenty days (120) days after the end of each fiscal year of Borrower, (i) a copy of the 10-K Report of Pioneer, as filed with the Securities Exchange Commission, together with (ii) a certificate signed by the President and/or Chief Financial Officer of Borrower and/or Chief Accounting Officer, stating that Borrower is in full compliance with all of its obligations under this Loan Agreement and all other Loan Documents and is not in default of any term or provisions hereof or thereof, and demonstrating compliance with all financial ratios and covenants set forth in this Loan Agreement.

        11.  Events of Default. Each of the following shall constitute an "Event of Default" under this Loan Agreement:

            (a)  The failure, refusal or neglect of Borrower to pay when due any part of the principal of, or interest on, the Notes or any other indebtedness or obligations owing to Lender by Borrower from time to time, from time to time, which default remains uncured for a period of ten (10) days after notice to Borrowers from Lender, given in accordance with the terms hereof.

            (b)  The failure of Borrower or any Obligated Party (as defined below) to timely and properly observe, keep or perform any covenant, agreement, warranty or condition required herein or in any of the other Loan Documents and the failure of Borrower or any Obligated Party to cure such default within 30 days after written notice from Lender specifying such default, provided that if such default or violation is susceptible of being remedied, but such remedy can not reasonably be accomplished within the initial 30-day cure period, no Event of Default shall be deemed to have occurred so long as Borrower or the appropriate Obligated Party is diligently pursuing such remedy and is successful in curing the default or violation to the reasonable satisfaction of Lender within such additional period of time as may be necessary to effect the remedy, not to exceed in any event an additional 60 days following the end of the initial cure period.

            (c)  The occurrence of an event of default under any of the other Loan Documents or under any other agreement now existing or hereafter arising between Lender and Borrower after the giving of any required notice and expiration of any applicable cure period.

            (d)  Any representation contained herein or in any of the other Loan Documents made by Borrower or any Obligated Party is false or misleading in any material respect.

            (e)  The occurrence of any event which permits the acceleration of the maturity of any indebtedness in excess of $100,000.00 owing by Borrower to any third party under any agreement or understanding and such default continues after the giving of written notice to Borrower and the passage of the cure period specified in Section 11(b) above.

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            (f)    If Borrower or any Obligated Party: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of thirty (30) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party.

            (g)  If Borrower or any Obligated Party is an entity, the liquidation, dissolution, merger or consolidation of any such entity or, if Borrower or any Obligated Party is an individual, the death or legal incapacity of any such individual.

            (h)  The entry of any judgment against Borrower or the issuance or entry of any attachment or other lien against any of the property of Borrower for an amount in excess of $500,000.00, if undischarged, unbonded or undismissed within thirty (30) days after such entry.

Nothing contained in this Loan Agreement shall be construed to limit the events of default enumerated in any of the other Loan Documents and all such events of default shall be cumulative. The term "Obligated Party", as used herein, shall mean any party other than Borrower who secures, guarantees and/or is otherwise obligated to pay all or any portion of the indebtedness evidenced by the Notes.

        12.  Remedies. Upon the occurrence of any one or more of the foregoing Events of Default, (a) the entire unpaid balance of principal of the Notes, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Lender by Borrower at such time shall, at the option of Lender, become immediately due and payable without further notice, demand, presentation, notice of dishonor, notice of intent to accelerate, notice of acceleration, protest or notice of protest of any kind, all of which are expressly waived by Borrower, and (b) Lender may, at its option, cease further advances under any of the Notes. All rights and remedies of Lender set forth in this Loan Agreement and in any of the other Loan Documents may also be exercised by Lender, at its option to be exercised in its sole discretion, upon the occurrence of an Event of Default.

        13.  Rights Cumulative. All rights of Lender under the terms of this Loan Agreement shall be cumulative of, and in addition to, the rights of Lender under any and all other agreements between Borrower and Lender (including, but not limited to, the other Loan Documents), and not in substitution or diminution of any rights now or hereafter held by Lender under the terms of any other agreement.

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        14.  Waiver and Agreement. Neither the failure nor any delay on the part of Lender to exercise any right, power or privilege herein or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision in this Loan Agreement or in any of the other Loan Documents and no departure by Borrower therefrom shall be effective unless the same shall be in writing and signed by Lender, and then shall be effective only in the specific instance and for the purpose for which given and to the extent specified in such writing. No modification or amendment to this Loan Agreement or to any of the other Loan Documents shall be valid or effective unless the same is signed by the party against whom it is sought to be enforced.

        15.  Benefits. This Loan Agreement shall be binding upon and inure to the benefit of Lender and Borrower, and their respective successors and assigns, provided, however, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations under this Loan Agreement or any of the other Loan Documents.

        16.  Notices. All notices, requests, demands or other communications required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) personal delivery, (ii) expedited delivery service with proof of delivery, or (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, sent to the intended addressee at the address set forth on the first page hereof and shall be deemed to have been received either, in the case of personal delivery, as of the time of personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of mail, upon deposit in a depository receptacle under the care and custody of the United States Postal Service. Either party shall have the right to change its address for notice hereunder to any other location within the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address.

        17.  Construction. This Loan Agreement and the other Loan Documents have been executed and delivered in the State of Texas, shall be governed by and construed in accordance with the laws of the State of Texas, and shall be performable by the parties hereto in the county in Texas where the Lender's address set forth on the first page hereof is located.

        18.  Invalid Provisions. If any provision of this Loan Agreement or any of the other Loan Documents is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Loan Agreement or any of the other Loan Documents shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance.

        19.  Expenses. Borrower shall pay all costs and expenses (including, without limitation, reasonable attorneys' fees) in connection with (i) any action required in the course of administration of the indebtedness and obligations evidenced by the Loan Documents, and (ii) any action in the enforcement of Lender's rights upon the occurrence of Event of Default.

        20.  Participation of the Loans. Borrower agrees that Lender may, at its option, sell interests in the Loans and its rights under this Loan Agreement to a financial institution or institutions and, in connection with each such sale, Lender may disclose any financial and other information available to Lender concerning Borrower to each prospective purchaser.

        21.  Conflicts. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the other Loan Documents, the terms and provisions contained in this Loan Agreement shall be controlling.

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        22.  Counterparts. This Loan Agreement may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same instrument.

        23.  Facsimile Documents and Signatures. For purposes of negotiating and finalizing this Loan Agreement, if this document or any document executed in connection with it is transmitted by facsimile machine ("fax"), it shall be treated for all purposes as an original document. Additionally, the signature of any party on this document transmitted by way of a facsimile machine shall be considered for all purposes as an original signature. Any such faxed document shall be considered to have the same binding legal effect as an original document. At the request of any party, any faxed document shall be re-executed by each signatory party in an original form.

        If the foregoing correctly sets forth our mutual agreement, please so acknowledge by signing and returning this Loan Agreement to the undersigned.

NOTICE TO COMPLY WITH STATE LAW

        For the purpose of this Notice, the term "WRITTEN AGREEMENT" shall include the document set forth above, together with each and every other document relating to and/or securing the same loan transaction, regardless of the date of execution.

    THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

    THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

BORROWER:   LENDER:

PIONEER DRILLING SERVICES, LTD., a Texas limited partnership (formerly known as Pioneer Drilling Co., Ltd.)
 
THE FROST NATIONAL BANK
a national banking association

By:
 
PDC Mgmt. Co., a Texas corporation, General Partner
 
By:
 
Printed Name:
Title:
By:  
Printed Name:
Title:
        

PIONEER DRILLING COMPANY, a Texas corporation (executing for purposes of joining in certain specific provisions, as noted above)
 
 
 
 

By:
 
Printed Name:
Title:
 
 
 
 

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FIRST AMENDED AND RESTATED LOAN AGREEMENT
 EX-4.14 7 a2082143zex-4_14.htm EXHIBIT 4.14
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EXHIBIT 4.14


LOAN AGREEMENT

    Between  

PIONEER DRILLING SERVICES, LTD.
9310 Broadway, Building 1
San Antonio, Texas 78217
 
and
THE FROST NATIONAL BANK
100 W. Houston Street
San Antonio, Texas 78205

 
 
May 24, 2002
 

        This Loan Agreement (the "Loan Agreement") will serve to set forth the terms of the financing transactions by and between PIONEER DRILLING SERVICES, LTD., a Texas limited partnership ("Borrower"), and THE FROST NATIONAL BANK, a national banking association ("Lender"):

        1.    Loan. Subject to the terms and conditions set forth in this Loan Agreement and the other agreements, instruments and documents evidencing, securing, governing, guaranteeing and/or pertaining to the Loan, as hereinafter defined (collectively, together with the Loan Agreement, referred to hereinafter as the "Loan Documents"), Lender hereby agrees to lend to Borrower, and Borrower agrees to borrow from Lender, the amount of $7,000,000.00 (the "Loan") in a single advance on the date hereof. Lender's obligation to make the Loan to Borrower shall also be subject to the following additional conditions precedent:

            (a)  Prior to the initial advance hereunder, Lender shall have received and approved in its sole discretion an original Letter of Credit (the "Acquisition Letter of Credit") in the amount of $7,000,000.00, showing Lender as Beneficiary and in all respects satisfactory to Lender in its sole discretion.

            (b)  Borrower shall have paid to Lender a Commitment Fee (payable upon execution of this Loan Agreement) in the amount of $17,500.00.

        The sums advanced under the Loan shall be for the purpose of financing the acquisition of two drilling rigs and related equipment designated by Borrower as Rig 22 (IDECO H-725) and Rig 23 (IDECO H-725) (the "Acquired Rigs").

        2.    Promissory Note. The Loan shall be evidenced by a promissory note (together with any renewals, extensions and increases thereof, the "Note") duly executed by Borrower and payable to the order of Lender, in form and substance acceptable to Lender. Interest on the Note shall accrue at the rate set forth therein. The principal of and interest on the Note shall be due and payable in accordance with the terms and conditions set forth in the Note and in this Loan Agreement.

        3.    Collateral. As collateral and security for the indebtedness evidenced by the Note and any and all other indebtedness or obligations from time to time owing by Borrower to Lender, Borrower shall grant, and hereby grants, to Lender, its successors and assigns, a first and prior lien and security interest in and to the property described hereinbelow, together with any and all PRODUCTS AND PROCEEDS thereof (the "Collateral"):

      The equipment, fixtures and inventory (if any) consisting of the following drilling rigs and related equipment:

      (the Drilling Rigs and related equipment designated by Obligor as Rig 22 (IDECO H-725) and Rig 23 (IDECO H-725) all as more particularly described on Exhibit A attached hereto and incorporated herein;

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      together with all replacements, accessories, additions, substitutions and accessions to all of the foregoing, all records relating in any way to the foregoing (including, without limitation, any computer software, whether on tape, disk, card, strip, cartridge or any other form).

The term "Collateral" shall also include all records and data relating to any of the foregoing (including, without limitation, any computer software on which such records and data may be located). Borrower agrees to execute such security agreements, assignments, deeds of trust and other agreements and documents as Lender shall deem appropriate and otherwise require from time to time to more fully create and perfect Lender's lien and security interests in the Collateral.

        4.    Intentionally Omitted.

        5.    Representations and Warranties. Borrower hereby represents and warrants, to Lender as follows:

            (a)  Existence. Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas and all other states where it is doing business, and has all requisite power and authority to execute and deliver the Loan Documents.

            (b)  Binding Obligations. The execution, delivery, and performance of this Loan Agreement and all of the other Loan Documents by Borrower have been duly authorized by all necessary action by Borrower, and constitute legal, valid and binding obligations of Borrower, enforceable in accordance with their respective terms, except as limited by Bankruptcy, insolvency or similar laws of general application relating to the enforcement of creditors' rights and except to the extent specific remedies may generally be limited by equitable principles.

            (c)  No Consent. The execution, delivery and performance of this Loan Agreement and the other Loan Documents, and the consummation of the transactions contemplated hereby and thereby, do not (i) conflict with, result in a violation of, or constitute a default under (A) any provision of its partnership agreement, any provision of the articles or certificate of incorporation or bylaws of Borrower's general or limited partner, or any agreement or other instrument binding upon Borrower, its general or limited partner, or (B) any law, governmental regulation, court decree or order applicable to Borrower, or (ii) require the consent, approval or authorization of any third party.

            (d)  Financial Condition. Each financial statement of Borrower supplied to the Lender truly discloses and fairly presents Borrower's financial condition as of the date of each such statement. There has been no material adverse change in such financial condition or results of operations of Borrower subsequent to the date of the most recent financial statement supplied to Lender.

            (e)  Litigation. Except as set forth in the Securities and Exchange Commission filings of PIONEER DRILLING COMPANY, a Texas corporation ("Pioneer"), copies of which have been made available to the Lender, there are no actions, suits or proceedings, pending or, to the knowledge of Borrower, threatened against or affecting Borrower or the properties of Borrower, before any court or governmental department, commission or board, which, if determined adversely to Borrower, would have a material adverse effect on the financial condition, properties, or operations of Borrower.

            (f)    Taxes; Governmental Charges. Borrower has filed all federal, state and local tax reports and returns required by any law or regulation to be filed by it and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected.

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        6.    Intentionally omitted.

        7.    Affirmative Covenants. Until (i) the Note and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower agrees and covenants that it will, unless Lender shall otherwise consent in writing:

            (a)  Accounts and Records. Maintain its books and records in accordance with generally accepted accounting principles.

            (b)  Right of Inspection. Permit Lender to visit its properties and installations and to examine, audit and make and take away copies or reproductions of Borrower's books and records, at all reasonable times.

            (c)  Right to Additional Information. Furnish Lender with such additional information and statements, lists of assets and liabilities, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time.

            (d)  Compliance with Laws. Conduct its business in an orderly and efficient manner consistent with good business practices, and perform and comply in all material respects with all statutes, rules, regulations and/or ordinances imposed by any governmental unit upon Borrower and its businesses, operations and properties (including without limitation, all applicable environmental statutes, rules, regulations and ordinances).

            (e)  Taxes. Pay and discharge when due all of its indebtedness and obligations, including without limitation, all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits; provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (i) the legality of the same shall be contested in good faith by appropriate judicial, administrative or other legal proceedings, and (ii) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien or claim in accordance with generally accepted accounting principles, consistently applied.

            (f)    Insurance. Maintain insurance, including but not limited to, fire insurance, comprehensive property damage, public liability, worker's compensation and other insurance deemed necessary or otherwise required by Lender.

            (g)  Notice of Indebtedness. Promptly inform Lender of the creation, incurrence or assumption by Borrower of any actual or contingent liabilities not permitted under this Loan Agreement.

            (h)  Notice of Litigation. Promptly after the commencement thereof, notify Lender of all actions, suits and proceedings before any court or any governmental department, commission or board affecting Borrower or any of its properties which, if determined adversely to Borrower, would have a material adverse effect on the financial condition, properties, or operations of Borrower.

            (i)    Notice of Material Adverse Change. Promptly inform Lender of (i) any and all material adverse changes in Borrower's financial condition, and (ii) all claims made against Borrower which could materially affect the financial condition of Borrower.

            (j)    Additional Documentation. Execute and deliver, or cause to be executed and delivered, any and all other agreements, instruments or documents which Lender may reasonably request in order to give effect to the transactions contemplated under this Loan Agreement and the other Loan Documents.

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        8.    Negative Covenants. Until the Note and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, neither Borrower nor Pioneer will, without the prior written consent of Lender:

            (a)  Nature of Business. Make any material change in the nature of its business as carried on as of the date hereof.

            (b)  Liquidations, Mergers, Consolidations. Liquidate, merge or consolidate with or into any other entity.

            (c)  Sale of Assets. Sell, transfer or otherwise dispose of (1) any of the Collateral, or (2) any of its assets or property, other than any asset of property valued not more than $500,000.00 and disposed of in the ordinary course of business.

            (d)  Liens. Create or incur any lien or encumbrance on any of its assets, other than (i) liens and security interests securing indebtedness owing to Lender, (ii) liens for taxes, assessments or similar charges that are (1) not yet due or (2) being contested in good faith by appropriate proceedings and for which such entity has established adequate reserves, (iii) liens and security interests existing as of the date hereof which have been disclosed to and approved by Lender in writing, (iv) liens and security interests on the Acquired Rigs to secure the obligations of Borrower to Wedge Trust Corporation as applicant of the Acquisition Letter of Credit, expressly provided that such liens and security interests are subordinate and inferior to the liens and security interests of Lender and (v) liens or encumbrances securing indebtedness which would not otherwise violate the terms of this Loan Agreement.

            (e)  Indebtedness. Create, incur or assume any indebtedness for borrowed money or issue or assume any other note, debenture, bond or other evidences of indebtedness, or guarantee any such indebtedness or such evidences of indebtedness of others, other than (i) borrowings from Lender, and (ii) borrowings from lenders other than Lender, except that during the term of the Loan, Borrower shall be permitted to incur or have outstanding indebtedness to other lenders provided that the aggregate principal balance of all such debt outstanding at any time shall not exceed $5,000,000.00 (exclusive of subordinated debt otherwise permitted by written agreement with Lender).

            (f)    Transfer of Ownership. Permit the sale, pledge or other transfer of any of the ownership interests in Borrower.

            (g)  Change in Management. Permit a change in the senior management of Pioneer (as used herein, "a change in senior management" shall mean that Michael E. Little shall have ceased to hold the titles of Chairman and Chief Executive Officer or William Stacey Locke shall have ceased to hold the titles of Chief Financial Officer and President); provided, however, should Michael E. Little or William Stacey Locke die, become disabled or be terminated for cause (an "Involuntary Change of Management"), Borrower shall not be in default hereunder if and only if Pioneer shall (i) immediately, but in no event more than thirty days following such Involuntary Change of Management, name a replacement reasonably acceptable to Lender to exercise the duties and hold the office(s) and positions held by Michael E. Little and William Stacey Locke on an interim basis; and (ii) as soon as practical, but in no event more than (270) days following such Involuntary Change of Management, name a replacement acceptable to Lender in it reasonable discretion to exercise the duties and hold the office(s) and positions held by Michael E. Little and William Stacey Locke.

            (h)  Loans. Make any loans to any person or entity, other than, in the loans made in the ordinary course of business to entities affiliated with Borrower or Pioneer and not exceeding $250,000.00 principal outstanding to all borrowers in the aggregate at any time.

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            (i)    Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase, sale or exchange of property or the rendering of any service, with any Affiliate (as hereinafter defined) of Borrower or Pioneer, except in the ordinary course of and pursuant to the reasonable requirements of the business of either of them and upon fair and reasonable terms no less favorable to Borrower and/or Pioneer as the case may be than would be obtained in a comparable arm's-length transaction with a person or entity not an Affiliate of Borrower or Pioneer. As used herein, the term "Affiliate" means any individual or entity directly or indirectly controlling, controlled by, or under common control with, another individual or entity.

            (j)    Distributions. Borrower agrees not to declare or pay any distributions on any of Borrower's partnership interests, make any other distributions with respect to any payment on account of the purchase, redemption, or other acquisition or retirement of any of Borrower's partnership interests, or make any other distribution, sale, transfer or lease of any of Borrower's assets other than in the ordinary course of business, unless any such amounts are directly utilized for the payment of principal or interest on indebtedness and obligations owing from time to time by Borrower to Lender. The above notwithstanding, the Borrower may make distributions with respect to Borrower's partnership interests, for the purposes of (i) providing funds to pay taxes (including federal income taxes and franchise taxes) of the partners of Borrower attributable to ownership of an interest in Borrower, (ii) providing operating capital to Pioneer in an amount not exceeding $250,000.00 distributed in any one fiscal year, and (iii) providing sufficient funds for the retirement of term bank debt owed by Pioneer to American Bank.

            (k)  Dividends. Pioneer agrees not to declare or pay any dividends on any shares of its capital stock, make any other distributions with respect to any payment on account of the purchase, redemption, or other acquisition or retirement of any shares of it capital stock, or make any other distribution, sale, transfer or lease of any of it assets other than in the ordinary course of business, unless any such amounts are directly utilized for the payment of principal or interest on indebtedness and obligations owing from time to time by it to Lender and other than Preferred Dividends which Pioneer is contractually obligated to pay pursuant to agreements in existence on the date hereof.

        9.    Financial Covenants. Until (i) the Note and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower will maintain the following financial covenants (on a consolidated basis with Pioneer):

            (a)  Leverage Ratio. Borrower will maintain, a Leverage Ratio not to exceed 3.0 to 1.0, to be tested annually during the term of Loan. Defined as:

  Funded Bank Debt
Net Income + Interest + Taxes + Depreciation + Amortization		  

        As used herein, "Funded Bank Debt" shall mean: all outstanding principal due to Lender and other non-equity lenders.

            (b)  Cash Flow Coverage Ratio. Borrower will maintain, as of the end of each fiscal year, a cash flow coverage ratio of not less than 1.25 to 1.0—defined as:

Net Income + Interest + Taxes + Depreciation + Amortization—Distributions or Dividends—
 Maintenance Capital Expenditures
Current Portion of Long-Term Debt + Interest Expense

      As used herein, "Maintenance Capital Expenditures" shall mean: Amounts actually paid for the routine maintenance of the equipment serving as collateral for the Loans to the extent such maintenance is required to keep that equipment in operating condition.

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            (c)  Debt to Worth Ratio. Borrower will maintain, at all times, to be tested quarterly on the last day of each fiscal quarter of Borrower, a ratio of (a) total liabilities (excluding any Subordinated Debt), to (b) Tangible Net Worth of not greater than 1.75 to 1.0.

As used herein, the term "Tangible Net Worth" means, as of any date, Borrower's total assets excluding all intangible assets, less total liabilities excluding any Subordinated Debt. As used herein, the term "Subordinated Debt" means any indebtedness owing by Borrower which has been subordinated by written agreement to all indebtedness now or hereafter owing by Borrower to Lender, such agreement to be in form and substance acceptable to Lender.

        10.  Reporting Requirements. Until (i) the Note and all other obligations and liabilities of Borrower under this Loan Agreement and the other Loan Documents are fully paid and satisfied, and (ii) the Lender has no further commitment to lend hereunder, Borrower will, unless Lender shall otherwise consent in writing, furnish to Lender (all on a consolidated basis with Pioneer):

            (a)  Interim Financial Statements. As soon as available, and in any event within forty-five (45) days after the end of each month of each fiscal year of Borrower, (i) a balance sheet, income statement and statement of cash flows of Borrower as of the end of such fiscal month; (ii) an accounts receivable aging report; (iii) a Borrowing Base Certificate; and (iv) a Rig Schedule/Utilization Report; each in form and substance and in reasonable detail satisfactory to Lender and duly certified (as to item (i), subject to year-end review adjustments) by the President and/or Chief Financial Officer of Borrower and/or Chief Accounting Officer (A) as being true and correct in all material aspects to the best of his or her knowledge and (B) (as to item (i) only), as having been prepared in accordance with generally accepted accounting principles, consistently applied.

            (b)  Quarterly Statements. Within sixty (60) days after the end of each quarter of each fiscal year of Borrower, a copy of the 10-Q Report of Pioneer, as filed with the Securities Exchange Commission.

            (c)  Annual Reporting. As soon as available and in any event within one hundred twenty days (120) days after the end of each fiscal year of Borrower, (i) a copy of the 10-K Report of Pioneer, as filed with the Securities Exchange Commission, together with (ii) a certificate signed by the President and/or Chief Financial Officer of Borrower and/or Chief Accounting Officer, stating that Borrower is in full compliance with all of its obligations under this Loan Agreement and all other Loan Documents and is not in default of any term or provisions hereof or thereof, and demonstrating compliance with all financial ratios and covenants set forth in this Loan Agreement.

        11.  Events of Default. Each of the following shall constitute an "Event of Default" under this Loan Agreement:

            (a)  The failure, refusal or neglect of Borrower to pay when due any part of the principal of, or interest on, the Note or any other indebtedness or obligations owing to Lender by Borrower from time to time, from time to time, which default remains uncured for a period of ten (10) days after notice to Borrowers from Lender, given in accordance with the terms hereof.

            (b)  The failure of Borrower or any Obligated Party (as defined below) to timely and properly observe, keep or perform any covenant, agreement, warranty or condition required herein or in any of the other Loan Documents and the failure of Borrower or any Obligated Party to cure such default within 30 days after written notice from Lender specifying such default, provided that if such default or violation is susceptible of being remedied, but such remedy can not reasonably be accomplished within the initial 30-day cure period, no Event of Default shall be deemed to have occurred so long as Borrower or the appropriate Obligated Party is diligently pursuing such remedy and is successful in curing the default or violation to the reasonable satisfaction of Lender within such additional period of time as may be necessary to effect the remedy, not to exceed in any event an additional 60 days following the end of the initial cure period.

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            (c)  The occurrence of an event of default under any of the other Loan Documents or under any other agreement now existing or hereafter arising between Lender and Borrower after the giving of any required notice and expiration of any applicable cure period.

            (d)  Any representation contained herein or in any of the other Loan Documents made by Borrower or any Obligated Party is false or misleading in any material respect.

            (e)  The occurrence of any event which permits the acceleration of the maturity of any indebtedness in excess of $100,000.00 owing by Borrower to any third party under any agreement or understanding and such default continues after the giving of written notice to Borrower and the passage of the cure period specified in Section 11(b) above.

            (f)    If Borrower or any Obligated Party: (i) becomes insolvent, or makes a transfer in fraud of creditors, or makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts as they become due; (ii) generally is not paying its debts as such debts become due; (iii) has a receiver, trustee or custodian appointed for, or take possession of, all or substantially all of the assets of such party, either in a proceeding brought by such party or in a proceeding brought against such party and such appointment is not discharged or such possession is not terminated within sixty (60) days after the effective date thereof or such party consents to or acquiesces in such appointment or possession; (iv) files a petition for relief under the United States Bankruptcy Code or any other present or future federal or state insolvency, bankruptcy or similar laws (all of the foregoing hereinafter collectively called "Applicable Bankruptcy Law") or an involuntary petition for relief is filed against such party under any Applicable Bankruptcy Law and such involuntary petition is not dismissed within sixty (60) days after the filing thereof, or an order for relief naming such party is entered under any Applicable Bankruptcy Law, or any composition, rearrangement, extension, reorganization or other relief of debtors now or hereafter existing is requested or consented to by such party; (v) fails to have discharged within a period of thirty (30) days any attachment, sequestration or similar writ levied upon any property of such party; or (vi) fails to pay within thirty (30) days any final money judgment against such party.

            (g)  If Borrower or any Obligated Party is an entity, the liquidation, dissolution, merger or consolidation of any such entity (provided that an Event of Default shall not occur upon the merger or consolidation of Credit Suisse) or, if Borrower or any Obligated Party is an individual, the death or legal incapacity of any such individual.

            (h)  The entry of any judgment against Borrower or the issuance or entry of any attachment or other lien against any of the property of Borrower for an amount in excess of $500,000.00, if undischarged, unbonded or undismissed within thirty (30) days after such entry.

Nothing contained in this Loan Agreement shall be construed to limit the events of default enumerated in any of the other Loan Documents and all such events of default shall be cumulative. The term "Obligated Party", as used herein, shall mean any party other than Borrower who secures, guarantees and/or is otherwise obligated to pay all or any portion of the indebtedness evidenced by the Note.

        12.  Remedies. Upon the occurrence of any one or more of the foregoing Events of Default, (a) the entire unpaid balance of principal of the Note, together with all accrued but unpaid interest thereon, and all other indebtedness owing to Lender by Borrower at such time shall, at the option of Lender, become immediately due and payable without further notice, demand, presentation, notice of dishonor, notice of intent to accelerate, notice of acceleration, protest or notice of protest of any kind, all of which are expressly waived by Borrower, and (b) Lender may, at its option, cease further advances under any of the Note. All rights and remedies of Lender set forth in this Loan Agreement and in any of the other Loan Documents may also be exercised by Lender, at its option to be exercised in its sole discretion, upon the occurrence of an Event of Default.

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        13.  Rights Cumulative. All rights of Lender under the terms of this Loan Agreement shall be cumulative of, and in addition to, the rights of Lender under any and all other agreements between Borrower and Lender (including, but not limited to, the other Loan Documents), and not in substitution or diminution of any rights now or hereafter held by Lender under the terms of any other agreement. Lender agrees that should the principal and interest due on the Loan be fully satisfied by actual receipt by Lender of payment on the Acquisition Letter of Credit or by funds paid directly to Lender by Wedge Energy Services, LLC ("Wedge") which funds are not the proceeds of an offering made in connection with Borrower or its affiliates, Lender acknowledges and Borrower agrees, that it will transfer and assign any liens and security interests it holds in the Acquired Rigs to Wedge (upon full indemnification by Wedge of Lender in connection therewith), provided however, that this statement shall not constitute an obligation of Lender to proceed against any Collateral, surety or other method of repayment in any particular order, it being expressly reserved to Lender in its sole discretion to determine from what sources and in what order it shall seek repayment of the Loan.

        14.  Waiver and Agreement. Neither the failure nor any delay on the part of Lender to exercise any right, power or privilege herein or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver of any provision in this Loan Agreement or in any of the other Loan Documents and no departure by Borrower therefrom shall be effective unless the same shall be in writing and signed by Lender, and then shall be effective only in the specific instance and for the purpose for which given and to the extent specified in such writing. No modification or amendment to this Loan Agreement or to any of the other Loan Documents shall be valid or effective unless the same is signed by the party against whom it is sought to be enforced.

        15.  Benefits. This Loan Agreement shall be binding upon and inure to the benefit of Lender and Borrower, and their respective successors and assigns, provided, however, that Borrower may not, without the prior written consent of Lender, assign any rights, powers, duties or obligations under this Loan Agreement or any of the other Loan Documents.

        16.  Notices. All notices, requests, demands or other communications required or permitted to be given pursuant to this Agreement shall be in writing and given by (i) personal delivery, (ii) expedited delivery service with proof of delivery, or (iii) United States mail, postage prepaid, registered or certified mail, return receipt requested, sent to the intended addressee at the address set forth on the first page hereof and shall be deemed to have been received either, in the case of personal delivery, as of the time of personal delivery, in the case of expedited delivery service, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of mail, upon deposit in a depository receptacle under the care and custody of the United States Postal Service. Either party shall have the right to change its address for notice hereunder to any other location within the continental United States by notice to the other party of such new address at least thirty (30) days prior to the effective date of such new address.

        17.  Construction. This Loan Agreement and the other Loan Documents have been executed and delivered in the State of Texas, shall be governed by and construed in accordance with the laws of the State of Texas, and shall be performable by the parties hereto in the county in Texas where the Lender's address set forth on the first page hereof is located.

        18.  Invalid Provisions. If any provision of this Loan Agreement or any of the other Loan Documents is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable and the remaining provisions of this Loan Agreement or any of the other Loan Documents shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance.

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        19.  Expenses. Borrower shall pay all costs and expenses (including, without limitation, reasonable attorneys' fees) in connection with (i) any action required in the course of administration of the indebtedness and obligations evidenced by the Loan Documents, and (ii) any action in the enforcement of Lender's rights upon the occurrence of Event of Default.

        20.  Participation of the Loans. Borrower agrees that Lender may, at its option, sell interests in the Loans and its rights under this Loan Agreement to a financial institution or institutions and, in connection with each such sale, Lender may disclose any financial and other information available to Lender concerning Borrower to each prospective purchaser.

        21.  Conflicts. In the event any term or provision hereof is inconsistent with or conflicts with any provision of the other Loan Documents, the terms and provisions contained in this Loan Agreement shall be controlling.

        22.  Counterparts. This Loan Agreement may be separately executed in any number of counterparts, each of which shall be an original, but all of which, taken together, shall be deemed to constitute one and the same instrument.

        23.  Facsimile Documents and Signatures. For purposes of negotiating and finalizing this Loan Agreement, if this document or any document executed in connection with it is transmitted by facsimile machine ("fax"), it shall be treated for all purposes as an original document. Additionally, the signature of any party on this document transmitted by way of a facsimile machine shall be considered for all purposes as an original signature. Any such faxed document shall be considered to have the same binding legal effect as an original document. At the request of any party, any faxed document shall be re-executed by each signatory party in an original form.

        If the foregoing correctly sets forth our mutual agreement, please so acknowledge by signing and returning this Loan Agreement to the undersigned.

NOTICE TO COMPLY WITH STATE LAW

        For the purpose of this Notice, the term "WRITTEN AGREEMENT" shall include the document set forth above, together with each and every other document relating to and/or securing the same loan transaction, regardless of the date of execution.

    THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

    THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signatures on following page.]

9

BORROWER:   LENDER:

PIONEER DRILLING SERVICES, LTD., a Texas limited partnership
 
THE FROST NATIONAL BANK
a national banking association

By:
 
PDC Mgmt. Co., a Texas corporation, General Partner
 
By:
  By:
   Printed Name:
  Printed Name:
   Title:
  Title:
        

PIONEER DRILLING COMPANY, a Texas corporation (executing for purposes of joining in certain specific provisions, as noted above)
 
 
 
 

By:
 
 
 
 
Printed Name:
        
Title:
        

Joining only for the limited purposes stated in Section 13 hereof:

WEDGE ENERGY SERVICES, LLC
a            limited liability corporation
 
 
 
 

By:
 
 
 
 
Printed Name:
        
Title:
        

10


Exhibit A

The Collateral

[to be attached]




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LOAN AGREEMENT
Exhibit A The Collateral [to be attached]
 EX-4.15 8 a2082143zex-4_15.htm EXHIBIT 4.15
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EXHIBIT 4.15


PROMISSORY NOTE
(Floating Rate)

$6,000,000.00   March 29, 2002

        For value received, PIONEER DRILLING SERVICES, LTD., a Texas limited partnership (formerly known as Pioneer Drilling Co., Ltd.), as principal ("Borrower"), promises to pay to the order of THE FROST NATIONAL BANK, a national banking association ("Lender") at P.O. Box 1600, San Antonio, Texas 78296, or at such other address as Lender shall from time to time specify in writing, the principal sum of SIX MILLION AND 00/100 DOLLARS ($6,000,000.00), or so much thereof as may be advanced pursuant to the terms of that certain Loan Agreement (herein so called) dated March 30, 2001, as amended, in legal and lawful money of the United States of America, with interest on the outstanding principal from the date advanced until paid at the rate set out below. Interest shall be computed on a per annum basis of a year of 360 days and for the actual number of days elapsed, unless such calculation would result in a rate greater than the highest rate permitted by applicable law, in which case interest shall be computed on a per annum basis of a year of 365 days or 366 days in a leap year, as the case may be.

        1.    Payment Terms. Interest only shall be due and payable monthly as it accrues on the last day of each and every calendar month, beginning April 30, 2002 and continuing regularly and monthly thereafter until September 29, 2002, when the entire amount hereof, principal and interest then remaining unpaid, shall be then due and payable; interest being calculated on the unpaid principal each day principal is outstanding and all payments made credited to any collection costs and late charges, to the discharge of the interest accrued and to the reduction of the principal, in such order as Lender shall determine.

        2.    Late Charge. If a payment is made 10 days or more late, Borrower will be charged, in addition to interest, a delinquency charge of (i) 5% of the unpaid portion of the regularly scheduled payment, or (ii) $250.00, whichever is less. Additionally, upon maturity of this Note, if the outstanding principal balance (plus all accrued but unpaid interest) is not paid within 10 days of the maturity date, Borrower will be charged a delinquency charge of (i) 5% of the sum of the outstanding principal balance (plus all accrued but unpaid interest), or (ii) $250.00, whichever is less. Borrower agrees with Lender that the charges set forth herein are reasonable compensation to Lender for the handling of such late payments.

        3.    Interest Rate. Interest on the outstanding and unpaid principal balance hereof shall be computed at a per annum rate equal to the lesser of (a) a rate equal to the Prime Rate of Lender, plus one percent (1%) per annum, with said rate to be adjusted to reflect any change in said Prime Rate at the time of any such change or (b) the highest rate permitted by applicable law, but in no event shall interest contracted for, charged or received hereunder plus any other charges in connection herewith which constitute interest exceed the maximum interest permitted by applicable law, said rate to be effective prior to maturity (however such maturity is brought about). The "Prime Rate" shall mean the prime rate of interest charged by Lender as established from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer.

        4.    Default Rate. Matured unpaid principal and interest shall bear interest from date of maturity until paid at (a) the highest rate permitted by applicable law, or (b) if no such maximum rate is established by applicable law, at the rate stated above plus five percent (5%) per annum.

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        5.    Prepayment. Borrower reserves the right to prepay, prior to maturity, all or any part of the principal of this Note without penalty. Any prepayments shall be applied first to accrued interest and then to principal. Borrower will provide written notice to the holder of this Note of any such prepayment of all or any part of the principal at the time thereof. All payments and prepayments of principal or interest on this Note shall be made in lawful money of the United States of America in immediately available funds, at the address of Lender indicated above, or such other place as the holder of this Note shall designate in writing to Borrower. All partial prepayments of principal shall be applied to the last installments payable in their inverse order of maturity.

        6.    Default. It is expressly provided that upon default in the punctual payment of this Note or any part hereof, principal or interest, as the same shall become due and payable, or upon the occurrence of an event of default specified in any of the other Loan Documents (as defined below) and such default continues after the giving of written notice to Borrower and the passage of the applicable cure period as provided in the Loan Agreement, the holder of this Note may, at its option, without further notice or demand, (i) declare the outstanding principal balance of and accrued but unpaid interest on this Note at once due and payable, (ii) refuse to advance any additional amounts under this Note, (iii) foreclose all liens securing payment hereof, (iv) pursue any and all other rights, remedies and recourses available to the holder hereof, including but not limited to any such rights, remedies or recourses under the Loan Documents, at law or in equity, or (v) pursue any combination of the foregoing; and in the event default is made in the prompt payment of this Note when due or declared due, and the same is placed in the hands of an attorney for collection, or suit is brought on same, or the same is collected through probate, bankruptcy or other judicial proceedings, then the Borrower agrees and promises to pay all costs of collection, including reasonable attorney's fees.

        7.    Joint and Several Liability; Waiver. Each maker, signer, surety and endorser hereof, as well as all heirs, successors and legal representatives of said parties, shall be directly and primarily, jointly and severally, liable for the payment of all indebtedness hereunder. Lender may release or modify the obligations of any of the foregoing persons or entities, or guarantors hereof, in connection with this loan without affecting the obligations of the others. All such persons or entities expressly waive presentment and demand for payment, notice of default, notice of intent to accelerate maturity, notice of acceleration of maturity, protest, notice of protest, notice of dishonor, and all other notices and demands for which waiver is not prohibited by law, and diligence in the collection hereof; and agree to all renewals, extensions, indulgences, partial payments, releases or exchanges of collateral, or taking of additional collateral, with or without notice, before or after maturity. No delay or omission of Lender in exercising any right hereunder shall be a waiver of such right or any other right under this Note.

        8.    No Usury Intended; Usury Savings Clause. In no event shall interest contracted for, charged or received hereunder, plus any other charges in connection herewith which constitute interest, exceed the maximum interest permitted by applicable law. The amounts of such interest or other charges previously paid to the holder of the Note in excess of the amounts permitted by applicable law shall be applied by the holder of the Note to reduce the principal of the indebtedness evidenced by the Note, or, at the option of the holder of the Note, be refunded. To the extent permitted by applicable law, determination of the legal maximum amount of interest shall at all times be made by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the loan and indebtedness, all interest at any time contracted for, charged or received from the Borrower hereof in connection with the loan and indebtedness evidenced hereby, so that the actual rate of interest on account of such indebtedness is uniform throughout the term hereof.

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        9.    Security. This Note has been executed and delivered pursuant to the Loan Agreement, and is secured by, inter alia, that certain Security Agreement dated March 30, 2001, executed by and between Pioneer Drilling Co., Ltd. and Lender, as amended, covering certain collateral as more particularly described therein. This Note, the Loan Agreement and all other documents evidencing, securing, governing, guaranteeing and/or pertaining to this Note, including but not limited to those documents described above, are hereinafter collectively referred to as the "Loan Documents." The holder of this Note is entitled to the benefits and security provided in the Loan Documents.

        10.  Texas Finance Code. In no event shall Chapter 346 of the Texas Finance Code (which regulates certain revolving loan accounts and revolving tri-party accounts) apply to this Note. To the extent that Chapter 303 of the Texas Finance Code is applicable to this Note, the "weekly ceiling" specified in such article is the applicable ceiling; provided that, if any applicable law permits greater interest, the law permitting the greatest interest shall apply.

        11.  Governing Law, Venue. This Note is being executed and delivered, and is intended to be performed in the State of Texas. Except to the extent that the laws of the United States may apply to the terms hereof, the substantive laws of the State of Texas shall govern the validity, construction, enforcement and interpretation of this Note. In the event of a dispute involving this Note or any other instruments executed in connection herewith, the undersigned irrevocably agrees that venue for such dispute shall lie in any court of competent jurisdiction in Bexar County, Texas.

        12.  Purpose of Loan. Borrower agrees that no advances under this Note shall be used for personal, family or household purposes, and that all advances hereunder shall be used solely for business, commercial, investment, or other similar purposes.

        13.  Captions. The captions in this Note are inserted for convenience only and are not to be used to limit the terms herein.

        14.  Financial Information. Borrower agrees to promptly furnish such financial information and statements, including financial statements in a format acceptable to Lender, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. This provision shall not alter the obligation of Borrower to deliver to Lender any other financial statements or reports pursuant to the terms of any other loan documents executed in connection with this Note.

        15.  Renewal and Extension. This Note is given in renewal and extension, but not extinguishment, of all amounts left owing and unpaid on that certain promissory note dated March 30, 2001 executed and delivered by Pioneer Drilling Co., Ltd. and payable to the order of Lender in the original principal face amount of $12,000,000.00.

    BORROWER:

 
 
PIONEER DRILLING SERVICES, LTD., a Texas limited partnership (formerly known as Pioneer Drilling Co., Ltd.)

 
 
By:
 
PDC Mgmt. Co., a Texas corporation, General Partner

 
 
By:
 
        Printed Name:
        Title:

3



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PROMISSORY NOTE (Floating Rate)
 EX-10.13 9 a2082143zex-10_13.htm EXHIBIT 10.13
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EXHIBIT 10.13


EQUIPMENT LEASE

        This lease ("Lease"), signed on the 19th day of March, 2002, is to be effective February 8, 2002 between INTERNATIONAL DRILLING SERVICES, INC., a Delaware corporation, duly authorized to conduct business in the State of Texas (hereinafter called "Lessor"), and Pioneer Drilling Services, Ltd., a Texas limited partnership (hereinafter called "Lessee"). Lessee's obligations under this Lease are guaranteed by the parent corporation of Lessee, Pioneer Drilling Company, a Texas corporation ("Pioneer").

W I T N E S S E T H:

WHEREAS, Lessee desires to lease certain equipment from Lessor and Lessor desires to lease such equipment to Lessee;

        NOW, THEREFORE, in consideration of and subject to the covenants, terms and conditions contained in this Lease, Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the equipment described herein in Exhibit "A" attached hereto and made a part hereof.


SECTION 1
DEFINITION

        For the purposes of this Lease, the following terms shall have the following meanings:

        "Equipment" or "Rig" shall mean Rig No. 153 a/k/a Rig No. 4 as more particularly described in Exhibit "A" attached hereto.

        "Stipulated Value" shall be $4,000,000.00.

        "Material Portion" shall mean any item or combination of items of the Equipment that are valued in excess of $5,000.00.

        "Per Day Contract Drilling Rate" shall be the dollar amount stipulated as the dayrate amount in the applicable drilling contract (whether a daywork, footage or turnkey drilling contract) between Lessee and any third party to whom Lessee performs drilling services.


SECTION 2
DELIVERY OF EQUIPMENT AND INITIAL REPAIRS

        2.1  Lessee acknowledges that Lessee has inspected and received the Equipment and further accepts the Equipment in its current "as is" condition. Lessee acknowledges and Lessor represents that the Equipment as scheduled on Exhibit "A" as specifically listed as "Lessor Property" is the sole property of Lessor, owned by Lessor free and clear of all liens and encumbrances other than this Lease. Lessee and Lessor acknowledge that the items listed on Exhibit "A" as "Lessee Property" includes items that have been added to the Rig by the Lessee, and that title to these items will be transferred "AS-IS", and free and clear of all liens and encubrances, to the Lessor upon the termination of this Lease. Lessor agrees that certain parts and accessories which were originally leased to Lessee under that certain Equipment Lease dated May 15, 1997, which is listed on Exhibit "A" as "Lessor Property Removed from the Rig" are being stored by Lessee, and that title to such items shall be transferred to the Lessee, on an AS-IS basis, free and clear of all liens and encumbrances, at the termination of this Lease. It is expressly understood that all drill pipe and collars are the exclusive property of Lessee and shall not be transferred to the Lessor at the termination of this Lease. Further, it is expressly understood that neither Lessor nor Lessee waive any of their claims in regard to the Disputed Property by execution of this Lease except as otherwise provided herein.

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        2.2  Lessee asserts that it satisfactorily repaired or caused to be repaired the crown block of the Equipment. The cost of the repair was offset in accordance with the terms of the previous Lease.

        2.3  Lessee and Lessor agree that no equipment is missing or needs to be replaced.


SECTION 3
TERM OF LEASE

        The primary term of this Lease shall commence effective February 8, 2002 and shall continue for the primary term of two years. Thereafter, this lease will automatically renew for consecutive 30 day periods unless sooner terminated in accordance with the provisions of this Lease or either party gives the other party notice of termination in which case this Lease shall terminate on February 8, 2002 or at the end of the 30 day period then in effect when such notice is given.


SECTION 4
RENTAL PAYMENTS

        4.1  Lessee covenants and agrees to pay to Lessor within 45 days of the last day of each calendar month during the term of this Lease, rental for the Equipment in the amount of 10% of the Per Day Contract Drilling Rate for each day (or portion of any such day) that the Rig was "In Use" (as hereinafter defined). The term "In Use" shall mean each day or portion of any day that the Rig is being used to drill an oil and/or gas well, starting at the time that drilling commences (which shall be deemed to mean when the well is "spudded"), and ending at the time that the Rig is released by the operator. In no event will the amount paid be less than $300.00 per day or 10% of the Per Day Contract Drilling Rate, which shall approximate the current market day rate. In the event that Lessee uses the Equipment to drill on its own behalf or on behalf of a related party, the daily rental rate due to IDS shall be $1,000.00 per day.

        4.2  All rental payments without limitation and all other payments by Lessee to Lessor under this Lease shall be net to Lessor without deduction, or offset for any amounts owed or claimed to be owed by Lessor to Lessee (hereunder of otherwise), defense or counterclaim, except in the case of overpayment by Lessee of a prior rental payment, and shall be made to Lessor at its office at 7710-T Cherry Park, Suite 503, Houston, Texas 77095, or to such other location or address as directed by Lessor in accordance with Section 18.3. This provision shall in no way limit the rights and remedies of Lessor under Section 11. All payments under this Lease shall be in such currency of the United States of America as at the time of payment shall be legal tender for the payment of public or private debts in the United States of America. If Lessee fails to make any payment due hereunder and such failure is not cured within the applicable cure period, all past due rentals shall bear interest from the ending date of the applicable cure period at the lesser of the rate of 18% per annum or the highest non-usurious rate permitted by Texas Law.

        4.3  Lessee covenants and agrees to pay to Lessor within 45 days of the last day of each calendar month during the term of this Lease rental for the Equipment in the amount of Three Hundred and No/100 Dollars ($300.00) per day multiplied by the number of days and partial days in the month that the rig was not "In Use" (as hereinafter defined). The term not "In Use" shall mean each day, and any portion of any day that the Equipment is not "In Use" as the term "In Use" is defined herein, so that the charge of $300.00 per day shall apply to time periods when the Rig is stacked, is being transported, at times prior to the time that the well is "spudded" and times after the Rig is released by the operator.

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SECTION 5
REPRESENTATIONS AND WARRANTIES

        5.1  Lessor represents and warrants that it owns the Equipment, free and clear of all known valid and enforceable liens and encumbrances, it has the lawful right to lease the Equipment in accordance with the terms hereof and that so long as an Event of Default (as hereinafter defined) shall not have occurred under this Lease, Lessee will have quiet enjoyment and peaceful possession of the Equipment during the term of this Lease. Lessor for a period of five (5) years from the effective date of this lease agrees to defend Lessee from and against any claims regarding title, liens or encumbrances, arising by or through Lessor but not otherwise.

        5.2  THE WARRANTY SET FORTH IN SECTION 5.1 HEREOF IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES OF LESSOR WHETHER WRITTEN, ORAL OR IMPLIED, AND LESSOR SHALL NOT, BY VIRTUE OF MERELY HAVING LEASED THE EQUIPMENT UNDER THIS LEASE, BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY (EXCEPTING THE EXPRESS WARRANTY SET FORTH IN SECTION 5.1 ABOVE) EITHER EXPRESS OR IMPLIED AS TO THE DESIGN, FITNESS, CONDITION, MERCHANTABILITY OR DESCRIPTION OF, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT, AS TO THE FITNESS OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE OR ANY PARTICULAR TRADE OR BUSINESS, AS TO THE COMPLIANCE OF THE EQUIPMENT AS TO ANY GOVERNMENTAL REGULATION OR REQUIREMENT, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, IT BEING AGREED AND UNDERSTOOD THAT ALL SUCH RISKS AS BETWEEN LESSOR AND LESSEE ARE TO BE BORNE EXCLUSIVELY BY LESSEE.

        5.3  Lessee represents, warrants and covenants with respect to this Lease as follows:

            (a)  Lessee is a Texas limited partnership, validly existing and in good standing under the laws of the State of Texas and is duly qualified and authorized to do business in the State of Texas and any other state where the Equipment will be located and wherever the nature of its activities or properties require such qualification and authorization.

            (b)  Lessee has the full power, authority and legal right to execute, deliver and perform the terms of this Lease. This Lease has been duly authorized by the partnership and constitutes a valid and binding obligation of Lessee in accordance with its terms.

            (c)  Pioneer has the full power, authority and legal rights to execute, deliver and perform its Guaranty. Pioneer's Guaranty has been duly authorized by all necessary corporate action and constitutes a valid and binding obligation of Pioneer in accordance with its terms.


SECTION 6
POSSESSION AND USE OF UNITS

        6.1  Unless an Event of Default shall have occurred and be continuing Lessee shall be entitled to use the Equipment in the ordinary course of the regular business conducted by Lessee, except as otherwise expressly limited herein. The Equipment shall be used as an onshore drilling rig for commercial or business purposes only in the State of Texas.

        6.2  Lessee shall be responsible for and shall pay for any and all accessories, support equipment, materials and consumables consumed by or required for the operation of the Equipment, and for all repairs, parts and supplies necessary therefor. All parts, materials, supplies and consumables used by Lessee in connection with the Rig which are not otherwise included on Exhibit "A" or are replacements of those items listed on Exhibit "A", shall remain the sole and exclusive property of Lessee and may be removed from the Rig at anytime; provided that at the end of the Lease, the Equipment meets the return conditions stated in Section 12 below.

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        6.3  Lessee shall not use or permit any Equipment to be used in an improper or unsafe manner or in violation of any federal, state, city or municipal law, statute, ordinance, rule or regulation. Lessee agrees that the Equipment will be used in accordance with any applicable vendor's or manufacturer's manuals or instructions, by competent and fully qualified personnel only.

        6.4  It is expressly understood that the Equipment shall be and remain removable personal property notwithstanding the manner in which the Equipment may become attached to any realty, structure or foundation, and that upon termination of the Lease term Lessee shall have the duty to remove the Equipment in accordance herewith, and Lessor shall have the right to remove the Equipment from the premises whereon the same are located whether or not affixed or attached in any manner at the sole cost and expense of Lessee. Lessor shall not be liable for and shall be held harmless by the Lessee from any damage caused to any realty, structure or foundation by the removal of the Equipment.

        6.5  No equipment may be removed from the Rig to be used for any purpose other than normal repair and maintenance. Should Lessee remove any item of equipment for a purpose other than normal repair or maintenance then Lessee shall owe Lessor, as rental, twice the fair market daily rental value of the equipment removed for each day the equipment is removed. Lessee shall notify Lessor within 24 hours of the removal of any equipment which is to be used for any purpose other than normal repair and maintenance. Lessee shall return any removed equipment to the Rig in a condition equal to or better than when removed from the Rig.


SECTION 7
MAINTENANCE, REPAIRS, ALTERATIONS AND REPLACEMENTS

        7.1  Lessee, at its own cost and expense, shall maintain, service, repair, overhaul, rebuild and improve the Equipment as necessary to keep the Equipment in good operating condition, state of repair and appearance, ordinary wear and tear excepted, so as to meet the mandatory standards of any applicable government authority, regardless of upon whom such standards are, by their terms, nominally imposed (such items being "Required Repairs and Improvements"). All repairs, replacement parts, equipment and improvements which are Required Repairs and Improvements shall become the sole and exclusive property of Lessor immediately upon being placed upon or being used in connection with the rig.

        7.2  Lessee may replace any accessory to or any part of any of the Equipment where necessary in accordance with a prudent operation and maintenance program, provided such replacement is in good operating order, and is at least equivalent in value and condition to the original value and original condition of the accessory or part replaced. Lessee shall not, without the prior written consent of Lessor, affix or install any accessory to or part of any of the Equipment if such addition will impair the originally intended function, use or value of any such Equipment.

        7.3  Lessee shall not, without the prior written consent of Lessor, make any substantial change or substantial alteration in any of the Equipment, except as necessary for compliance with the provisions of this Lease or to keep the Equipment suitable for its intended use.

        7.4  Lessee will perform routine maintenance and preventive maintenance on this Rig whether the Rig is working or is stacked.


SECTION 8
INSURANCE TAXES AND ASSESSMENTS

        8.1  During the term of this Lease, Lessee shall at its own cost carry and maintain in full force and effect comprehensive general public liability and "all risk" property damage insurance with respect to the Equipment with policy limits comparable to those maintained on Lessee's other rigs. Certificates of

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such insurance shall be submitted to and approved by Lessor on or as of the execution of this Lease. The minimum insurance to be carried shall be equal to the Stipulated Value. Insurance carried in accordance with this Section shall name Lessee and Lessor as insureds and shall provide that it may be materially altered by the insurer or Lessee only after fifteen (15) days prior written notice to the Lessor or canceled by the insurer or Lessee only after fifteen (15) days prior written notice to the Lessor and that losses shall be adjusted only with and with respect to physical damage or loss, paid to the named insureds as their interests may appear, and with respect to public liability, shall be paid only to third parties upon the prior written approval of Lessor and Lessee. Each such policy shall insure Lessor's interest up to the limits of the policy, regardless of any breach or violation by Lessee of any warranties, declarations or conditions contained in such policies.

        8.2  Certificates or other evidence satisfactory to Lessor showing the existence of such insurance, the terms and conditions of the policy and payment of the premium therefor shall, together with a certified copy of each and every policy as may be requested by Lessor, be delivered to Lessor at the time Lessee executes this Lease and periodically thereafter prior to each expiration of such insurance or upon the prior written request of Lessor. Lessee shall not do any act or voluntarily suffer any act to be done whereby any insurance required hereunder shall or may be suspended, impaired or defeated and Lessee shall not in any circumstances suffer or permit any of the Equipment to be used or operated during any period under this Lease without all said insurance being fully in effect.

        8.3  In the event that Lessee should for any reason fail to renew or replace any such policy or contract of insurance at least fifteen (15) days prior to the expiration thereof or fail to keep any such policy in full force and effect, Lessor shall have the option to pay the premiums on any said policy or contract of insurance or to take out new insurance in an amount, type, coverage and terms satisfactory to Lessor, and any sum shall be reimbursed by Lessee to Lessor on demand; provided, however, that no exercise by Lessor of said option shall in any way affect any provisions of this Lease, including the provision that failure by Lessee to maintain the prescribed insurance shall constitute an Event of Default. Lessor shall also have the right to obtain, at Lessor's cost, secondary liability insurance insuring any additional liability that might be incurred by Lessor, and Lessee agrees to cooperate fully with Lessor in connection therewith.

        8.4  The timely rendering and payment of any taxes, assessments or fees relating to Lessee's or which arises by or through Lessee's use or operation or control of the Equipment shall be the sole responsibility of the Lessee, this includes, but is not limited to ad valorem taxes.


SECTION 9
LOSS, DAMAGE AND DESTRUCTION

        9.1  In the event that any material portion of the Equipment shall be lost, destroyed or damaged from any cause whatsoever during the term of this Lease, Lessee shall promptly notify Lessor and shall file all necessary accident reports, including those required by law and those required by interested insurance companies. Lessor and Lessee shall proceed diligently and cooperate fully with each other and all insurers providing coverage under this Lease in the recovery of any and all proceeds of insurance applicable thereto and in the investigation and defense of all claims or suits.

        9.2  In the event of loss or damage to all or any material portion of the Equipment other than a "Total Loss" as defined below, Lessee shall either place such property in good repair, condition and working order, or replace such property with like property in good repair, condition and working order, and Lessor shall consent to the release of any insurance proceeds for such purposes.

        9.3  In the event of a total loss or destruction of the Equipment, or a loss or damage to all or any portion of the Equipment having a replacement cost reasonably estimated by an appraiser approved by Lessor to be in excess of $4,000,000, the insurance proceeds shall be divided as follows: Lessor shall receive an amount equal to $4,000,000, less one-half of the aggregate amount of all rental payments

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made by Lessee to Lessor during the term of this Lease up to the day of total loss or destruction ("Lessor's Portion") and, Lessee shall receive any remaining amount of the insurance proceeds to compensate it for its interest in the Equipment, drill pipe, collars and this Lease. Upon such loss or damage, this Lease shall terminate and Lessee shall become entitled to the Equipment, to the extent that the equipment does not become the property of the insurance company, on an "as is, where is" basis, without warranty by Lessor, express or implied, for any matter concerning the Equipment. Lessor shall execute and deliver to Lessee a bill of sale transferring title to the Equipment to the Lessee, to the extent that the equipment does not become the property of the insurance company, free and clear of all known valid and enforceable liens or encumbrances, as well as releases of any known valid and enforceable liens or encumbrances affecting the Equipment which arise by or through the Lessor. It is extremely understood that Lessor shall not be required to purchase any of the equipment or any portion thereof from the insurance company.

        9.4  Lessor may, at its option, place additional insurance on the Equipment at its own cost and for its sole benefit with respect to risks of any kind insurable by Lessor. Lessee agrees that it will cooperate with the Lessor in any reasonably manner to enable Lessor to obtain such additional insurance.


SECTION 10
INDEMNIFICATION, RELEASE AND WAIVER

        10.1 Lessee hereby agrees to and shall assume all of the risks and liability for, and shall indemnify, defend and hold Lessor and its respective successors, assigns, agents and employees harmless from and against, all expenses (including attorneys' fees), claims, demands, fines, penalties or other charges of applicable governmental and/or environmental authorities, liability (including any claim or liability for strict liability in tort imposed on Lessor), damage to property (including Lessee's property), loss of use of any property (including any of the Equipment), or injury to or death of persons (including agents and employees of Lessee), directly of indirectly resulting from the use, operation, control, storage or condition of any of the Equipment during the term hereof or from any defect (latent or patent) in any of the Equipment, regardless of whether such Equipment is at the time in the possession of the Lessee.

        10.2 The obligations of Lessee under this Section 10 shall survive the expiration or earlier termination of this Lease and are expressly made for the benefit of, and shall be enforceable by, Lessor and its successors and assigns.


SECTION 11
DEFAULTS AND REMEDIES

        11.1 The following shall constitute events of default ("Events of Default"):

            (a)  Failure of Lessee to make any rental or other payments to Lessor on or before such payments are due under this lease and such failure is not cured by Lessee within ten days of written notice from Lessor; provided however, Lessee shall not have the right to cure any default if there has been a previous default of which Lessee has been notified in writing within 90 days immediately preceding the date of such default.

            (b)  Failure of Lessee to procure or maintain any insurance coverage prescribed herein and such failure is not cured by Lessee within ten days of written notice from Lessor; provided however, if for reasons beyond Lessee's control, insurance is not available on commercially reasonable terms, no default shall be deemed to occur so long as (i) Lessee does not use the Equipment during such time period, and (ii) Lessee diligently attempts to procure the required insurance.

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            (c)  Failure of Lessee to observe or perform any of the other covenants, conditions, and/or agreements on the part of Lessee contained herein if such failure shall continue for thirty (30) days after written notice from Lessor to Lessee specifying the failure and demanding the same to be remedied;

            (d)  Lessee shall consent to the appointment of a receiver, trustee or liquidator of itself or of a substantial part of its property, or shall admit in writing its insolvency, or bankruptcy or its inability to pay its debts generally as they come due, or shall make a general assignment for the benefit of creditors, or shall file a petition in bankruptcy under any bankruptcy laws (as now or hereafter in effect), or shall file a petition or an answer seeking reorganization or a readjustment of its indebtedness, in a proceeding under any bankruptcy laws (as not or hereafter in effect), or shall file an answer admitting the material allegations of a petition filed against Lessee in any such proceeding, or shall fail seasonably to contest any such proceeding, or shall file a petition or an answer consenting to or seeking relief under the provisions of any other now existing or future bankruptcy or other similar law providing for the relief of any obligations or indebtedness or for the reorganization or winding-up of corporations or other entities, or shall enter into an agreement or adjustment with its creditors providing for the same;

            (e)  An order, judgment or decree shall be entered by any court of competent jurisdiction appointing without the consent of Lessee, a receiver, trustee or liquidator of Lessee or of any substantial part of its property, or providing for the sequestration of any substantial part of Lessee's property, and any such order, judgment or decree of appointment or sequestration shall remain in force undismissed, unstayed or unvacated for a period of sixty (60) days (whether or not consecutive) after the date of entry thereof;

            (f)    an order, judgment or decree shall be entered by any court of competent jurisdiction in a proceeding under any bankruptcy or insolvency laws (as now or hereafter in effect) adjudging Lessee a bankrupt or insolvent in such proceeding and such order, judgment or decree shall remain in force undismissed or unstayed for a period of sixty (60) days (whether or not consecutive) after such adjudication, or a court of competent jurisdiction shall approve as properly filed a petition against Lessee in a proceeding under any bankruptcy or insolvency laws (as now or hereafter in effect) and the approval of such petition shall not be withdrawn or the proceeding dismissed within thirty (30) days thereafter (whether or not consecutive), or any court of competent jurisdiction in a proceeding under the provisions of any law providing for the reorganization or winding-up of corporations shall assume jurisdiction, custody or control of Lessee or of any substantial part of Lessee's property and such jurisdiction, custody or control shall remain in force unrelinquished, unstayed or unterminated for a period of sixty (60) days (whether or not consecutive).

        11.2 Upon the occurrence of any such Event of Default, Lessor at its option may:

            (a)  proceed to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof, and/or, seek injunction or other equitable relief if necessary to protect Lessor's interest.

            (b)  terminate this Lease by written notice to Lessee, which notice shall specify the Event of Default or Events of Default and the effective date of such termination (hereinafter the "Date of Termination"), whereupon Lessee shall deliver possession of the Equipment to Lessor in accordance with Section 12 hereof; provided that Lessor shall nevertheless have the right to recover from Lessee any and all amounts which may be then due and unpaid and/or which have

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    accrued to the Date of Termination for the use of the Equipment (including rentals accruing hereunder after the Event of Default), and also to recover forthwith from Lessee:

              (1)  any damages in addition thereto which Lessor shall have sustained by reason of the breach of any covenants of this Lease other than for the payment of rental, and, in addition

              (2)  as damages for the loss of a bargain and not as a penalty, a sum equal to the present value of the unpaid balance of total rental payments remaining under this Lease, calculated at the rate of $300.00 per day and beginning on the date of any Event of Default and ending on February 8, 2004, using a discount rate of 10%.

              (3)  interest on the unpaid balance of any such excess amounts payable to Lessor by Lessee pursuant to the above clause (2) shall be paid at the lesser rate of 18% per annum or the highest non-usurious rate permitted by Texas law commencing on the Date of Termination, and plus

              (4)  all expenses, costs and commissions incurred by Lessor (including reasonable attorneys' fees) in enforcing its rights hereunder and in taking possession of, overhauling, repairing or modifying the Equipment after repossession thereof as reasonably required to place such Equipment in a condition reasonably suitable for sale, re-lease or use.

        11.3 Lessor may at its election waive any Event of Default and its consequences in writing, whereupon the respective rights of the parties shall be as they would have been if no Event of Default had occurred and no such notice of termination had been given. No waiver, rescission or annulment shall extend to or affect any other or subsequent default or impair any right or remedies consequent thereon.

        11.4 Each and every power and remedy hereby specifically given to Lessor shall be in addition to every other power and remedy specifically so given or now or hereafter existing at law or in equity, and each and every power and remedy may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by Lessor. All such powers and remedies shall be cumulative and the exercise of one shall not be deemed a waiver of the right to exercise any other or others. No delay or omission of Lessor in the exercise of any such power or remedy and no renewal or extension of time with regard to any payments due hereunder shall impair any such power or remedy or shall be construed to be a waiver of any default or an acquiescence therein. In the event of any action, proceeding, controversy or dispute of any kind whatever in connection with the enforcement of rights under this Lease, the prevailing party shall be entitled to recover its expenses, including attorneys' fees.

        11.5 Lessor and Lessee acknowledge that time is of the essence under this Lease and the time periods set forth herein shall be adhered to strictly according to their terms.

        11.6 Lessor shall be deemed to be in default of this Lease in the event that it breaches or is in breach of the representations contained in Section 5.1, and if such breach is not cured within ten (10) days after written notice of such breach is delivered to Lessor, Lessee may terminate this Lease and receive any and all damages resulting from Lessor's breach.

        11.7 At any time, Lessee shall have the unilateral right to terminate this Lease upon sixty days prior written notice to Lessor, by (i) returning the Equipment to the Lessor in accordance with the requirements of Section 12, (ii) paying any past due amounts owing to Lessor, and (iii) paying to Lessor and amount equal to the present value of the unpaid balance of total rental payments remaining under this Lease, calculated at the rate of $300.00 per day and beginning on the date of termination and ending on February 8, 2004, using a discount rate of 10%.

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SECTION 12
RETURN OF EQUIPMENT

        12.1 At the expiration of the term of this Lease (by maturity or otherwise), Lessee shall forthwith deliver possession of the Equipment to Lessor at a bonded trucking company storage yard in the State of Texas in Houston or of Lessee's choosing with approval by Lessor upon 15 days prior written notification delivered via certified mail. The condition of the Equipment is to be comparable to or better than its condition at the inception of this Lease.

        12.2 If upon the expiration or earlier termination of this Lease, Lessee fails or refuses to return the Equipment to Lessor, Lessor shall have the right to take possession of the Equipment and for that purpose to enter into any premises where the Equipment is located, without being liable to Lessee for such removal in any suit, action or other proceedings.

        12.3 Any Equipment delivered to Lessor hereunder shall have installed thereon all accessories and/or parts installed thereon at the commencement of the term of this Lease, or replacements therefor made in accordance with the provisions of this Lease, shall be in as good condition and appearance as when delivered to Lessee, ordinary wear and tear and changes or alterations properly made by Lessee as permitted under this Lease excepted, and shall be in good operating condition, state of repair and appearance pursuant to Section 7 hereof. Lessee shall pay for any repairs necessary to restore any such Equipment to such condition. All markings of Lessee shall be removed by Lessee by methods approved by Lessor. Lessee shall also deliver to Lessor with the Equipment, all manuals and inspection, modification, overhaul and maintenance records applicable to each of the Equipment.

        12.4 In addition, Lessee shall provide a written inventory of equipment delivered to the yard.

        12.5 Lessor may, within 60 days of the return of the Equipment, require Lessee, at Lessee's sole cost and expense, to remove and dispose of, in accordance with federal, state, city and municipal law, statute, ordinance, rule or regulation, any parts, equipment or materials returned to Lessor by Lessee.


SECTION 13
INSPECTION AND REPORTS

        13.1 During the term of this Lease, Lessee shall furnish to Lessor, within forty five (45) days after the end of each calendar month (the "Calendar Month"), the following information:

    A.
    An accounting of all rental payments owing under the Lease for the Calendar Month, describing in reasonable detail the days (or portions of days) when the Equipment is In Use and not In Use;

    B.
    Copies of all drilling contracts in which the Equipment was used during the Calendar Month;

    C.
    A Job Record for the Calendar Month, which sets forth a list of the operators, dayrate, spud and release dates, county, depth of well, type of contract (daywork, footage or turnkey), rates and charges;

    D.
    A description of all maintenance and repair performed on the Equipment during the Calendar Month; and

    E.
    Any material event occurring during the Calendar Month, whether a significant loss or damage to the Equipment or accident occurring incident to the operations of the Equipment.

        13.2 Within three business days, at anytime during the term of the Lease, Lessee shall provide Lessor any information regarding the Equipment reasonably requested by Lessor, including the location of the Equipment, the drilling contracts under which the Equipment is being used, or any other information reasonably requested by Lessor.

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        13.3 Without demand Lessee shall:

            (a)  Immediately notify Lessor, with respect to each accident involving a claim in excess of $100,000, or wherein the estimated damage to person and/or property may be in excess of $100,000, arising out of the alleged or apparent improper construction, functioning or operation of any Equipment, of (i) the time, place and nature of the accident and damage, (ii) the names and addresses of the parties involved, persons injured, witnesses and owners of property damaged, and (iii) such other material information in relation thereto as is known by Lessee;

            (b)  Immediately notify Lessor of all correspondence, papers, notices and documents of any kind whatever received by Lessee in connection with any claim or demand relating to alleged improper construction, operation or functioning of any of the Equipment, in any substantial respect, or charging Lessor with liability of any kind, and together with Lessor's employees, Lessee shall aid in the investigation and defense of all such claims and shall aid in the recovery of damages from third persons liable therefor.

            (c)  Documentation indicating the levying and payment of all taxes and fees shall be furnished within forty-five (45) days of receipt or payment.

            (d)  Notify Lessor within three business days after the Equipment is moved to a new location of the new location and provide reasonable directions to the new location from Lessor's office.

            (e)  Notify Lessor within 45 days of making any repairs, enhancements or upgrades to the Equipment of the repair, enhancement, or upgrade made to the Equipment or any part thereto along with invoices for said repairs, enhancements or upgrades.

        13.4 Should Lessee fail to furnish Lessor the information, in the required form, as required in Section 13, Lessor may take such action as is necessary to produce the required reports. Lessee agrees to fully cooperate with Lessor and give Lessor access to information necessary to produce such reports. Further, Lessee agrees to reimburse Lessor within five (5) business days, upon demand, One Hundred Twenty-five percent (125%) of Lessor's cost in preparing such reports.

        13.5 This information that Lessor and Lessee provide to each other pursuant to this Lease is confidential and proprietary information. Lessor and Lessee agree to keep such information strictly confidential and agree not to disclose any of such information to any third party (other than required by law or by a court order or governmental agency, and then only if the non-disclosing party is given prior written notice of the proceeding and given a chance to protect its interest in such information.) Further, Lessor and Lessee agree that they will only use such information for the limited purpose of monitoring and enforcing the lease.


SECTION 14
IDENTIFICATION

        Each piece of the Equipment shall bear such manufacturer's serial number as the manufacturer shall have assigned. Lessee shall not remove or deface, or permit to be removed or defaced, either the identifying manufacturer's serial number of any of the Equipment or any such plate, disc, or other marking so placed on any Equipment. In the event of such removal or defacement, Lessee shall promptly cause such manufacturer's serial number and/or such plate, disc, or other marking to be replaced at Lessee's cost.


SECTION 15
ASSIGNMENT, SALE AND ENCUMBRANCE

        15.1 Due to the existence of Lessee's option to purchase the Equipment, Lessor may not sell, encumber, transfer or assign the Equipment or this Lease or any rights under it at any time during the

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term of this Lease, so that all times during the term of this Lease, the Equipment and the Lease shall be owned by Lessor, free and clear of all known valid and enforceable liens and encumbrances other than the Lease.

        15.2 Lessee shall not assign this Lease or any property described in it, or assign any interest in the Lease or property, or sublet any of the Equipment without the specific written permission of Lessor; provided however, that Lessor shall be required to provide its consent if such assignment is made incident to a sale of all or a substantial portion of the assets of the Lessee.

        15.3 Lessee shall not part with possession or control of, sell or attempt to sell or mortgage, any of the Equipment, or otherwise dispose of any interest under this Lease, other than Equipment replaced pursuant to Section 9 hereof.

        15.4 Lessee shall not, without the prior written consent of Lessor, sell, transfer, or, directly or indirectly, create or permit the creation or existence of any mortgage, lien, charge or encumbrance of any kind on any of its rights under this Lease or in any Equipment, and if any such mortgage, lien, charge or encumbrance does exist (to the extent that it arises by or through the Lessee), Lessee, at its sole cost and expense, shall promptly remove the same. Upon request by Lessor, Lessee shall deliver to Lessor appropriate satisfactions, waivers, or evidence of payment of any lien or encumbrance which arises by or through Lessee.


SECTION 16
OTHER INFORMATION

        Lessee covenants that forthwith upon any officer of Lessee obtaining knowledge of an Event of Default or of any condition, event or acts which with notice or lapse of time or both would become an Event of Default under this Lease, Lessee shall deliver to Lessor an Officer's Certificate specifying the nature thereof, the period of existence thereof, and what action Lessee proposes to take with respect thereto.


SECTION 17
PURCHASE OPTION

        Lessee is hereby granted an option exercisable between January 1, 2004 and February 1, 2004 to purchase the Rig (so that if Lessee exercises its option, it will own all Lessor Property, Disputed Property and Lessor Property Removed from the Rig) at a price of $4,000,000.00 pursuant to the terms of this Section 17. The purchase price will be reduced by an amount equal to one-half of the rent actually paid by Lessee to Lessor pursuant to the terms of this contract. This reduction reflects the normal wear and tear on the equipment. The credit granted above is not intended to represent a payment toward the purchase price nor an exercise of the option to purchase. Lessee shall pay the full purchase price in cash at closing (whether by wire transfer or a certified or cashier's check). Lessee shall exercise this option by giving Lessor signed written notice of its intention to exercise its option, which notice must be sent by Certified mail, Return Receipt Requested, Postage prepaid, to Lessor's address for notice. Lessor must receive this notice on or before February 1, 2004 at 5:00 p.m. Houston, Texas time. The notice shall also specify a date; time and location for closing which shall be in Harris County, Texas during normal business hours. The date of closing must be on or before March 1, 2004. Lessor shall deliver a Bill of Sale to Lessee at closing specifying that the Rig is being sold free and clear of all known valid and enforceable liens and encumbrances and otherwise shall be sold, "As is, Where is and without any warranties expressed or implied", other than the warranty of title. At the closing, Lessor shall deliver releases of any known valid and enforceable liens or encumbrances affecting the Equipment which arise by or through the Lessor. Lessee may not assign this option without Lessor's express written consent, unless such assignment is made incident to an assignment of

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the Lease, which may only be made with the Lessor's consent. The parties understand that time is of the essence and that there will be no extensions of the option or time deadlines.


SECTION 18
MISCELLANEOUS

        18.1 Lessee and Lessor shall from time to time do and perform such other and further acts and execute and deliver any and all such other and further instruments as may be required by law or reasonably requested by the other to establish, maintain and protect the respective rights and remedies of the other and carry out and effect the intents and purposes of this Lease.

        18.2 No delay or omission in the exercise of any power or remedy herein provided or otherwise available to Lessor shall impair or affect Lessor's right thereafter to exercise the same. Any extension of time for payment hereunder or other indulgence granted to Lessee shall not otherwise alter or affect Lessor's rights or the obligations of Lessee hereunder. Lessor's acceptance of any payment after it shall have become due hereunder shall not be deemed to alter or affect the obligations of Lessee or Lessor's rights hereunder with respect to any subsequent payment or default therein.

        18.3 All demands, notices and other communications hereunder shall be in writing, and shall be deemed to have been duly given when personally delivered or when sent by first class mail, postage prepaid, or when received if sent by cable or telex, addressed as follows:

    To
    Lessor: International Drilling Services, Inc.
    7710-T Cherry Park, Suite 503
    Houston, Texas 77095
    Attention: Thomas I. Jackson, President

      with copy to:

      Johnny J. Williams
      13831 Northwest Freeway, Suite 155
      Houston, Texas 77040

    To
    Lessee: Pioneer Drilling Company
    9310 Broadway, Building I
    San Antonio, Texas 78217
    Attention: Wm. Stacy Locke, President and CFO

      with copy to:
      Matthews & Branscomb, PC
      Attn: Dan Elder and John Fisch
      112 East Pecan, Suite 1100
      San Antonio, Texas 78205

or at such addresses as may hereafter be furnished in writing by either party to the other in accordance herewith.

        18.4 The provisions of this Lease and all rights and obligations hereunder shall be governed by and construed in accordance with the law of the State of Texas. Lessee and Lessor hereby waive any provision of law which renders any provisions hereof prohibited and unenforceable in any respect. Any provision hereof which is prohibited by or unenforceable in any jurisdiction, notwithstanding the foregoing waiver, shall be ineffective as to such jurisdiction, without modifying the remaining provisions of this Lease. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

12


        18.5 Any other provisions contained in this Lease to the contrary notwithstanding, it is hereby agreed that the provisions of Sections 4, 5, 8, 9, 10, 11, 12,13, 17 and 18.7 hereof shall survive the expiration or termination of this lease and renewals hereof to the extent required thereby for their full observance and performance.

        18.6 Subject to the provisions of Section 5 and 15 hereof, this Lease shall be binding upon and shall inure to the benefit of Lessor and Lessee, and their respective successors and assigns.

        18.7 Any controversy or claim arising out of or relating to this agreement, or its breach, shall be settled by arbitration in accordance with the Commercial arbitration rules of the American Arbitration Association and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction.

        18.8 If Lessee shall fail at any time to comply with the covenants herein contained, including its covenants with respect to the maintenance of insurance, the payment of taxes, assessments and other charges or keeping the Equipment in good operating condition and state of repair and free of liens, charges and encumbrances, Lessor may, but shall not be obligated to, (i) make advances to perform the same, and (ii) enter upon the Lessee's premises to perform any and all acts required by Lessee's covenants herein contained and to take all such action thereon as in the Lessor's opinion may be necessary or appropriate therefor. All payments so made by Lessor and all costs and expenses (including reasonable attorneys' fees and expenses) incurred in connection therewith shall be payable by Lessee upon demand as additional rent hereunder, with interest thereon from the date(s) of such payments by Lessor until paid by Lessee at the rate set forth in Section 4.2 hereof. No entry shall be deemed an eviction of Lessee or a repossession of the Equipment, and no such advance, performance or other act shall be deemed to relieve Lessee from any default or obligation hereunder.

        18.9 The headings in this instrument are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

        18.10  This Lease constitutes the entire agreement between the parties hereto; there are no other agreements which constitute any part of the consideration for, or any condition to, either party's compliance with its obligations under this Lease.

        18.11  This Lease may be signed in one or more counterparts, each of which, when taken together, shall constitute one and the same agreement.

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        IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed by their respective officers thereunto duly authorized as of the date first above written.

    INTERNATIONAL DRILLING SERVICES, INC.

 
 
By:
 
Tom Jackson
 President

 
 
PIONEER DRILLING SERVICES, LTD.

 
 
BY: PDC MGMT. CO., its general partner

 
 
By:
 
Wm Stacey Locke
 President

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EQUIPMENT LEASE
SECTION 1 DEFINITION
SECTION 2 DELIVERY OF EQUIPMENT AND INITIAL REPAIRS
SECTION 3 TERM OF LEASE
SECTION 4 RENTAL PAYMENTS
SECTION 5 REPRESENTATIONS AND WARRANTIES
SECTION 6 POSSESSION AND USE OF UNITS
SECTION 7 MAINTENANCE, REPAIRS, ALTERATIONS AND REPLACEMENTS
SECTION 8 INSURANCE TAXES AND ASSESSMENTS
SECTION 9 LOSS, DAMAGE AND DESTRUCTION
SECTION 10 INDEMNIFICATION, RELEASE AND WAIVER
SECTION 11 DEFAULTS AND REMEDIES
SECTION 12 RETURN OF EQUIPMENT
SECTION 13 INSPECTION AND REPORTS
SECTION 14 IDENTIFICATION
SECTION 15 ASSIGNMENT, SALE AND ENCUMBRANCE
SECTION 16 OTHER INFORMATION
SECTION 17 PURCHASE OPTION
SECTION 18 MISCELLANEOUS
 EX-21.1 10 a2082143zex-21_1.htm EXHIBIT 21.1
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EXHIBIT 21.1

LIST OF ALL DIRECT AND INDIRECT SUBSIDIARIES

1.
PDC MGMT. CO. (formerly SOTEX Exploration Company), a Texas corporation—100% Direct Subsidiary—1% general partner of Pioneer Drilling Services, Ltd.

2.
PDC Investment Corp., a Delaware corporation—100% Direct Subsidiary—99% limited partner of Pioneer Drilling Services, Ltd.

3.
Pioneer Drilling Services, Ltd. (formerly Pioneer Drilling Co., Ltd.), a Texas limited partnership—100% Indirect Subsidiary—owned by PDC MGMT. CO. (1%) and PDC Investment Corp. (99%).

4.
South Texas Drilling Company, a Texas corporation—100% Direct Subsidiary.

5.
South Texas Offshore Drilling Company, a Texas corporation—100% Direct Subsidiary.

6.
ST/1200, Inc., a Texas corporation—100% Direct Subsidiary


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 EX-23.1 11 a2082143zex-23_1.htm EXHIBIT 23.1
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EXHIBIT 23.1


Independent Auditors' Consent

The Board of Directors
Pioneer Drilling Company:

We consent to the incorporation by reference in the registration statement on Form S-8 of Pioneer Drilling Company (Reg. No. 333-48286) of our report dated May 24, 2002 relating to the consolidated balance sheets of Pioneer Drilling Company and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2002, which report appears in the Annual Report on Form 10-K of Pioneer Drilling Company for the fiscal year ended March 31, 2002.

KPMG LLP

San Antonio, Texas
June 10, 2002



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Independent Auditors' Consent
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