**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

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**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, 2004**                                                         |
|           |   |       |   |                                                                                                       |
|           |   | **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGE  ACT OF 1934** |

 

**Commission File Number: 1-8182**

 

**PIONEER DRILLING COMPANY**

(Exact name ofregistrant as specified in its charter)

 

| **TEXAS**                                                                           |   | **74-2088619**                            |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------|
| (State  or other jurisdiction  of incorporation or organization)                    |   | (I.R.S.  Employer  Identification Number) |
|                                                                                |   |                                      |
| **9310 Broadway, Bldg. I  San Antonio, Texas**                                      |   | **78217**                                 |
| (Address  of principal executive offices)                                           |   | (Zip  Code)                               |
|                                                                                |   |                                      |
| Registrant’s  telephone number, including area code:   **(210) 828-7689** |

 

**Securities registered pursuant to Section 12(b) of theAct:**

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

 

Securitiesregistered 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 theSecurities Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).  Yes o No ý

 

The aggregate market value of the registrant’svoting and nonvoting common equity held by non-affiliates of the registrant asof the last business day of the registrant’s most recently completed secondfiscal quarter (September 30, 2003) was $23,354,178, based on the lastsales price of the registrant’s common stock reported on the American StockExchange on that date.

 

As of June 25, 2004, there were 27,300,126shares of common stock, par value $0.10 per share, of the registrant issued andoutstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Portions of the proxy statement related to theregistrant’s 2004 Annual Meeting of Shareholders are incorporated by referenceinto Part III of this report.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**     |                                                                                                                |
|----------------|---------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                |   |
| Items 1 and 2. | Business and  Properties                                                                                            |   |
| Item 3.        | Legal Proceedings                                                                                                   |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                                |   |
|           |                                                                                                                |   |
| **PART II**    |                                                                                                                |
|           |                                                                                                                |   |
| Item  5.       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |
| Item 6.        | Selected Financial Data                                                                                             |   |
| Item  7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   |
| Item  7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   |
| Item  8.       | Financial  Statements and Supplementary Data                                                                        |   |
| Item  9.       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               |   |
| Item 9A.       | Controls and  Procedures                                                                                            |   |
|           |                                                                                                                |   |
| **PART III**   |                                                                                                                |
|           |                                                                                                                |   |
| Item  10.      | Directors  and Executive Officers of the Registrant                                                                 |   |
| Item 11.       | Executive Compensation                                                                                              |   |
| Item  12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stock  holder Matters                   |   |
| Item  13.      | Certain  Relationships and Related Transactions                                                                     |   |
| Item  14.      | Principal  Accountant Fees and Services                                                                             |   |
|           |                                                                                                                |   |
| **PART IV**    |                                                                                                                |
|           |                                                                                                                |   |
| Item  15.      | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                                                    |   |

 

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# **PART I**

#  

Statements we make in this Annual Report on Form 10-K that express abelief, expectation or intention, as well as those that are not historicalfact, are forward-looking statements under the Private Securities LitigationReform Act of 1995. These forward-looking statements are subject to variousrisks, uncertainties and assumptions, including those to which we refer underthe heading ‘‘Cautionary Statement Concerning Forward-Looking Statements andRisk Factors’’ following Items 1 and 2 of Part I of this report.

 

## ***Items 1 and 2.***                   Business and Properties

 

**General**

 

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

 

Over the past five fiscal years, we have significantly expanded ourfleet of drilling rigs through acquisitions and the construction of new rigsand the refurbishment of older rigs we acquired.  The following table summarizes these acquisitions:

 
| **Date**            |   | **Acquisition**                                                 |   | **Market**   |   | **Number of  Rigs Acquired** |
|---------------------|--------|-----------------------------------------------------------------|--------|--------------|--------|------------------------------|
|                |   |                                                            |   |         |   |                         |
| September 1999 |   | Howell  Drilling, Inc. —  Asset Purchase              |   | South  Texas |   | 2                            |
| August 2000    |   | Pioneer  Drilling Co. —  Stock Purchase               |   | South  Texas |   | 4                            |
| March 2001     |   | Mustang  Drilling, Ltd. — Asset Purchase                   |   | East  Texas  |   | 4                            |
| May 2002       |   | United  Drilling Company —  Asset Purchase            |   | South  Texas |   | 2                            |
| August 2003    |   | Texas  Interstate Drilling Company, L. P. — Asset Purchase |   | North  Texas |   | 2                            |
| March 2004     |   | Sawyer  Drilling & Service, Inc. — Asset Purchase      |   | East  Texas  |   | 7                            |
| March 2004     |   | SEDCO  Drilling Co., Ltd. — Asset Purchase                 |   | North  Texas |   | 1                            |

 

Asof June 28, 2004, our rig fleet consists of 36 operating drilling rigs, 15of which are operating in South Texas, 17 of which are operating in East Texasand four of which are operating in North Texas.  During our fiscal year ended March 31, 2002, we added fourrigs, consisting of two newly constructed rigs and two refurbished rigs,increasing our rig fleet to a total of 20 rigs at March 31, 2002.   During our fiscal year ended March 31,2003, we added two additional refurbished rigs and two rigs we acquired fromUnited Drilling Company, increasing our rig fleet to a total of 24 rigs atMarch 31, 2003.  During our fiscalyear ended March 31, 2004, we added two refurbished rigs, acquired tworigs from Texas Interstate Drilling Company, L.P., acquired seven rigs fromSawyer Drilling & Service, Inc. and acquired one rig from SEDCO DrillingCo., Ltd. (which we named Rig 5 in place of our old Rig 5, which was retiredand the components of which were moved to our inventory of spareequipment).  In December 2003, weacquired the one rig we had previously been leasing under an operating leasesince August 2000.  As a result, wenow own all 36 of the operating rigs in our fleet.

 

Weconduct our operations primarily in South, East and North Texas.  During fiscal 2004, substantially all thewells we drilled for our customers were drilled in search of natural gas.  Natural gas reserves are typically found indeep geological formations and generally require premium equipment and qualitycrews to drill the wells.

 

Ourbusiness strategy is to own and operate a high quality fleet of land drillingrigs in active drilling markets.  Weintend to continue making additions to our drilling fleet, primarily throughprudent acquisitions of businesses or selected drilling rig assets.  As we add to our fleet, we intend to focuson the addition of rigs capable of performing deep drilling for natural gas.

 

Formany years, the United States contract land drilling services industry has beencharacterized by an oversupply of drilling rigs and a large number of drillingcontractors.  Since 1996, however,  there has been significant consolidationwithin the industry.  We believecontinued consolidation in the industry will generate more stability indayrates, even during industry downturns. However,

 

1

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although consolidation in the industry is continuing, the industry isstill 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 ofOperations – Market Conditions in Our Industry” in Item 7 of Part II of thisreport.

 

**Drilling Equipment**

** **

*General*

* *

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

 

Dieselor gas engines are typically the main power sources for a drilling rig.  Power requirements for drilling jobs mayvary considerably, but most land drilling rigs employ two or more engines togenerate between 500 and 2,000 horsepower, depending on well depth and rigdesign.  Most drilling rigs capable ofdrilling in deep formations, involving depths greater than 15,000 feet, usediesel-electric power units to generate and deliver electric current throughcables to electrical switch gears, then to direct-current electric motorsattached to the equipment in the hoisting, rotating and circulating systems.

 

Drillingrigs use long strings of drill pipe and drill collars to drill wells.  Drilling rigs are also used to set heavystrings of large-diameter pipe, or casing, inside the borehole.  Because the total weight of the drill stringand the casing can exceed 500,000 pounds, drilling rigs require significanthoisting and braking capacities. Generally, a drilling rig’s hoisting system is made up of a mast, orderrick, a traveling block and hook assembly that attaches to the rotatingsystem, a mechanism known as the drawworks, a drilling line and ancillaryequipment.  The drawworks mechanismconsists of a revolving drum, around which the drilling line is wound, and aseries of shafts, clutches and chain and gear drives for generating speedchanges and reverse motion. The drawworks also houses the main brake, which hasthe capacity to stop and sustain the weights used in the drilling process. Whenheavy loads are being lowered, a hydraulic or electric auxiliary brake assiststhe main brake to absorb the great amount of energy developed by the mass ofthe traveling block, hook assembly, drill pipe, drill collars and drill bit orcasing being lowered into the well.

 

Therotating equipment from top to bottom consists of a swivel, the kelly cock, thekelly, the rotary table, drill pipe, drill collars and the drill bit.  We refer to the equipment between the swiveland the drill bit as the drill stem. The swivel assembly sustains the weight of the drill stem, permits itsrotation and affords a rotating pressure seal and passageway for circulatingdrilling fluid into the top of the drill string.  The swivel also has a large handle that fits inside the hookassembly at the bottom of the traveling block. Drilling fluid enters the drill stem through a hose, called the rotaryhose, attached to the side of the swivel. The kelly is a triangular, square or hexagonal piece of pipe, usually 40feet long, that transmits torque from the rotary table to the drill stem andpermits its vertical movement as it is lowered into the hole.  The bottom end of the kelly fits inside acorresponding triangular, square or hexagonal opening in a device called thekelly bushing.  The kelly bushing, inturn, fits into a part of the rotary table called the master bushing.  As the master bushing rotates, the kellybushing also rotates, turning the kelly, which rotates the drill pipe and thusthe drill bit.  Drilling fluid is pumpedthrough the kelly on its way to the bottom. The rotary table, equipped with its master bushing and kelly bushing, suppliesthe necessary torque to turn the drill stem. The drill pipe and drill collars are both steel tubes through whichdrilling fluid can be pumped.  Drillpipe, sometimes called drill string, comes in 30-foot sections, or joints, withthreaded sections on each end.  Drillcollars are heavier than drill pipe and are also threaded on the ends.  Collars are used on the bottom of the drillstem to apply weight to the drilling bit. At the end of the drill stem is the bit, which chews up the formationrock and dislodges it so that drilling fluid can circulate the fragmentedmaterial back up to the surface where the circulating system filters it out ofthe fluid.

 

Drillingfluid, 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 ofthe equipment and cost of drilling a well. Bulk storage of drilling fluid materials, the pumps and the mud-mixingequipment are placed at the start of the circulating system.  Working mud pits and reserve storage are atthe other end of the system.  Betweenthese two points the circulating system includes auxiliary equipment fordrilling fluid maintenance and equipment for well pressure control.  Within the system, the drilling mud istypically routed from the mud pits to the mud pump and from the mud pumpthrough a standpipe and the rotary hose to the drill stem.  The drilling mud travels down the drill stemto the bit, up the annular space between the drill stem and the borehole andthrough the blowout preventer stack to the return flow line.  It then travels to a shale shaker forremoval of rock cuttings, and then back to the mud pits, which are usuallysteel tanks.  The reserve pits, usuallyone or two fairly shallow excavations, are used for waste material and excesswater around the location.

 

Thereare numerous factors that differentiate land drilling rigs, including theirpower generation systems and their drilling depth capabilities.  The actual drilling depth capability of arig may be less than or more than its rated depth capability due to numerousfactors, including the size, weight and amount of the drill pipe on therig.  The intended well depth and thedrill site conditions determine the amount of drill pipe and other equipmentneeded to drill a well.  Generally, landrigs operate with crews of five to six persons.

 

2

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*Our Fleet of Drilling Rigs*

* *

Asof June 28, 2004, our rig fleet consists of 36 drilling rigs.  We own all the rigs in our fleet. Thefollowing table sets forth information regarding utilization for our fleet ofdrilling rigs:

 
|                                   |   | **Years ended March 31,** |   |
|----------------------------------------|--------|--------------------------------|--------|
|                                   |   | **2004**                       |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Average  number of rigs for the period |   | 27.3                           |   | 22.3 |   | 18.0 |   | 10.5 |   | 6.6 |   | 6.0 |   |
| Average  utilization rate              |   | 88                             | %      | 79 | % | 82 | % | 91 | % | 66 | % | 66 | % |

 

Thefollowing table sets forth information regarding our drilling fleet:

 
| **Rig  Number** |   | **Rig Design**     |   | **Approximate  Drilling Depth  Capability  (feet)** |   | **Current  Location** |   | **Type**   |   | **Horse Power** |   |
|-----------------|--------|--------------------|--------|-----------------------------------------------------|--------|-----------------------|--------|------------|--------|-----------------|--------|
|            |   |               |   |                                                |   |                  |   |       |   |            |   |
| 1               |   | Cabot 750E         |   | 9,500                                               |   | South Texas           |   | Electric   |   | 750             |   |
| 2               |   | Cabot 750E         |   | 9,500                                               |   | South Texas           |   | Electric   |   | 750             |   |
| 3               |   | National 110 UE    |   | 18,000                                              |   | South Texas           |   | Electric   |   | 1500            |   |
| 4               |   | RMI 1000 E         |   | 15,000                                              |   | South Texas           |   | Electric   |   | 1000            |   |
| 5               |   | Brewster N-46      |   | 12,000                                              |   | North Texas           |   | Mechanical |   | 1000            |   |
| 6               |   | Brewster DH-4610   |   | 13,000                                              |   | East Texas            |   | Mechanical |   | 750             |   |
| 7               |   | National 110 UE    |   | 18,000                                              |   | South Texas           |   | Electric   |   | 1500            |   |
| 8               |   | National 110 UE    |   | 18,000                                              |   | East Texas            |   | Electric   |   | 1500            |   |
| 9               |   | Gardner-denver 500 |   | 11,000                                              |   | East Texas            |   | Mechanical |   | 700             |   |
| 10              |   | Brewster N-46      |   | 12,000                                              |   | East Texas            |   | Mechanical |   | 1000            |   |
| 11              |   | Brewster N-46      |   | 12,000                                              |   | South Texas           |   | Mechanical |   | 1000            |   |
| 12              |   | IRI Cabot 900      |   | 12,500                                              |   | South Texas           |   | Mechanical |   | 900             |   |
| 14              |   | Brewster N-46      |   | 12,000                                              |   | South Texas           |   | Mechanical |   | 1000            |   |
| 15              |   | Cabot 750          |   | 9,500                                               |   | South Texas           |   | Mechanical |   | 750             |   |
| 16              |   | Cabot 750          |   | 9,500                                               |   | South Texas           |   | Mechanical |   | 750             |   |
| 17              |   | Ideco 725          |   | 12,000                                              |   | East Texas            |   | Mechanical |   | 750             |   |
| 18              |   | Brewster N-75      |   | 12,000                                              |   | East Texas            |   | Mechanical |   | 1000            |   |
| 19              |   | Brewster N-75      |   | 12,000                                              |   | 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 725          |   | 12,000                                              |   | East Texas            |   | Mechanical |   | 750             |   |
| 23              |   | Ideco 725          |   | 12,000                                              |   | North Texas           |   | Mechanical |   | 750             |   |
| 24              |   | National 110 UE    |   | 18,000                                              |   | South Texas           |   | Electric   |   | 1500            |   |
| 25              |   | National 110 UE    |   | 18,000                                              |   | East Texas            |   | Electric   |   | 1500            |   |
| 26              |   | Oilwell 840 E      |   | 18,000                                              |   | South Texas           |   | Electric   |   | 1500            |   |
| 27              |   | IRI Cabot 1200 M   |   | 13,500                                              |   | South Texas           |   | Mechanical |   | 1300            |   |
| 28              |   | Oilwell 760 E      |   | 15,000                                              |   | South Texas           |   | Electric   |   | 1000            |   |
| 29              |   | Brewster N-46      |   | 12,000                                              |   | North Texas           |   | Mechanical |   | 1000            |   |
| 30              |   | Mid Cont U36A      |   | 11,000                                              |   | North Texas           |   | Mechanical |   | 750             |   |
| 31              |   | Brewster N-7       |   | 11,500                                              |   | East Texas            |   | Mechanical |   | 750             |   |
| 32              |   | Brewster N-75      |   | 13,500                                              |   | East Texas            |   | Mechanical |   | 1000            |   |
| 33              |   | Brewster N-95      |   | 13,500                                              |   | East Texas            |   | Mechanical |   | 1200            |   |
| 34              |   | All-Rig 900        |   | 12,000                                              |   | East Texas            |   | Mechanical |   | 900             |   |
| 35              |   | RMI 1000           |   | 13,500                                              |   | East Texas            |   | Mechanical |   | 1000            |   |
| 36              |   | Brewster N-7       |   | 11,500                                              |   | East Texas            |   | Mechanical |   | 750             |   |
| 37              |   | Brewster N-95      |   | 13,500                                              |   | East Texas            |   | Mechanical |   | 1200            |   |

 

Asof June 28, 2004, we owned a fleet of 52 trucks and related transportationequipment that we use to transport our drilling rigs to and from drillingsites.  By owning our own trucks, wereduce the cost of rig moves and reduce downtime between rig moves.

 

3

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Webelieve that our drilling rigs and other related equipment are in goodoperating condition.  Our employeesperform periodic maintenance and minor repair work on our drilling rigs.  We rely on various oilfield servicecompanies for major repair work and overhaul of our drilling equipment whenneeded.  We also engage in periodicimprovement of our drilling equipment. In the event of major breakdowns or mechanical problems, our rigs couldbe subject to significant idle time and a resulting loss of revenue if thenecessary repair services are not immediately available.

 

**DrillingContracts**

 

Asa provider of contract land drilling services, our business and theprofitability of our operations depend on the level of drilling activity by oiland gas exploration and production companies operating in the geographicmarkets where we operate.  The oil andgas exploration and production industry is a historically cyclical industrycharacterized by significant changes in the levels of exploration anddevelopment activities.  During periodsof lower levels of drilling activity, price competition tends to increase andresults in decreases in the profitability of daywork contracts.  In this lower level drilling activity andcompetitive price environment, we may be more inclined to enter into turnkeyand footage contracts that expose us to greater risk of loss withoutcommensurate increases in potential contract profitability.

 

Weobtain our contracts for drilling oil and gas wells either through competitivebidding or through direct negotiations with customers.  Our drilling contracts generally provide forcompensation on either a daywork, turnkey or footage basis.  The contract terms we offer generally dependon the complexity and risk of operations, the on-site drilling conditions, thetype of equipment used and the anticipated duration of the work to beperformed.  Generally, our contractsprovide for the drilling of a single well and typically permit the customer toterminate on short notice, usually on payment of an agreed fee.

 

Thefollowing table presents, by type of contract, information about the totalnumber of wells we completed for our customers during each of the last threefiscal years.

 
|                   |   | **Year Ended March 31,** |   |
|------------------------|--------|-------------------------------|--------|
|                   |   | **2004**                      |   | **2003** |   | **2002** |   |
| Daywork                |   | 205                           |   | 119 |   | 150 |   |
| Turnkey                |   | 92                            |   | 78 |   | 9 |   |
| Footage                |   | 13                            |   | 5 |   | 6 |   |
| Total number  of wells |   | 310                           |   | 202 |   | 165 |   |

 

*DayworkContracts*.  Under daywork drilling contracts, we providea drilling rig with required personnel to our customer who supervises thedrilling of the well.  We are paid basedon a negotiated fixed rate per day while the rig is used.  Daywork drilling contracts specify theequipment to be used, the size of the hole and the depth of the well.  Under a daywork drilling contract, thecustomer bears a large portion of the out-of-pocket drilling costs and wegenerally bear no part of the usual risks associated with drilling, such astime delays and unanticipated costs.

 

*TurnkeyContracts. *Under a turnkey contract, we agree to drill awell for our customer to a specified depth and under specified conditions for afixed price, regardless of the time required or the problems encountered indrilling the well.  We provide technicalexpertise and engineering services, as well as most of the equipment anddrilling supplies required to drill the well. We often subcontract for related services, such as the provision ofcasing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progresspayments and are paid by our customer only after we have performed the terms ofthe drilling contract in full.

 

Therisks to us under a turnkey contract are substantially greater than on a welldrilled on a daywork basis.  This isprimarily because under a turnkey contract we assume most of the risks associatedwith drilling operations generally assumed by the operator in a dayworkcontract, including the risk of blowout, loss of hole, stuck drill pipe,machinery breakdowns, abnormal drilling conditions and risks associated withsubcontractors’ services, supplies, cost escalations and personnel.  We employ or contract for engineeringexpertise to analyze seismic, geologic and drilling data to identify and reducesome of the drilling risks we assume. We use the results of this analysis to evaluate the risks of a proposedcontract and seek to account for such risks in our bid preparation.  We believe that our operating experience,qualified drilling personnel, risk management program, internal engineeringexpertise and access to proficient third-party engineering contractors haveallowed us to reduce some of the risks inherent in turnkey drilling operations.We also maintain insurance coverage against some, but not all, drillinghazards.  However, the occurrence ofuninsured or under-insured losses or operating cost overruns on our turnkeyjobs could have a material adverse effect on our financial position and resultsof operations.

 

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*FootageContracts*.  Under footage contracts, we are paid a fixedamount for each foot drilled, regardless of the time required or the problemsencountered in drilling the well.  Wetypically pay more of the out-of-pocket costs associated with footage contractsas compared to daywork contracts. Similar to a turnkey contract, the risks to us on a footage contract aregreater because we assume most of the risks associated with drilling operationsgenerally assumed by the operator in a daywork contract, including the risk ofblowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormaldrilling conditions and risks associated with subcontractors’ services,supplies, cost escalation and personnel. As with turnkey contracts, we manage this additional risk through theuse of engineering expertise and bid the footage contracts accordingly, and wemaintain insurance coverage against some, but not all, drilling hazards.  However, the occurrence of uninsured orunder-insured losses or operating cost overruns on our footage jobs could havea material adverse effect on our financial position and results of operations.

 

**Customers and Marketing**

 

Wemarket our rigs to a number of customers. In fiscal 2004, we drilled wells for 88 different customers, compared to64 customers in fiscal 2003 and 48 customers in fiscal 2002.  Forty-nine of our customers in fiscal 2004were customers for whom we had not drilled any wells in fiscal 2003.  The following table shows our three largestcustomers as a percentage of our total contract drilling revenue for each ofour last three fiscal years.

 
| **Customer**                                  |   | **Total  Contract  Drilling  Revenue  Percentage** |   |
|-----------------------------------------------|--------|----------------------------------------------------|--------|
| **Fiscal 2004**                               |   |                                               |   |
| Chinn  Exploration                            |   | 11                                                 | %      |
| Dale  Operating Company                       |   | 6                                                  | %      |
| Medicine Bow  Energy Corporation              |   | 5                                                  | %      |
|                                          |   |                                               |   |
| **Fiscal 2003**                               |   |                                               |   |
| Gulf Coast  Energy Associates                 |   | 11                                                 | %      |
| Apache  Corporation                           |   | 7                                                  | %      |
| Suemaur  Exploration & Production, L.L.C. |   | 5                                                  | %      |
|                                          |   |                                               |   |
| **Fiscal 2002**                               |   |                                               |   |
| Dominion  Exploration & Production, Inc.  |   | 14                                                 | %      |
| Kerr-McGee  Oil & Gas Onshore, L.L.C.     |   | 12                                                 | %      |
| Pogo  Producing Company                       |   | 11                                                 | %      |

 

Weprimarily market our drilling rigs through employee marketing representatives.  These marketing representatives use personalcontacts and industry periodicals and publications to determine which operatorsare planning to drill oil and gas wells in the near future in our South, Eastand North Texas market areas.  Once wehave been placed on the “bid list” for an operator, we will typically be giventhe opportunity to bid on most future wells for that operator in the areas inwhich we operate.  Our rigs aretypically contracted on a well-by-well basis.

 

Fromtime to time we also enter into informal, nonbinding commitments with ourcustomers to provide drilling rigs for future periods at specified rates plusfuel and mobilization charges, if applicable, and escalation provisions.  This practice is customary in the contractland drilling services business during times of tightening rig supply.

 

**Competition**

** **

Weencounter substantial competition from other drilling contractors. Our primarymarket areas of South, East and North Texas are highly fragmented andcompetitive.  The fact that drillingrigs are mobile and can be moved from one market to another in response tomarket conditions heightens the competition in the industry.

 

Thedrilling contracts we compete for are usually awarded on the basis ofcompetitive bids.  Our principalcompetitors are Grey Wolf, Inc., Helmerich & Payne, Inc. and Patterson-UTIEnergy, Inc.  We believe pricing and rigavailability are the primary factors our potential customers consider indetermining which drilling contractor to select.  In addition, we believe the following factors are also important:

 

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

 

•  the mobility and efficiency of the rigs;

 

•  the quality of service and experience of therig crews;

 

•  the safety records of the rigs;

 

•  the offering of ancillary services; and

 

•  the ability to provide drilling equipmentadaptable to, and personnel familiar with, new technologies and drillingtechniques.

 

Whilewe must be competitive in our pricing, our competitive strategy generallyemphasizes the quality of our equipment, the safety record of our rigs and theexperience of our rig crews to differentiate us from our competitors.

 

Contractdrilling companies compete primarily on a regional basis, and the intensity ofcompetition may vary significantly from region to region at any particulartime.  If demand for drilling servicesimproves in a region where we operate, our competitors might respond by movingin suitable rigs from other regions.  Aninflux of rigs from other regions could rapidly intensify competition and makeany improvement in demand for drilling rigs in a particular region short-lived.

 

Manyof our competitors have greater financial, technical and other resources thanwe do.  Their greater capabilities inthese areas may enable them to:

 

•  better withstand industry downturns;

 

•  compete more effectively on the basis ofprice and technology;

 

•  better retain skilled rig personnel; and

 

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

 

**Raw Materials**

** **

Thematerials and supplies we use in our drilling operations include fuels tooperate our drilling equipment, drilling mud, drill pipe, drill collars, drillbits and cement.  We do not rely on asingle source of supply for any of these items.  While we are not currently experiencing any shortages, from timeto time there have been shortages of drilling equipment and supplies duringperiods of high demand.  Shortages couldresult in increased prices for drilling equipment or supplies that we may beunable to pass on to customers.  Inaddition, during periods of shortages, the delivery times for equipment andsupplies can be substantially longer. Any significant delays in our obtaining drilling equipment or suppliescould limit drilling operations and jeopardize our relations withcustomers.  In addition, shortages ofdrilling equipment or supplies could delay and adversely affect our ability toobtain new contracts for our rigs, which could have a material adverse effecton our financial condition and results of operations.

 

**Operating Risks and Insurance**

** **

Ouroperations are subject to the many hazards inherent in the contract landdrilling business, including the risks of:

 

•                  blowouts;

 

•                  fires andexplosions;

 

•                  loss of wellcontrol;

 

•                  collapse of theborehole;

 

•                  lost or stuckdrill strings; and

 

•                  damage or lossfrom natural disasters.

 

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

 

•                  suspension ofdrilling operations;

 

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

 

•                  personal injuryand loss of life;

 

6

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•                  damage toproducing or potentially productive oil and gas formations through which wedrill; and

 

•                  environmentaldamage.

 

Weseek to protect ourselves from some but not all operating hazards throughinsurance coverage.  However, some risksare either not insurable or insurance is available only at rates that weconsider uneconomical.  Those risksinclude pollution liability in excess of relatively low limits.  Depending on competitive conditions andother factors, we attempt to obtain contractual protection against uninsuredoperating risks from our customers. However, customers who provide contractual indemnification protectionmay not in all cases maintain adequate insurance to support their indemnificationobligations.  We can offer no assurancethat our insurance or indemnification arrangements will adequately protect usagainst liability or loss from all the hazards of our operations.  The occurrence of a significant event thatwe have not fully insured or indemnified against or the failure of a customerto meet its indemnification obligations to us could materially and adverselyaffect our results of operations and financial condition.  Furthermore, we may not be able to maintainadequate insurance in the future at rates we consider reasonable.

 

Ourcurrent insurance coverage includes property insurance on our rigs, drillingequipment and real property.  Ourinsurance coverage for property damage to our rigs and to our drillingequipment is based on our estimate, as of October 2003, of the cost ofcomparable used equipment to replace the insured property.  The policy provides for a deductible on rigsof $50,000 or $100,000 (depending on the rig) per occurrence.  Our third-party liability insurance coverageis $26 million per occurrence and in the aggregate, with a deductible of$110,000 per occurrence.  We believethat we are adequately insured for public liability and property damage toothers with respect to our operations. However, such insurance may not be sufficient to protect us againstliability for all consequences of well disasters, extensive fire damage ordamage to the environment.

 

Inaddition, we generally carry insurance coverage to protect against certainhazards inherent in our turnkey and footage contract drilling operations.  This insurance covers “control-of-well,”including blowouts above and below the surface, redrilling, seepage andpollution.  This policy providescoverage of $3 million, $5 million or $10 million, depending on the area inwhich the well is drilled and its target depth.  This policy also provides care, custody and control insurance,with a limit of $250,000.

 

**Employees**

** **

Wecurrently have approximately 900 employees. Approximately 123 of these employees are salaried administrative orsupervisory employees.  The rest of ouremployees are hourly employees who operate or maintain our drilling rigs andrig-hauling trucks.  The number ofhourly employees fluctuates depending on the number of drilling projects we areengaged in at any particular time.  Noneof our employment arrangements are subject to collective bargainingarrangements.

 

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

 

**Facilities**

 

Weown our headquarters building in San Antonio, Texas.  We also own a 15-acre division office, rig storage andmaintenance yard in Corpus Christi, Texas and own a 4-acre trucking departmentoffice, storage and maintenance yard in Kilgore, Texas.  We lease a six-acre division office, storageand maintenance yard in Henderson, Texas, at a cost of $3,700 per month,pursuant to a lease extending through March 2006.  We also lease a 43-acre division office andstorage yard in Decatur, Texas, at a cost of $800 per month, pursuant to a leaseextending through September 2006, and a trucking department office,storage and maintenance yard in Alice, Texas at a cost of $4,500 per month,pursuant to a lease extending through July 2006.   We believe these facilities are adequate to serve our currentand anticipated needs.

 

7

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**Governmental Regulation**

** **

Ouroperations are subject to stringent laws and regulations relating tocontainment, disposal and controlling the discharge of hazardous oilfield wasteand other non-hazardous waste material into the environment, requiring removaland cleanup under certain circumstances, or otherwise relating to theprotection of the environment.  Inaddition, our operations are often conducted in or near ecologically sensitiveareas, such as wetlands, which are subject to special protective measures andwhich may expose us to additional operating costs and liabilities foraccidental discharges of oil, natural gas, drilling fluids or contaminatedwater or for noncompliance with other aspects of applicable laws.  We are also subject to the requirements ofthe federal Occupational Safety and Health Act (“OSHA”) and comparable statestatutes.  The OSHA hazard communicationstandard, the Environmental Protection Agency “community right-to-know”regulations under Title III of the Federal Superfund Amendment andReauthorization Act and comparable state statutes require us to organize andreport information about the hazardous materials we use in our operations toemployees, state and local government authorities and local citizens.

 

Environmentallaws and regulations are complex and subject to frequent change.  In some cases, they can impose liability forthe entire cost of cleanup on any responsible party without regard tonegligence or fault and can impose liability on us for the conduct of others orconditions others have caused, or for our acts that complied with allapplicable requirements when we performed them.  We may also be exposed to environmental or other liabilities originatingfrom businesses and assets that we purchased from others.  Compliance with applicable environmentallaws and regulations has not, to date, materially affected our capitalexpenditures, earnings or competitive position, although compliance measureshave added to our costs of operating drilling equipment in some instances.  We do not expect to incur material capitalexpenditures in our next fiscal year in order to comply with currentenvironment control regulations. However, our compliance with amended, new or more stringentrequirements, stricter interpretations of existing requirements or the futurediscovery of contamination may require us to make material expenditures orsubject us to liabilities that we currently do not anticipate.

 

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

 

**AvailableInformation**

 

Ourwebsite address is www.pioneerdrlg.com. We make available on this website under “Investor Relations-SECFilings,” free of charge, our annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file those materials with, orfurnish those materials to, the SEC.

 

**CAUTIONARYSTATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND RISK FACTORS**

 

Weare including the following discussion to inform our existing and potentialsecurity holders generally of some of the risks and uncertainties that canaffect our company and to take advantage of the “safe harbor” protection forforward-looking statements that applicable federal securities law affords.

 

Fromtime to time, our management or persons acting on our behalf makeforward-looking statements to inform existing and potential security holdersabout our company.  These statements mayinclude projections and estimates concerning the timing and success of specificprojects and our future backlog, revenues, income and capital spending.  Forward-looking statements are generallyaccompanied by words such as “estimate,” “project,” “predict,” “believe,”“expect,” “anticipate,” “plan,” “goal” or other words that convey theuncertainty of future events or outcomes. These forward-looking statementsspeak only as of the date on which they are first made, which in the case offorward-looking statements made in this report is the date of this report.   Sometimes we will specifically describe astatement as being a forward-looking statement and refer to this cautionarystatement.

 

Inaddition, various statements that this Annual Report on Form 10-K contains,including those that express a belief, expectation or intention, as well asthose that are not statements of historical fact, are forward-lookingstatements.  Those forward-lookingstatements appear in Items 1 and 2 – “Business and Properties” and Item 3 –“Legal Proceedings” in Part I of this report and in Item 5 – “Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities,” and in Item 7 – “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” Item 7A – “Quantitative andQualitative Disclosures About Market Risk” and in the Notes to ConsolidatedFinancial Statements we have included in Item 8 of Part II of this report andelsewhere in this report.  Theseforward-looking statements speak only as of the date of this report.  We disclaim any

 

8

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obligation to update these statements, and we caution you not to undulyrely on them.  We have based theseforward-looking statements on our current expectations and assumptions aboutfuture events.  While our managementconsiders these expectations and assumptions to be reasonable, they areinherently subject to significant business, economic, competitive, regulatoryand other risks, contingencies and uncertainties, most of which are difficultto predict and many of which are beyond our control.  These risks, contingencies and uncertainties relate to, amongother matters, the following:

 

•                  general economicand business conditions and industry trends;

 

•                  the continuedstrength of the contract land drilling industry in the geographic areas where weoperate;

 

•                  decisions aboutonshore exploration and development projects to be made by oil and gascompanies;

 

•                  the highlycompetitive nature of our business;

 

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

 

•                  the continuedavailability of qualified personnel; and

 

•                  changes in, orour failure or inability to comply with, governmental regulations, includingthose relating to the environment.

 

                We believe the items we have outlined aboveare important factors that could cause our actual results to differ materiallyfrom those expressed in a forward-looking statement made in this report orelsewhere by us or on our behalf.  Wehave discussed many of these factors in more detail elsewhere in thisreport.  These factors are notnecessarily all the important factors that could affect us.  Unpredictable or unknown factors we have notdiscussed in this report could also have material adverse effects on actualresults of matters that are the subject of our forward-looking statements.  We do not intend to update our descriptionof important factors each time a potential important factor arises.  We advise our security holders that theyshould (1) be aware that important factors not referred to above could affectthe accuracy of our forward-looking statements and (2) use caution and commonsense when considering our forward-looking statements.  Also, please read the risk factors set forthbelow.

 

**RisksRelating to the Oil and Gas Industry**

** **

*We derive all our revenues from companies in the oil and gasexploration and production industry, a historically cyclical industry withlevels of activity that are significantly affected by the levels and volatilityof oil and gas prices.*

 

As a provider of contract land drilling services, our business dependson the level of drilling activity by oil and gas exploration and productioncompanies operating in the geographic markets where we operate. The oil and gasexploration and production industry is a historically cyclical industry characterizedby significant changes in the levels of exploration and developmentactivities.  Oil and gas prices, andmarket expectations of potential changes in those prices, significantly affectthe levels of those activities. Worldwide political, economic and militaryevents have contributed to oil and gas price volatility and are likely tocontinue to do so in the future.  Anyprolonged reduction in the overall level of exploration and developmentactivities, whether resulting from changes in oil and gas prices or otherwise,can materially and adversely affect us in many ways by negatively impacting:

 

•                  our revenues,cash flows and profitability;

 

•                  the fair marketvalue of our rig fleet;

 

•                  our ability tomaintain or increase our borrowing capacity;

 

•                  our ability toobtain additional capital to finance our business and make acquisitions, andthe cost of that capital; and

 

•                  our ability toretain skilled rig personnel whom we would need in the event of an upturn inthe demand for our services.

 

Depending on the market prices of oil and gas, oil and gas explorationand production companies may cancel or curtail their drilling programs, therebyreducing demand for our services.  Oiland gas prices have been volatile historically and, we believe, will continueto be so in the future.  Many factorsbeyond our control affect oil and gas prices, including:

 

•                  weatherconditions in the United States and elsewhere;

 

•                  economicconditions in the United States and elsewhere;

 

•                  actions by OPEC,the Organization of Petroleum Exporting Countries;

 

•                  politicalinstability in the Middle East and other major oil and gas producing regions;

 

9

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•                  governmentalregulations, both domestic and foreign;

 

•                  domestic andforeign tax policy;

 

•                  the pace adoptedby foreign governments for the exploration, development and production of theirnational reserves;

 

•                  the price offoreign imports of oil and gas;

 

•                  the cost ofexploring for, producing and delivering oil and gas;

 

•                  the discovery rateof new oil and gas reserves;

 

•                  availablepipeline and other oil and gas transportation capacity;

 

•                  the ability ofoil and gas companies to raise capital; and

 

•                  the overallsupply and demand for oil and gas.

 

**RisksRelating to Our Business**

** **

*We have a history of losses.*

 

We have a history of losses.  Weincurred net losses of $1.8 million, $5.1 million, and $0.4 million in thefiscal years ended March 31, 2004, 2003 and 2000, respectively.  Our profitability in the future will dependon many factors, but largely on utilization rates and dayrates for our drillingrigs.  Our current utilization rates anddayrates may decline and we may experience losses in the future.

 

*Our acquisition strategy involves various risks*.

 

As a key component of our business strategy, we have pursued and intendto continue to pursue acquisitions of complementary assets and businesses.  Certain risks are inherent in an acquisitionstrategy, such as increasing leverage and debt service requirements andcombining disparate company cultures and facilities, which could adverselyaffect our operating results.  Thesuccess of any completed acquisition will depend in part on our ability tointegrate effectively the acquired business into our operations.  The process of integrating an acquiredbusiness may involve unforeseen difficulties and may require a disproportionateamount of management attention and financial and other resources.  Possible future acquisitions may be forpurchase prices significantly higher than those we paid for recentacquisitions.  We may be unable tocontinue to identify additional suitable acquisition opportunities, negotiateacceptable terms, obtain financing for acquisitions on satisfactory terms orsuccessfully acquire identified targets. Our failure to achieve consolidation savings, to incorporate theacquired businesses and assets into our existing operations successfully or tominimize any unforeseen operational difficulties could have a material adverseeffect on our financial condition and results of operations.

 

*We operate in a highly competitive, fragmented industry inwhich price competition is intense.*

 

We encounter substantial competition from other drilling contractors.Our primary market areas of South Texas, East Texas and North Texas are highlyfragmented and competitive.  The factthat drilling rigs are mobile and can be moved from one market to another inresponse to market conditions heightens the competition in the industry.

 

The drilling contracts we compete for are usually awarded on the basisof competitive bids.  We believe pricingand rig availability are the primary factors our potential customers considerin determining which drilling contractor to select.  In addition, we believe the following factors are also important:

 

•                  the type andcondition of each of the competing drilling rigs;

 

•                  the mobility andefficiency of the rigs;

 

•                  the quality ofservice and experience of the rig crews;

 

•                  the safetyrecords of the rigs;

 

•                  the offering ofancillary services; and

 

•                  the ability toprovide drilling equipment adaptable to, and personnel familiar with, newtechnologies and drilling techniques.

 

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While we must be competitive in our pricing, our competitive strategygenerally emphasizes the quality of our equipment, the safety record of ourrigs and the quality of service and experience of our rig crews todifferentiate us from our competitors. This strategy is less effective as lower demand for drilling servicesintensifies price competition and makes it more difficult for us to compete onthe basis of factors other than price. In all of the markets in which we compete, an over-supply of rigs cancause greater price competition.

 

Contract drilling companies compete primarily on a regional basis, andthe intensity of competition may vary significantly from region to region atany particular time.  If demand fordrilling services improves in a region where we operate, our competitors mightrespond by moving in suitable rigs from other regions.  An influx of rigs from other regions couldrapidly intensify competition and reduce profitability and make any improvementin demand for drilling rigs short-lived.

 

*We face competition from many competitors with greaterresources.*

 

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

 

•                  better withstandindustry downturns;

 

•                  compete moreeffectively on the basis of price and technology;

 

•                  retain skilledrig personnel; and

 

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

 

*Unexpected cost overruns on our turnkey drilling jobs andour footage contracts could adversely affect us.*

 

We have historically derived a significant portion of our revenues fromturnkey drilling contracts and we expect that they will represent a significantcomponent of our future revenues.  Theoccurrence of uninsured or under-insured losses or operating cost overruns onour turnkey jobs could have a material adverse effect on our financial positionand results of operations.  Under atypical turnkey drilling contract, we agree to drill a well for our customer toa specified depth and under specified conditions for a fixed price.  We provide technical expertise andengineering services, as well as most of the equipment and drilling suppliesrequired to drill the well.  We oftensubcontract for related services, such as the provision of casing crews,cementing and well logging.  Undertypical turnkey drilling arrangements, we do not receive progress payments andare paid by our customer only after we have performed the terms of the drillingcontract in full.  For these reasons,the risk to us under a turnkey drilling contract is substantially greater thanfor a well drilled on a daywork basis, because we must assume most of the risksassociated with drilling operations that the operator generally assumes under adaywork contract, including the risk of blowout, loss of hole, stuck drillpipe, machinery breakdowns, abnormal drilling conditions and risks associatedwith subcontractors’ services, supplies, cost escalations and personnel.  Similar to our turnkey contracts, under afootage contract we assume most of the risks associated with drillingoperations that the operator generally assumes under a daywork contract.  Although we attempt to obtain insurancecoverage to reduce certain of the risks inherent in our turnkey and footagedrilling operations, adequate coverage may be unavailable in the future and wemight have to bear the full cost of such risks, which could have an adverseeffect on our financial condition and results of operation.

 

*Our operations involve operating hazards, which if notinsured or indemnified against could adversely affect our results of operationsand financial condition.*

 

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

 

•                  blowouts;

 

•                  fires andexplosions;

 

•                  loss of wellcontrol;

 

•                  collapse of theborehole;

 

•                  lost or stuckdrill strings; and

 

•                  damage or lossfrom natural disasters.

 

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

 

11

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•                  suspension ofdrilling operations;

 

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

 

•                  personal injuryand loss of life;

 

•                  damage toproducing or potentially productive oil and gas formations through which wedrill; and

 

•                  environmentaldamage.

 

We seek to protect ourselves from some but not all operating hazardsthrough insurance coverage. However, some risks are either not insurable orinsurance is available only at rates that we consider uneconomical.  Those risks include pollution liability inexcess of relatively low limits. Depending on competitive conditions and other factors, we attempt to obtaincontractual protection against uninsured operating risks from our customers.  However, customers who provide contractualindemnification protection may not in all cases maintain adequate insurance tosupport their indemnification obligations. Our insurance or indemnification arrangements may not adequately protectus against liability or loss from all the hazards of our operations. Theoccurrence of a significant event that we have not fully insured or indemnifiedagainst or the failure of a customer to meet its indemnification obligations tous could materially and adversely affect our results of operations andfinancial condition.  Furthermore, wemay be unable to maintain adequate insurance in the future at rates we considerreasonable.

 

*Our operations are subject to various laws and governmentalregulations that may adversely affect our future operations.*

 

Many aspects of our operations are subject to various federal, stateand local laws and governmental regulations, including laws and regulationsgoverning:

 

•                  environmentalquality;

 

•                  pollutioncontrol;

 

•                  remediation of contamination;

 

•                  preservation ofnatural resources; and

 

•                  worker safety.

 

Our operations are subject to stringent laws and regulations relatingto containment, disposal and controlling the discharge of hazardous oilfieldwaste and other non-hazardous waste material into the environment, requiringremoval and cleanup under certain circumstances, or otherwise relating to theprotection of the environment.  Inaddition, our operations are often conducted in or near ecologically sensitiveareas, such as wetlands, which are subject to special protective measures andwhich may expose us to additional operating costs and liabilities foraccidental discharges of oil, gas, drilling fluids or contaminated water or fornoncompliance with other aspects of applicable laws.  We are also subject to the requirements of OSHA and comparablestate statutes.  The OSHA hazardcommunication standard, the Environmental Protection Agency “community right-to-know”regulations under Title III of the Federal Superfund Amendment and ReauthorizationAct and comparable state statutes require us to organize and report informationabout the hazardous materials we use in our operations to employees, state andlocal government authorities and local citizens.

 

Environmental laws and regulations are complex and subject to frequentchange.  In some cases, they can imposeliability for the entire cost of cleanup on any responsible party withoutregard to negligence or fault and can impose liability on us for the conduct ofothers or conditions others have caused, or for our acts that complied with allapplicable requirements when we performed them.  We may also be exposed to environmental or other liabilitiesoriginating from businesses and assets which we purchased from others. Ourcompliance with amended, new or more stringent requirements, stricterinterpretations of existing requirements or the future discovery ofcontamination may require us to make material expenditures or subject us toliabilities that we currently do not anticipate.

 

In addition, our business depends on the demand for land drillingservices from the oil and gas industry and, therefore, is affected by tax,environmental and other laws relating to the oil and gas industry generally, bychanges in those laws and by changes in related administrativeregulations.  It is also possible thatthese laws and regulations may in the future add significantly to our operatingcosts or those of our customers or otherwise directly or indirectly affect ouroperations.

 

*We could be adversely affected if shortages of equipment,supplies or personnel occur.*

 

From time to time there have been shortages of drilling equipment andsupplies during periods of high demand which we believe could reoccur.  Shortages could result in increased pricesfor drilling equipment or supplies that we may be unable to pass on tocustomers.  In addition, during periodsof shortages, the delivery times for equipment and supplies can besubstantially longer.  Any

 

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significantdelays in our obtaining drilling equipment or supplies could limit drillingoperations and jeopardize our relations with customers.  In addition, shortages of drilling equipmentor supplies could delay and adversely affect our ability to obtain newcontracts for our rigs, which could have a material adverse effect on ourfinancial condition and results of operations.

 

Our operations require the services of employees having the technicaltraining and experience necessary to obtain the proper operationalresults.  As a result, our operationsdepend, to a considerable extent, on the continuing availability of suchpersonnel.  Shortages of qualifiedpersonnel are occurring in our industry. If we should suffer any material lossof personnel to competitors or be unable to employ additional or replacementpersonnel with the requisite level of training and experience to adequatelyoperate our equipment, our operations could be materially and adverselyaffected.  A significant increase in thewages paid by other employers could result in a reduction in our workforce,increases in wage rates, or both.  Theoccurrence of either of these events for a significant period of time couldhave a material and adverse effect on our financial condition and results ofoperations.

 

**RiskRelating to Our Capitalization and Corporate Documents**

** **

*Our largest shareholders and our management control amajority of our common stock, and their interests may conflict with those ofour other shareholders.*

 

As of June 18, 2004, our largest shareholder, WEDGE EnergyServices, L.L.C. (“WEDGE”), beneficially owned 40.24% of our outstanding commonstock, and together with our other largest shareholders and our officers anddirectors as a group beneficially owned a total of 68.73% of our outstandingcommon stock.  For each shareholder orgroup of shareholders, beneficial ownership includes shares of our common stockissuable on conversion of our convertible subordinated debentures and onexercise of outstanding stock options held by that shareholder or group ofshareholders.  The following tableshows, as of June 18, 2004, the beneficial ownership of these persons:

 
| **Shareholder**                                                                         |   | **Shares** |   | **Percentage** |   |
|-----------------------------------------------------------------------------------------|--------|------------|--------|----------------|--------|
|                                                                                    |   |       |   |           |   |
| WEDGE (1)                                                                               |   | 13,508,864 |   | 40.2           | %      |
|                                                                                    |   |       |   |           |   |
| Chesapeake  Energy Corporation (“Chesapeake”)                                 |   | 5,333,333  |   | 19.5           | %      |
|                                                                                    |   |       |   |           |   |
| T.L.L.  Temple Foundation and Temple Interests, L.P. (collectively, “Temple”) |   | 1,999,038  |   | 7.3            | %      |
|                                                                                    |   |       |   |           |   |
| Officers and  directors as a group                                                      |   | 2,857,142  |   | 10.1           | %      |

 

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(1)                                  The number of shares and percentage shown forWEDGE reflect 6,267,857 shares that WEDGE currently has the right to acquire onconversion of the $27,000,000 aggregate principal amount of our 6.75%convertible debentures that WEDGE current holds.  The percentages shown for the other stockholders have not beenadjusted to reflect the possible conversion of those debentures.

 

In some circumstances, if WEDGE were to act alone or in concert with asmall number of these or other shareholders, they would be able to exercisecontrol over our affairs, including the election of our entire board ofdirectors and, subject to the applicable provisions of the Texas BusinessCorporation Act, the disposition of any matter submitted to a vote of ourshareholders.  Wedge currently has theright to nominate three persons for election to our board of directors, whichas of the date of this annual report consists of seven members.  The interests of Wedge and these otherpersons with respect to matters potentially or actually involving or affectingus, such as future acquisitions, financings and other corporate opportunitiesand attempts to acquire us, may conflict with the interests of our othershareholders.

 

*Limited trading volume of our common stock may contribute toits price volatility.*

 

Our common stock is traded on the American Stock Exchange.  During the period from January 1, 2003through May 31, 2004, the average daily trading volume of our common stockas reported by the American Stock Exchange was 17,986 shares.  Even if we achieve a wider dissemination ofour common stock, a more active trading market in our common stock may notdevelop.  As a result, relatively smalltrades may have a significant impact on the price of our common stock and,therefore, may contribute to the price volatility of our common stock.  As a result, our common stock may be subjectto greater price volatility than the stock market as a whole.

 

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The market price of our common stock has been, and may continue to be,volatile.  For example, during our 2004fiscal year, the trading price of our common stock ranged from $3.30 to $7.35per share.

 

Because of the limited trading market of our common stock and the pricevolatility of our common stock, you may be unable to sell shares of commonstock when you desire or at a price you desire.  The inability to sell your shares in a declining market becauseof such illiquidity or at a price you desire may substantially increase yourrisk of loss.

 

*Under our existing dividend policy, we do not pay dividendson our common stock.*

 

We have not paid or declared any dividends on our common stock andcurrently intend to retain any earnings to fund our working capital needs andgrowth opportunities.  Any futuredividends will be at the discretion of our board of directors after taking intoaccount various factors it deems relevant, including our financial conditionand performance, cash needs, income tax consequences and the restrictionsimposed by the Texas Business Corporation Act and other applicable laws and byour credit facilities.  Our debtarrangements include provisions that generally prohibit us from payingdividends on our capital stock, including our common stock.

 

*We may issue preferred stock whose terms could adverselyaffect the voting power or value of our common stock.*

 

Our articles of incorporation authorize us to issue, without theapproval of our shareholders, one or more classes or series of preferred stockhaving such designations, preferences, limitations and relative rights,including preferences over our common stock respecting dividends anddistributions, as our board of directors may determine.  The terms of one or more classes or seriesof preferred stock could adversely impact the voting power or value of ourcommon stock.  For example, we mightgrant holders of preferred stock the right to elect some number of ourdirectors in all events or on the happening of specified events or the right toveto specified transactions.  Similarly,the repurchase or redemption rights or liquidation preferences we might assignto holders of preferred stock could affect the residual value of the commonstock.

 

*Provisions in our organizational documents could delay orprevent a change in control of our company, even if that change would bebeneficial to our shareholders.*

 

The existence of some provisions in our corporate documents could delayor prevent a change in control of our company, even if that change would bebeneficial to our shareholders.  Ourarticles of incorporation and bylaws contain provisions that may make acquiringcontrol of our company difficult, including:

 

•                  provisionsregulating the ability of our shareholders to bring matters for action atannual meetings of our shareholders;

 

•                  limitations onthe ability of our shareholders to call a special meeting and act by writtenconsent;

 

•                  provisionsdividing our board of directors into three classes elected for staggered terms;and

 

•                  theauthorization given to our board of directors to issue and set the terms ofpreferred stock.

 

## ***Item3.***                        Legal Proceedings

 

Due to the nature of our business, we are, from timeto time, involved in routine litigation or subject to disputes or claimsrelated to our business activities, including workers’ compensation claims andemployment-related disputes.  In theopinion of our management, none of the pending litigation, disputes or claimsagainst us will have a material adverse effect on our financial condition orresults of operations.

 

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

 

Wedid not submit any matter to a vote of our security holders during the fourthquarter of fiscal 2004.

 

# **PART II**

#  

## ***Item 5.***                        Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities

 

Asof June 25, 2004, 27,300,126 shares of our common stock were outstanding,held by approximately 700 shareholders of record. The number of record holdersdoes not necessarily bear any relationship to the number of beneficial ownersof our common stock.

 

14

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Ourcommon stock trades on the American Stock Exchange under the symbol “PDC.”  The following table sets forth, for each ofthe periods indicated, the high and low sales prices per share on the AmericanStock Exchange:

 
|                                       |   | **Low** |   | **High** |   |
|--------------------------------------------|--------|---------|--------|----------|--------|
| **Fiscal Year Ended March 31, 2004:** |   |    |   |     |   |
| First  Quarter                             |   | $       | 3.57   |     | $      | 5.24 |   |
| Second  Quarter                            |   | 3.65    |   | 4.99     |   |
| Third  Quarter                             |   | 3.30    |   | 5.20     |   |
| Fourth  Quarter                            |   | 4.75    |   | 7.35     |   |
|                                       |   |    |   |     |   |
| **Fiscal Year Ended March 31, 2003:** |   |    |   |     |   |
| First  Quarter                             |   | $       | 4.00   |     | $      | 5.05 |   |
| Second  Quarter                            |   | 2.85    |   | 4.20     |   |
| Third  Quarter                             |   | 2.86    |   | 3.85     |   |
| Fourth  Quarter                            |   | 3.10    |   | 3.64     |   |

 

Thelast reported sales price for our common stock on the American Stock Exchangeon June 25, 2004 was $7.45 per share.

 

Wehave not paid or declared any dividends on our common stock and currentlyintend to retain earnings to fund our working capital needs and growthopportunities.  Any future dividendswill be at the discretion of our board of directors after taking into accountvarious factors it deems relevant, including our financial condition andperformance, cash needs, income tax consequences and the restrictions Texas andother applicable laws and our credit facilities then impose.  Our debt arrangements include provisionsthat generally prohibit us from paying dividends, other than dividends on ourpreferred stock.  We currently have nopreferred stock outstanding.

 

*EquityCompensation Plan Information*

 

The following table provides information on our equity compensationplans as of March 31, 2004:

 
| **Plan  category**                                          |   | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights***(a)* |   | **Weighted-average  exercise price per  share of outstanding  options, warrants  and rights***(b)* |   | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a))***(c)* |      |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Equity  compensation plans approved by security holders     |   | 2,056,666                                                                                               |   | $                                                                                                  | 3.24   |                                                                                                                                                       | 2,406,413 |   |
|                                                        |   |                                                                                                    |   |                                                                                               |   |                                                                                                                                                       |      |
| Equity  compensation plans not approved by security holders |   | —                                                                                                  |   | —                                                                                             |   | —                                                                                                                                                     |      |
|                                                        |   |                                                                                                    |   |                                                                                               |   |                                                                                                                                                       |      |
| Total                                                       |   | 2,056,666                                                                                               |   | $                                                                                                  | 3.24   |                                                                                                                                                       | 2,406,413 |   |

 

*RecentSales of Unregistered Securities*

 

OnMarch 31, 2003, we sold 5,333,333 shares of our common stock to ChesapeakeEnergy Corporation for $20,000,000 ($3.75 per share), before related offeringexpenses including $600,000 in commissions paid to Jefferies & Company,Inc.  In connection with that sale, wegranted Chesapeake Energy a preemptive right to acquire equity securities thatwe may issue in the future, under specified circumstances, in order to permitChesapeake Energy to maintain its proportionate ownership of our outstandingshares of common stock.  We also grantedChesapeake Energy a right, under certain circumstances, to request registrationof the acquired shares under the Securities Act of 1933.  Chesapeake Energy owns approximately 19.5%of our outstanding common stock, or approximately 14.9% assuming the conversionof all outstanding options and convertible subordinated debentures.  We issued those shares without registration underthe Securities Act of 1933 in reliance on the exemption that Section 4(2)of that Act provides for transactions not involving any public offering.

 

On August 1, 2003, we issued 477,000 shares of our common stockvalued at $4.45 per share to Texas Interstate Drilling Company, L.P. in connectionwith our purchase of two land drilling rigs, associated spare parts andequipment and vehicles.  We issued

 

15

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those shares without registration under theSecurities Act of 1933 in reliance on the exemption that Section 4(2) ofthat Act provides for transactions not involving any public offering.

 

On February 20, 2004, we sold 4,400,000 shares of our common stockat $5.40 per share in a private placement to various individuals andinstitutional investors, all of whom were accredited investors.  This private placement resulted in$23,760,000 in proceeds, before related offering expenses, which included$1,188,000 in commissions paid to Jefferies & Company, Inc., Raymond James& Associates, Inc. and Pritchard Capital Partners, LLC.   Although we issued those shares withoutregistration under the Securities Act of 1933 in reliance on the exemption thatSection 4(2) of that Act provides for transactions not involving anypublic offering, we filed a registration statement on Form S-3 to registerthose shares.  The registrationstatement became effective on June 22, 2004.

 

## ***Item6.***                        Selected Financial Data

 

Thefollowing information derives from our audited financial statements.  You should review this information inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 7 of this report and the historicalfinancial statements and related notes this report contains.

 
|                                                                          |   | **Years Ended  March 31,**              |    |
|-------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                          |   | **2004**                                     |    | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                                          |   | **(In thousands, except per share amounts)** |    |
| Contract  drilling revenues                                                   |   | $                                            | 107,876 |   | $ | 80,183 |   | $ | 68,627 |   | $ | 50,345 |   | $ | 19,391 |   |
| Income  (loss) from operations                                                |   | 438                                          |    | (4,943 | ) | 11,201 |   | 3,803 |   | 108 |   |
| Income  (loss) before income taxes                                            |   | (2,216                                       | )       | (7,305 | ) | 9,737 |   | 3,838 |   | (65 | ) |
| Preferred  dividends                                                          |   | —                                       |    | — |   | 93 |   | 275 |   | 304 |   |
| Net earnings  (loss) applicable to common stockholders                        |   | (1,790                                       | )       | (5,086 | ) | 6,225 |   | 2,428 |   | (384 | ) |
| Earnings  (loss) per common share-basic                                       |   | (0.08                                        | )       | (0.31 | ) | 0.41 |   | 0.22 |   | (0.06 | ) |
| Earnings  (loss) per common share-diluted                                     |   | (0.08                                        | )       | (0.31 | ) | 0.35 |   | 0.19 |   | (0.06 | ) |
| Long-term  debt and capital lease obligations, excluding current installments |   | 44,892                                       |    | 45,855 |   | 26,119 |   | 10,056 |   | 267 |   |
| Shareholders’  equity                                                    |   | 70,836                                       |    | 47,672 |   | 33,343 |   | 17,827 |   | 6,783 |   |
| Total assets                                                                  |   | 143,731                                      |    | 119,694 |   | 83,450 |   | 56,493 |   | 15,670 |   |
| Capital  expenditures                                                         |   | 44,845                                       |    | 33,589 |   | 27,597 |   | 41,628 |   | 5,069 |   |
|                                                                               |        |                                              |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Refer to Note 2 of the consolidated financialstatements for information on acquisitions.

 

## ***Item 7.***                         Management’s Discussion and Analysis of Financial Conditionand Results of Operations

 

*Statementswe make in the following discussion that express a belief, expectation orintention, as well as those which are not historical fact, are forward-lookingstatements that are subject to risks, uncertainties and assumptions.  Our actual results, performance orachievements, or industry results, could differ materially from those weexpress in the following discussion as a result of a variety of factors,including general economic and business conditions and industry trends, thecontinued strength or weakness of the contract land drilling industry in thegeographic areas in which we operate, decisions about onshore exploration anddevelopment projects to be made by oil and gas companies, the highlycompetitive nature of our business, our future financial performance, includingavailability, terms and deployment of capital, the continued availability ofqualified personnel, and changes in, or our failure or inability to complywith, government regulations, including those relating to the environment.*

 

**CompanyOverview**

 

PioneerDrilling Company provides contract land drilling services to independent andmajor oil and gas exploration and production companies.  In addition to our drilling rigs, we providethe drilling crews and most of the ancillary equipment needed to operate ourdrilling rigs.  We have focused ouroperations in the natural gas production regions of South Texas, East Texas andNorth Texas.  Our company was incorporatedin 1979 as the successor to a business that had been operating since 1968.  We conduct our operations through ourprincipal operating subsidiary, Pioneer Drilling Services, Ltd.  We are an oil and gas services company.  We do not invest in oil and natural gasproperties.  The drilling activity ofour customers is highly dependent on the current price of oil and natural gas.

 

16

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Ourbusiness strategy is to own and operate a high-quality fleet of land drillingrigs in active drilling markets, and position ourselves to maximize rigutilization and dayrates and to enhance shareholder value.  We intend to continue making additions toour drilling fleet, either through acquisitions of businesses or selectedassets or through the construction of refurbished drilling rigs.

 

Overthe past five fiscal years, we have significantly expanded our fleet ofdrilling rigs through acquisitions and the construction of new and refurbishedrigs.  As of March 31, 2004, ourrig fleet consisted of 35 land drilling rigs that drill in depth ranges between8,000 and 18,000 feet.  Fourteen of ourrigs are operating in South Texas, 17 in East Texas and four in North Texas. Weactively market all of these rigs.  Wecompleted construction of our 36th rig in late May 2004 andbegan moving it to its first drilling location on May 28, 2004.  Subject to obtaining satisfactory financing,we anticipate continued growth of our rig fleet in fiscal 2005.  However, we are not currently committed toany acquisitions.

 

Weearn our revenues by drilling oil and gas wells.  We obtain our contracts for drilling oil and gas wells eitherthrough competitive bidding or through direct negotiations with customers.  Our drilling contracts generally provide forcompensation on either a daywork, turnkey or footage basis.  Contract terms we offer generally depend onthe complexity and risk of operations, the on-site drilling conditions, thetype of equipment used and the anticipated duration of the work to beperformed.  Generally, our contractsprovide for the drilling of a single well and typically permit the customer toterminate on short notice, usually on payment of an agreed fee.

 

Asignificant performance measurement in our industry is rig utilization.  We compute rig utilization rates by dividingrevenue days by total available days during a period.  Total available days are the number of calendar days during theperiod that we have owned the rig. Revenue days for each rig are days when the rig is earning revenuesunder a contract, which is usually a period from the date the rig begins movingto the drilling location until the rig is released from the contract.  On daywork contracts, during themobilization period we earn a fixed amount of revenue based on the mobilizationrate stated in the contract.  We attemptto set the mobilization rate at an amount equal to our external costs for themove plus our internal costs during the mobilization period.  We begin earning our contracted daywork ratewhen we begin drilling the well.

 

For the three years ended March 31, 2004, ourrig utilization, revenue days and number of rigs were as follows:

 
|               |   | **Year Ended March 31,** |   |
|--------------------|--------|-------------------------------|--------|
|               |   | **2004**                      |   | **2003** | ** ** | **2002** | ** ** |
| Utilization  Rates |   | 88                            | %      | 79 | % | 82 | % |
| Revenue Days       |   | 8,764                         |   | 6,419 |   | 5,384 |   |
| Number of  rigs    |   | 35                            |   | 24 |   | 20 |   |

 

Thereasons for the increase in the number of revenue days in 2004 over 2003 and2002 are the increase in size of our rig fleet and the improvement in ouroverall rig utilization rate.  For 2005,we anticipate continued growth in revenue days and maintaining relatively highutilization rates.

 

Weattribute our relatively high utilization rates to a strong sales effort,quality equipment, good field and operations personnel, a disciplined safetyapproach, and our generally successful performance of turnkey operations.  Turnkey contracts account for approximatelyone-fourth of our contracts.  Turnkeycontracts provide us with the opportunity to keep our rigs working in periodsof lower demand and improve our drilling margin, but at an increased risk.  Over the long term, turnkey margins perrevenue day have been greater than daywork margins; however, occasionally, aturnkey contract will not be profitable if the contract cannot be completedsuccessfully without unanticipated complications.

 

Wedevote substantial resources to maintaining and upgrading our rig fleet.  During 2004, we removed three rigs fromservice for approximately three weeks each, in order to perform upgrades.  In the short term, these actions resulted infewer revenue days and slightly lower utilization; however, in the long term,we believe the upgrades will help the marketability of the rigs and improvetheir operating performance.

 

***Market Conditions in Our Industry***

 

TheUnited States contract land drilling services industry is highly cyclical.  Volatility in oil and gas prices can producewide swings in the levels of overall drilling activity in the markets we serveand affect the demand for our drilling services and the dayrates we can chargefor our rigs.  The availability offinancing sources, past trends in oil and gas prices and the outlook for futureoil and gas prices strongly influence the number of wells oil and gasexploration and production companies decide to drill.

 

17

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Forthe three months ended March 31, 2004, the average weekly spot price forWest Texas Intermediate crude oil was $35.08, the average weekly spot price forHenry Hub natural gas was $5.56 and the average weekly Baker Hughes land rigcount was 1,002.  On June 11, 2004,the spot price for West Texas Intermediate crude oil was $38.45, the spot pricefor Henry Hub natural gas was $6.00 and the Baker Hughes land rig count was1,070, a 13% increase from 948 on June 13, 2003.

 

Theaverage weekly spot prices of West Texas Intermediate crude oil, Henry Hubnatural gas and the average weekly domestic land rig count, per the BakerHughes land rig count, for each of the previous six years ended March 31,2004 were:

 
|                           |   | **Year Ended March 31,** |   |
|--------------------------------|--------|-------------------------------|--------|
|                           |   | **2004**                      |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Oil (West  Texas Intermediate) |   | $                             | 31.47  |   | $ | 29.27 |   | $ | 24.31 |   | $ | 30.40 |   | $ | 23.23 |   | $ | 13.69 |   |
| Gas (Henry  Hub)               |   | $                             | 5.27   |   | $ | 4.24 |   | $ | 2.96 |   | $ | 5.27 |   | $ | 2.46 |   | $ | 1.97 |   |
| U.S. Land  Rig Count           |   | 964                           |   | 723 |   | 912 |   | 841 |   | 550 |   | 592 |   |

 

Thedecline in oil and natural gas prices from mid-2001 to mid-2002 resulted in areduction in the demand for contract land drilling services, which resulted ina substantial reduction in the rates land drilling companies were able toobtain for their services.  While oiland natural gas prices have recovered in recent months, drilling activity hasnot yet recovered to a level at which we are able to significantly improve ourrevenue rates and drilling margins.

 

Duringfiscal 2004, 2003 and 2002, substantially all the wells we drilled for ourcustomers were drilled in search of natural gas because of the depth capacityof our rigs and the gas rich areas in which we operate.  Natural gas reserves are typically found indeeper geological formations and generally require premium equipment andquality crews to drill the wells.

 

***Critical Accounting Policies andEstimates***

 

*Revenueand cost recognition –*Weearn our revenues by drilling oil and gas wells for our customers underdaywork, turnkey or footage contracts, which usually provide for the drillingof a single well.  We recognize revenueson daywork contracts for the days completed based on the dayrate each contractspecifies.  We recognize revenues fromour turnkey and footage contracts on the percentage-of-completion method basedon our estimate of the number of days to complete each contract.  Contract drilling in progress representsrevenues we have recognized in excess of amounts billed on contracts inprogress. Individual contracts areusually completed in less than 60 days. The risks to us under a turnkey contract, and to a lesser extent underfootage contracts, are substantially greater than on a contract drilled on adaywork basis.  This is primarilybecause under a turnkey contract we assume most of the risks associated withdrilling operations generally assumed by the operator in a daywork contract,including the risks of blowout, loss of hole, stuck drill pipe, machinerybreakdowns and abnormal drilling conditions, as well as risks associated withsubcontractors’ services, supplies, cost escalations and personnel operations.

 

Ourmanagement has determined that it is appropriate to use thepercentage-of-completion method to recognize revenue on our turnkey and footagecontracts.  Although our turnkey andfootage contracts do not have express terms that provide us with rights toreceive payment for the work that we perform prior to drilling wells to theagreed on depth, we use this method because, as provided in applicableaccounting literature, we believe we achieve a continuous sale for ourwork-in-progress and believe, under applicable state law, we ultimately couldrecover the fair value of our work-in-progress even in the event we were unableto drill to the agreed on depth in breach of the applicable contract.  However, ultimate recovery of that value, inthe event we were unable to drill to the agreed on depth in breach of thecontract, would be subject to negotiations with the customer and thepossibility of litigation.

 

Ifa customer defaults on its payment obligation to us under a turnkey or footagecontract, we would need to rely on applicable law to enforce our lien rights,because our turnkey and footage contracts do not expressly grant to us asecurity interest in the work we have completed under the contract and we haveno ownership rights in the work-in-progress or completed drilling work, exceptany rights arising under the applicable lien statute on foreclosure.  If we were unable to drill to the agreed ondepth in breach of the contract, we also would need to rely on equitableremedies outside of the contract, including *quantum meruit*, available in applicablecourts to recover the fair value of our work-in-progress under a turnkey orfootage contract.

 

Weaccrue estimated contract costs on turnkey and footage contracts for each dayof work completed based on our estimate of the total costs to complete thecontract divided by our estimate of the number of days to complete thecontract.  Contract costs include labor,materials, supplies, repairs and maintenance, operating overhead allocationsand allocations of depreciation and amortization expense.   In addition, the occurrence of uninsured orunder-insured losses or operating cost overruns on our turnkey and footagecontracts could have a material adverse effect on our financial position andresults of operations.* *Therefore,our actual results could

 

18

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differ significantly if our cost estimates are later revised from ouroriginal estimates for contracts in progress at the end of a reporting periodwhich were not completed prior to the release of our financial statements.

 

*Assetimpairments* –Weassess the impairment of property and equipment whenever events orcircumstances indicate that the carrying value may not be recoverable.  Factors that we consider important and whichcould trigger an impairment review would be our customers’ financial conditionand any significant negative industry or economic trends.  More specifically, among other things, weconsider our contract revenue rates, our rig utilizations rates, cash flowsfrom our drilling rigs, current oil and gas prices, industry analysts’ outlookfor the industry and their view of our customers’ access to debt or equity,discussions with major industry suppliers, discussions with officers of ourprimary lender regarding their experiences and expectations for oil and gasoperators in our areas of operations and the trends in the price of useddrilling equipment observed by our management. If a review of our drilling rigs indicates that our carrying valueexceeds the estimated undiscounted future cash flows, we are required underapplicable accounting standards to write down the drilling equipment to itsfair market value.  A one percent write-downin the cost of our drilling equipment, at March 31, 2004, would haveresulted in a corresponding increase in our net loss of approximately $962,000for our fiscal year ended March 31, 2004.

 

*Deferredtaxes* –We providedeferred taxes for net operating loss carryforwards and for the basisdifference in our property and equipment between financial reporting and taxreporting purposes.  For property andequipment, basis differences arise from differences in depreciation periods andmethods and the value of assets acquired in a business acquisition where weacquire an entity rather than just its assets. For financial reporting purposes, we depreciate the various componentsof our drilling rigs over eight to 15 years and refurbishments over threeyears, while federal income tax rules require that we depreciate drilling rigsand refurbishments 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 inour providing deferred taxes on this depreciation difference.  After five years, financial reportingdepreciation exceeds tax depreciation, and the deferred tax liability begins toreverse.

 

*Accountingestimates* –Weconsider the recognition of revenues and costs on turnkey and footage contractscritical accounting estimates.  On thesetypes of contracts, we are required to estimate the number of days it willrequire for us to complete the contract and our total cost to complete thecontract.  Our actual costs couldsubstantially exceed our estimated costs if we encounter problems such as lostcirculation, stuck drill pipe or an underground blowout on contracts still inprogress subsequent to the release of the financial statements.

 

Wereceive payment under turnkey and footage contracts when we deliver to ourcustomer a well completed to the depth specified in the contract, unless thecustomer authorizes us to drill to a shallower depth. Since 1995, when currentmanagement joined our company, we have completed all our turnkey or footagecontracts.  Although our initial costestimates for turnkey and footage contracts do not include cost estimates forrisks such as stuck drill pipe or loss of circulation, we believe that ourexperienced management team, our knowledge of geologic formations in our areasof operations, the condition of our drilling equipment and our experiencedcrews enable us to make reasonably dependable cost estimates and completecontracts according to our drilling plan. While we do bear the risk of loss for cost overruns and other eventsthat are not specifically provided for in our initial cost estimates, ourpricing of turnkey and footage contracts takes such risks intoconsideration.  When we encounter,during the course of our drilling operations, conditions unforeseen in thepreparation of our original cost estimate, we immediately increase our costestimate for the additional costs to complete the contracts.  If we anticipate a loss on a contract inprogress at the end of a reporting period due to a change in our cost estimate,we immediately accrue the entire amount of the estimated loss including allcosts that are included in our revised estimated cost to complete that contractin our consolidated statement of operations for that reporting period.  During fiscal 2004, we experienced losses oneight of the 105 turnkey and footage contracts completed, with losses exceeding$25,000 on six contracts and losses exceeding $100,000 on two contracts.  We are more likely to encounter losses onturnkey and footage contracts in years in which revenue rates are lower for alltypes of contracts.  During periods ofreduced demand for drilling rigs, our overall profitability on turnkey andfootage contracts has historically exceeded our profitability on dayworkcontracts.

 

Revenuesand costs during a reporting period could be affected for contracts in progressat the end of a reporting period which have not been completed before ourfinancial statements for that period are released.  All but one of our turnkey contracts in progress atMarch 31, 2004 were completed prior to the release of the financialstatements included in this report.  AtMarch 31, 2004 our contract drilling in progress totaled approximately$9,131,000.  Of that amount accrued, turnkeyand footage contract revenues were approximately $7,683,000.  The remaining balance of approximately$1,448,000 relates to the revenue recognized but not yet billed on dayworkcontracts in progress at March 31, 2004.

 

Weestimate an allowance for doubtful accounts based on the creditworthiness ofour customers as well as general economic conditions.  We evaluate the creditworthiness of our customers based oninformation obtained from major industry suppliers, current prices of oil andgas and any past experience we have with the customer.  Consequently, an adverse change in thosefactors could affect our estimate of our allowance for doubtful accounts.  In some instances, we require new customersto establish escrow accounts or make

 

19

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prepayments.  We typicallyinvoice our customers at 15-day intervals during the performance of dayworkcontracts and upon completion of the daywork contract.  Turnkey and footage contracts are invoicedupon completion of the contract.  Ourtypical contract provides for payment of invoices in 10 to 30 days.  We generally do not extend payment termsbeyond 30 days and have not extended payment terms beyond 60 days for any ofour contracts in the last three fiscal years.

 

Another critical estimate is our determination of the useful lives ofour depreciable assets, which directly affects our determination ofdepreciation expense and deferred taxes. A decrease in the useful life of our drilling equipment would increasedepreciation expense and reduce deferred taxes.  We provide for depreciation of our drilling, transportation andother equipment on a straight-line method over useful lives that we haveestimated and that range from three to 15 years.  We record the same depreciation expense whether a rig is idle orworking.  Our estimate of the usefullives of our drilling, transportation and other equipment are based on our morethan 35 years of experience in the drilling industry with similar equipment.

 

Otheraccrued expenses in our March 31, 2004 financial statements include anaccrual of approximately $680,000 for costs incurred under the self-insuranceportion of our health insurance and under our workers’ compensationinsurance.  We have a deductible of (1)$100,000 per covered individual per year under the health insurance and (2)$250,000 per occurrence under our workers’ compensation insurance.  We accrue for these costs as claims areincurred based on cost estimates established for each claim by the insurancecompanies providing the administrative services for processing the claims,including an estimate for incurred but not reported claims, estimates forclaims paid directly by us, our estimate of the administrative costs associatedwith these claims and our historical experience with these types of claims.

 

***Liquidity and Capital Resources***

 

*Sources ofCapital Resources*

 

Ourrig fleet has grown from eight rigs in August 2000 to 35 rigs as ofMarch 31, 2004.  We have financedthis growth with a combination of debt and equity financing.  We have raised additional equity or usedequity for growth six times since January 2000 and have increased ourlong-term debt from approximately $3,909,000 at June 30, 2000 toapproximately $48,500,000 at March 31, 2004.  We plan to continue to grow our rig fleet.  We believe that near-term growth willrequire the use of equity financing rather than additional debt.  At March 31, 2004, our total debt tototal capital was approximately 41%. Due to the volatility in our industry, we are reluctant to take onsubstantial additional debt at this time. However, our ability to continue funding our growth through the issuanceof shares of our common stock is uncertain, as our common stock is not heavilytraded and the market price for our common stock has been volatile in recentperiods.

 

OnFebruary 20, 2004, we sold 4,400,000 shares of our common stock at $5.40per share in a private placement for $23,760,000 in proceeds, before relatedoffering expenses.

 

*Uses ofCapital Resources*

 

In May 2003, we added one refurbished18,000-foot SCR land drilling rig at a cost of approximately $7,300,000.  On August 1, 2003, we purchased twoland drilling rigs, associated spare parts and equipment and vehicles from TexasInterstate Drilling Company, L. P. for $2,500,000 in cash and the issuance of477,000 shares of our common stock valued at $4.45 per share.  On August 26, 2003, we purchased a14,000-foot mechanical rig for $2,925,661 in cash.  After accepting delivery of the rig, we spent approximately$2,400,000 upgrading the rig before placing it in service.  On December 15, 2003, we acquired a rigfor approximately $3,770,000 that we had previously been leasing.

 

OnMarch 2, 2004, we acquired 23 used rig hauling trucks and associatedtrailers and equipment from A & R Trejo Trucking for $1,200,000.  On March 4, 2004, we acquired aseven-rig drilling fleet from Sawyer Drilling & Service, Inc. for$12,000,000.  On March 12, 2004, weacquired one drilling rig from SEDCO Drilling Co., Ltd. for $2,015,000.  These acquisitions were funded with proceedsfrom the February 20, 2004 sale of our common stock.

 

Inlate May 2004, we completed constructing, primarily from used components,a 1000-hp electric drilling rig.  As ofMarch 31, 2004, we had incurred approximately $2,800,000 of constructioncosts on this rig and anticipate additional related construction costs ofapproximately $2,100,000.  We beganmoving it to its first drilling location on May 28, 2004.  For fiscal 2005, we project regular capitalexpenditures to be approximately $10,200,000 and rig upgrade expenditures to beapproximately $4,500,000.  These regularcapital expenditures and rig upgrade capital expenditures are expected to befunded primarily from operating cash flow.

 

20

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SinceMarch 31, 2003, the additions to our property and equipment have totaled$44,844,745.  Additions consisted of thefollowing:

 
| Drilling  rigs (1)        |   | $         | 34,961,004 |   |
|---------------------------|--------|-----------|------------|--------|
| Other  drilling equipment |   | 7,642,968 |       |
| Transportation  equipment |   | 2,160,838 |       |
| Other                     |   | 79,935    |       |
|                      |   | $         | 44,844,745 |   |

 

----

(1) Includes capitalized interest costs of$106,395.

 

*WorkingCapital*

 

Ourworking capital decreased to $6,028,018 at March 31, 2004 from $11,144,309at March 31, 2003.  Our currentratio, which we calculate by dividing our current assets by our currentliabilities, was 1.27 at March 31, 2004 compared to 1.55 at March 31,2003.  The principal reason for thedecrease in our working capital at March 31, 2004 was our use ofapproximately $3,400,000 of working capital toward the purchase of drillingequipment.  We used substantially allthe $20,000,000 in proceeds from the shares of common stock we sold toChesapeake Energy Corporation on March 31, 2003 to expand our rig fleet orreduce debt we incurred to expand our rig fleet.  We have used approximately $17,000,000 of the funds we raised inFebruary 2004 to expand our rig fleet or acquire other equipment.  Our operations have historically generatedsufficient cash flow to meet our requirements for debt service and equipmentexpenditures, even during periods of industry downturns.  During periods when a higher percentage ofour contracts are turnkey and footage contracts, our short-term working capitalneeds could increase.  We have availablea $2,500,000 line of credit for short-term cash requirements.  We did not make any borrowings under theline of credit during fiscal 2004. We have used debt and equity to finance ourlong-term growth strategy to increase the size of our rig fleet.  During periods of improved revenue rates, webelieve we can generate cash flows in excess of our normal cash requirements.

 

Thechanges in the components of our working capital were as follows:

 
|                       |   | **March 31,** |      |       |   |
|----------------------------|--------|--------------------|-----------|------------|--------|
|                       |   | **2004**           |      | **2003**   |   | **Change** |   |
| Cash and  cash equivalents |   | $                  | 6,365,759 |       | $      | 21,002,913 |   | $ | (14,637,154 | ) |
| Receivables                |   | 20,032,785         |      | 8,928,923  |   | 11,103,862 |   |
| Income tax  receivable     |   | —             |      | 444,900    |   | (444,900 | ) |
| Deferred tax  receivable   |   | 285,384            |      | 180,991    |   | 104,393 |   |
| Prepaid  expenses          |   | 1,336,337          |      | 914,187    |   | 422,150 |   |
| Current  assets            |   | 28,020,265         |      | 31,471,914 |   | (3,451,649 | ) |
|                       |   |               |      |       |   |   |   |
| Current debt               |   | 4,423,306          |      | 3,399,163  |   | 1,024,143 |   |
| Accounts  payable          |   | 13,270,989         |      | 14,206,586 |   | (935,597 | ) |
| Accrued  payroll           |   | 1,499,151          |      | 847,163    |   | 651,988 |   |
| Accrued  expenses          |   | 2,798,801          |      | 1,874,693  |   | 924,108 |   |
|                       |   | 21,992,247         |      | 20,327,605 |   | 1,664,642 |   |
|                       |   |               |      |       |   |   |   |
| Working  capital           |   | $                  | 6,028,018 |       | $      | 11,144,309 |   | $ | (5,116,291 | ) |

 

Thelarge cash balance at March 31, 2003 was due to our sale of $20,000,000 ofequity on March 31, 2003, of which $14,000,000 was in the March 31,2003 cash balance.  The $14,000,000 wasused during fiscal 2004 to purchase drilling rigs and equipment.

 

Theincrease in our receivables at March 31, 2004 from March 31, 2003 wasdue to our operating eleven additional rigs in the quarter ended March 31,2004, including an approximately $3,693,000 increase in contract drilling inprogress related to turnkey contracts, and an improvement in revenue rates infiscal 2004 over fiscal 2003.

 

21

----

 

Substantiallyall our prepaid expenses at March 31, 2004 consisted of prepaidinsurance.  The increase in prepaidinsurance is due to the increase in the size of our drilling rig fleet from 24rigs at March 31, 2003 to 35 rigs at March 31, 2004.

 

Theincrease in accrued payroll is due to the approximately 50% increase in ournumber of employees and the increase in the number of payroll days included inthe accrual from seven at March 31, 2003 to nine at March 31, 2004.

 

Thetotal increase in accrued expenses at March 31, 2004 from March 31,2003 was due to an increase of approximately $477,000 in the accrual for ourinsurance deductibles and additional insurance premiums, expense accruals ofapproximately $250,000 related to the sale of common stock in February andaccrued property taxes of approximately $205,000 due to increases in rigvaluations and the size of our rig fleet.

 

*Long-termDebt*

 

Ourlong-term debt at March 31, 2004 consisted of the following:

 
| Convertible  subordinated debentures due July 2007 at 6.75% (1)                                                                                                                                                                                           |   | $          | 28,000,000 |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                           |   |       |       |
| Note payable  to Merrill Lynch Capital, secured by drilling equipment, due in monthly  payments of $172,619 plus interest at a floating rate equal to the three  month LIBOR rate (1.1% at March 31, 2004) plus 385 basis points, due  December 2007 |   | 13,119,048 |       |
|                                                                                                                                                                                                                                                           |   |       |       |
| Note payable  to Frost National Bank, secured by drilling equipment, due in monthly  payments of $107,143 plus interest at prime (4.0% at March 31, 2004)  plus 1.00%, due August 2007                                                               |   | 4,392,174  |       |
|                                                                                                                                                                                                                                                           |   |       |       |
| Note payable  to Frost National Bank, secured by drilling equipment, due in monthly  payments of $42,401, including interest at prime (4.0% at March 31,  2004) plus 1.0%, beginning April 15, 2004, due March 15, 2007 (2)                     |   | 3,000,000  |       |
|                                                                                                                                                                                                                                                           |   | 48,511,222 |       |
|                                                                                                                                                                                                                                                           |   |       |       |
| Less current  installments                                                                                                                                                                                                                                     |   | (3,724,302 | )          |
|                                                                                                                                                                                                                                                           |   | $          | 44,786,920 |   |

 

----

(1)          Wedge Energy Services, LLC (“WEDGE”) holds $27,000,000 of theconvertible subordinated debentures and William H. White, a former director ofour company, holds $1,000,000.  WEDGEowns 26.5% of our common stock (40.2% if the debentures were converted).  Beginning July 3, 2004, we have theoption to redeem all or part of the debentures by paying a premium of 5%through July 2, 2005, 4% through July 2, 2006, 3% through July 2,2007 and 0% thereafter.

 

(2)          We incurred this debt to finance the purchase of the rig we werepreviously leasing.

 

22

----

 

*Contractual Obligations*

 

Wedo not have any routine purchase obligations. However, as of March 31, 2004, we were in the process ofconstructing a drilling rig, as described above.   The following table excludes interest payments on long-term debtand capital lease obligations.  Thefollowing table includes all of our contractual obligations at March 31,2004.

 
|                         |   | **Payments Due by Period** |       |
|------------------------------|--------|----------------------------|------------|
| **Contractual  Obligations** |   | **Total**                  |       | **Less than 1  year** |   | **1-3  years** |   | **4-5  years** |   | **More than  5 years** |   |
| Long-Term  Debt Obligations  |   | $                          | 48,511,222 |   | $ | 3,724,302 |   | $ | 9,347,127 |   | $ | 35,439,793 |   | $ | — |   |
| Capital  Lease Obligations   |   | 245,688                    |       | 140,934 |   | 104,754 |   | — |   | — |   |
| Operating  Lease Obligations |   | 314,460                    |       | 121,608 |   | 192,852 |   | — |   | — |   |
| Total                        |   | $                          | 49,071,370 |   | $ | 3,986,844 |   | $ | 9,644,733 |   | $ | 35,439,793 |   | $ | — |   |

 

*DebtRequirements*

 

Borrowingsfrom Frost National Bank and Merrill Lynch Capital, a division of Merrill LynchBusiness Financial Services, Inc. (“MLC”), contain various covenants pertainingto leverage, cash flow coverage, fixed charge coverage and net worth ratios andrestrict us from paying dividends. Under these credit arrangements, we determine compliance with the ratioson a quarterly basis, based on the previous four quarters.  As of March 31, 2004, we were incompliance with all covenants applicable to our outstanding debt.

 

Eventsof default in our loan agreements, which could trigger an early repaymentrequirement, include, among others:

 

•                  our failure to make required payments;

 

•                  our failure to comply with financialcovenants related to the maintenance of a ratio of debt to tangible net worth,a leverage ratio, a cash flow coverage ratio and a senior cash flow coverageratio;

 

•                  our incurrence of additional indebtedness inexcess of $2,000,000 not already allowed by the loan agreements without eachlender’s approval; and

 

•                  any payment of cash dividends on our commonstock.

 

Thelimitation on additional indebtedness has not affected our operations orliquidity and we do not expect it to affect us in the future as we expect tocontinue to generate adequate cash flow from operations.

 

Wealso have a $2,500,000 line of credit from Frost National Bank to supplementour short-term cash needs.  Anyborrowings under this line of credit are secured by our trade receivables andbear interest at a rate of prime (4.00% at March 31, 2004) plus 1.0%.   The sum of draws under this line and theamount of all outstanding letters of credit issued by the bank for our accountare limited to 75% of eligible accounts receivable.  Therefore, if 75% of our eligible accounts receivable is lessthan $2,500,000 plus any outstanding letters of credit issued by the bank onour behalf, our ability to draw under this line would be reduced.  At March 31, 2004, we had nooutstanding advances under this line of credit, letters of credit were$1,664,000 and 75% of eligible accounts receivable was approximately $8,030,000.  The letters of credit are issued to two workers’compensation insurance companies to secure possible future claims that do notexceed the deductibles on these policies. It is our practice to pay any amounts due that do not exceed thesedeductibles as they are incurred. Therefore, we do not anticipate the lender will be required to fund anydraws under these letters of credit.

 

23

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***Results of Operations***

* *

Ouroperations consist of drilling oil and gas wells for our customers underdaywork, turnkey, or footage contracts usually on a well-to-well basis.  Daywork contracts are the easiest for us toperform and involve the least risk. Turnkey contracts are the most difficult to perform and involve muchgreater risk but provide the opportunity for higher operating margins.

 

*DayworkContracts*.  Under daywork drilling contracts, we providea drilling rig with required personnel to our customer, who supervises thedrilling of the well.  We are paid basedon a negotiated fixed rate per day while the rig is used.

 

*TurnkeyContracts. *Under a turnkey contract, we agree to drill awell for our customer to a specified depth and under specified conditions for afixed price, regardless of the time required or the problems encountered indrilling the well.  We provide technicalexpertise and engineering services, as well as most of the equipment anddrilling supplies required to drill the well. We often subcontract for related services, such as the provision ofcasing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progresspayments and are paid by our customer only after we have performed the terms ofthe drilling contract in full.  Therisks under a turnkey contract are greater than those under a daywork contract. This is primarily because under aturnkey contract we assume most of the risks associated with drillingoperations that the operator generally assumes under a daywork contract.

 

*FootageContracts*.  Under footage contracts, we are paid a fixedamount for each foot drilled, regardless of the time required or the problemsencountered in drilling the well.  Wetypically pay more of the out-of-pocket costs associated with footage contractsas compared to daywork contracts. Similar to turnkey contracts, under a footage contract we assume most ofthe risks associated with drilling operations that the operator generallyassumes under a daywork contract.

 

Wehave a history of losses.  We incurrednet losses of approximately $1,800,000, $5,100,000 and $400,000 in the fiscalyears ended March 31, 2004, 2003 and 2000, respectively.  Our profitability in the future will dependon many factors, but largely on utilization rates and dayrates for our drillingrigs.

 

Thecurrent demand for drilling rigs greatly influences the types of contracts weare able to obtain.  As the demand forrigs increases, daywork rates move up and we are able to switch primarily todaywork contracts.

 

Forthe years ended March 31, 2004, 2003 and 2002, the percentages of ourdrilling revenues by type of contract were as follows:

 
|               |   | **Year Ended March 31,** |   |
|--------------------|--------|-------------------------------|--------|
|               |   | **2004**                      |   | **2003** |   | **2002** |   |
| Turnkey  Contracts |   | 50                            | %      | 58 | % | 7 | % |
| Footage  Contracts |   | 3                             | %      | 1 | % | 2 | % |
| Daywork  Contracts |   | 47                            | %      | 41 | % | 91 | % |

 

Whilecurrent demand for drilling rigs has increased, we continue to bid on turnkeycontracts in an effort to improve margins and maintain rig utilization.  Although oil and natural gas prices haveimproved, we anticipate only a moderate change in the mix of our types ofcontracts in fiscal 2005.

 

Inour quarter ended March 31, 2004, we recognized revenues of approximately$924,000 and recorded contract drilling costs of approximately $745,000,excluding depreciation, on one daywork contract with Chesapeake EnergyCorporation, who owns approximately 19.5% of our outstanding common stock.

 

24

----

 

*Statementof Operations Analysis*

 

The following table provides information about our operations for theyears ended March 31, 2004, March 31, 2003, and March 31, 2002.

 
|                                       |   | **Year Ended March 31,** |        |
|--------------------------------------------|--------|-------------------------------|-------------|
|                                       |   | **2004**                      |        | **2003** |   | **2002** |   |
| Contract  drilling revenues                |   | $                             | 107,875,533 |   | $ | 80,183,486 |   | $ | 68,627,486 |   |
| Contract  drilling costs                   |   | 88,504,102                    |        | 70,823,310 |   | 46,145,364 |   |
| Depreciation  and amortization             |   | 16,160,494                    |        | 11,960,387 |   | 8,426,082 |   |
| General and  administrative expenses       |   | 2,772,730                     |        | 2,232,390 |   | 2,855,274 |   |
| Revenue days  by type of contract:         |   |                          |        |   |   |   |   |
| Turnkey  contracts                         |   | 2,827                         |        | 2,619 |   | 289 |   |
| Footage  contracts                         |   | 311                           |        | 119 |   | 136 |   |
| Daywork  contracts                         |   | 5,626                         |        | 3,681 |   | 4,959 |   |
| Total  revenue days                        |   | 8,764                         |        | 6,419 |   | 5,384 |   |
|                                       |   |                          |        |   |   |   |   |
| Contract  drilling revenue per revenue day |   | $                             | 12,309      |   | $ | 12,492 |   | $ | 12,747 |   |
| Contract  drilling cost per revenue day    |   | $                             | 10,099      |   | $ | 11,033 |   | $ | 8,571 |   |
| Rig  utilization rates                     |   | 88                            | %           | 79 | % | 82 | % |

 

Ourcontract drilling revenues grew by approximately 35% in fiscal 2004 from fiscal2003, due to an improvement in rig revenue rates, a 37% increase in revenuedays, a 9% increase in rig utilization and an increase in the number of rigs inour fleet.  Approximately 52% of theincrease in revenue days was an increase in daywork revenue days resulting in a$183 decrease in average contract drilling revenue per day.

 

Ourcontract drilling revenue in fiscal 2003 grew by $11,556,000, or 17%, fromfiscal 2002 due to a 19% increase in revenue days, an increase in the number ofrigs in our fleet and a higher percentage of turnkey contracts.

 

Ourcontract drilling costs grew by approximately $17,681,000, or 25%, in fiscal2004 from fiscal 2003 due to the increase in revenue days, rig utilization andthe number of rigs in our fleet.  Theincrease in daywork revenue days resulted in a $934 decrease in contractdrilling costs per revenue day because costs associated with the drilling ofdaywork contracts is less than costs associated with turnkey and footagecontracts.  Under daywork contracts, ourcustomer provides supplies and materials such as fuel, drill bits, casing,drilling fluids, etc.

 

Ourcontract drilling costs in fiscal 2003 grew by approximately $24,678,000, or53%, due primarily to the increase in revenue days, increase in number of rigsand additional costs associated with the increase in turnkey contracts.  The increase in contract drilling costs perday of $2,462 in 2003 from 2002 is due to the increase in turnkey contracts.

 

Ourdepreciation and amortization expense in 2004 increased by approximately$4,200,000, or 35%, from 2003. Depreciation and amortization expense in 2003increased approximately $3,534,000, or 42%, from 2002.  The increase in 2004 over 2003 resulted fromour addition of eleven drilling rigs and related equipment in 2004.  The increase in 2003 over 2002 resulted fromour addition of four drilling rigs and related equipment during 2003.

 

Ourgeneral and administrative expenses increased by approximately $541,000, or24%, in the year ended March 31, 2004 from the corresponding period of2003.  The increase resulted fromincreased payroll costs, employment fees, loan fees, insurance costs anddirector fees.  In 2004, payroll costincreased by approximately $310,000 due to pay raises and the increase from 12to 17 employees in our corporate office. Employment and loan fees increased by $61,000 due to the employeeadditions and fees associated with the Merrill Lynch Capital loan.  In addition, our directors’ and officers’liability and employment practices insurance increased by approximately $60,000and directors’ fees increased by approximately $93,000.

 

Theapproximately $623,000 decrease in general and administrative expenses in 2003from 2002 is due to reduced payroll costs of approximately $269,000 and lowerlegal and professional fees of approximately $520,000, offset by otherincreases of approximately $166,000. The higher payroll costs in 2002 were due to bonuses paid in that year.

 

25

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Ourcontract land drilling operations are subject to various federal and state lawsand regulations designed to protect the environment.  Maintaining compliance with these regulations is part of ourday-to-day operating procedures.  Wemonitor each of our yard facilities and each of our rig locations on aday-to-day basis for potential environmental spill risks.  In addition, we maintain a spill preventioncontrol and countermeasures plan for each yard facility and each riglocation.  The costs of these proceduresrepresent only a small portion of our routine employee training, equipmentmaintenance and job site maintenance costs. We estimate the annual compliance costs for this program isapproximately $143,000.   We are notaware of any potential clean-up obligations that would have a material adverseeffect on our financial condition or results of operations.

 

Oureffective income tax rates of 19.2%, 30.4% and 35.1% for 2004, 2003 and 2002,respectively, differ from the federal statutory rate of 34% due to permanentdifferences.  Permanent differences arecosts included in results of operations in the accompanying financialstatements which are not fully deductible for federal income tax purposes.

 

**Inflation**

 

Asa result of the relatively low levels of inflation during the past two years,inflation did not significantly affect our results of operations in any of theperiods reported.

 

**Off BalanceSheet Arrangements**

 

Wedo not currently have any off balance sheet arrangements.

 

## ***Item 7A.***                                                 Quantitativeand Qualitative Disclosures About Market Risk

## *** ***

Weare subject to market risk exposure related to changes in interest rates onmost of our outstanding debt.  AtMarch 31, 2004, we had outstanding debt of approximately $20,511,000 thatwas subject to variable interest rates, in each case based on an agreedpercentage-point spread from the lender’s prime interest rate.  An increase or decrease of 1% in theinterest rate would have a corresponding decrease or increase in our net income(loss) of approximately $135,000 annually. We did not enter into any of these debt arrangements for tradingpurposes.

 

26

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***Item 8.*****         ****FinancialStatements and Supplementary Data**

 

PIONEER DRILLING COMPANY

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
| Report  of Independent Registered Public Accounting Firm                                                                               |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                   |   |
| Consolidated Balance Sheets  as of March 31, 2004 and 2003                                                                        |   |
|                                                                                                                                   |   |
| Consolidated  Statements of Operations for the Years Ended March 31, 2004, 2003 and  2002                                         |   |
|                                                                                                                                   |   |
| Consolidated  Statements of Shareholders’ Equity and Comprehensive Income for the Years  Ended March 31, 2004, 2003 and 2002 |   |
|                                                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2004, 2003 and  2002                                         |   |
|                                                                                                                                   |   |
| Notes to  Consolidated Financial Statements                                                                                            |   |

 

27

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

To the Board of Directors and ShareholdersPioneer Drilling Company:

 

We have audited the accompanying consolidatedbalance sheets of Pioneer Drilling Company and subsidiaries as ofMarch 31, 2004 and 2003 and the related consolidated statements ofoperations, shareholders’ equity and comprehensive income and cash flows foreach of the years in the three-year period ended March 31, 2004.   These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatements.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, the   financial position of Pioneer DrillingCompany and subsidiaries as of March 31, 2004 and 2003, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended March 31, 2004, in conformity with U. S. generally acceptedaccounting principles.

 
| KPMG LLP           |
|--------------------|
|               |
| San Antonio, Texas |
| June 23, 2004      |

 

28

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**PIONEERDRILLING COMPANY AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                      |   | **March 31,** |        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------|
|                                                                                                                                                                                      |   | **2004**           |        | **2003** |   |
| ASSETS                                                                                                                                                                                    |   |               |        |   |   |
| Current assets:                                                                                                                                                                           |   |               |        |   |   |
| Cash and cash equivalents                                                                                                                                                                 |   | $                  | 6,365,759   |   | $ | 21,002,913 |   |
| Receivables:                                                                                                                                                                              |   |               |        |   |   |
| Trade, net                                                                                                                                                                                |   | 10,901,991         |        | 4,499,378 |   |
| Contract drilling in progress                                                                                                                                                             |   | 9,130,794          |        | 4,429,545 |   |
| Federal income tax receivable                                                                                                                                                             |   | —             |        | 444,900 |   |
| Current deferred income taxes                                                                                                                                                             |   | 285,384            |        | 180,991 |   |
| Prepaid expenses                                                                                                                                                                          |   | 1,336,337          |        | 914,187 |   |
| Total current assets                                                                                                                                                                      |   | 28,020,265         |        | 31,471,914 |   |
| Property and equipment, at cost:                                                                                                                                                          |   |               |        |   |   |
| Drilling rigs and equipment                                                                                                                                                               |   | 145,758,913        |        | 106,728,573 |   |
| Transportation, office, land and other                                                                                                                                                    |   | 5,427,637          |        | 3,494,657 |   |
|                                                                                                                                                                                      |   | 151,186,550        |        | 110,223,230 |   |
| Less accumulated depreciation and  amortization                                                                                                                                           |   | 35,844,938         |        | 22,367,327 |   |
| Net property and equipment                                                                                                                                                                |   | 115,341,612        |        | 87,855,903 |   |
| Other assets                                                                                                                                                                              |   | 369,278            |        | 366,500 |   |
| Total assets                                                                                                                                                                              |   | $                  | 143,731,155 |   | $ | 119,694,317 |   |
|                                                                                                                                                                                      |   |               |        |   |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                 |   |               |        |   |   |
| Current liabilities:                                                                                                                                                                      |   |               |        |   |   |
| Notes payable                                                                                                                                                                             |   | $                  | 558,070     |   | $ | 587,177 |   |
| Current installments of long-term debt                                                                                                                                                    |   | 3,724,302          |        | 2,671,269 |   |
| Current installments of capital lease  obligations                                                                                                                                        |   | 140,934            |        | 140,717 |   |
| Accounts payable                                                                                                                                                                          |   | 13,270,989         |        | 14,206,586 |   |
| Accrued expenses:                                                                                                                                                                         |   |               |        |   |   |
| Payroll and payroll taxes                                                                                                                                                                 |   | 1,499,151          |        | 847,163 |   |
| Other                                                                                                                                                                                     |   | 2,798,801          |        | 1,874,693 |   |
| Total current liabilities                                                                                                                                                                 |   | 21,992,247         |        | 20,327,605 |   |
| Long-term debt, less current installments                                                                                                                                                 |   | 44,786,920         |        | 45,594,517 |   |
| Capital lease obligations, less current  installments                                                                                                                                     |   | 104,754            |        | 260,025 |   |
| Deferred income taxes                                                                                                                                                                     |   | 6,010,916          |        | 5,839,908 |   |
| Total liabilities                                                                                                                                                                         |   | 72,894,837         |        | 72,022,055 |   |
| Shareholders’ equity:                                                                                                                                                                |   |               |        |   |   |
| Preferred stock, 10,000,000 shares  authorized; none issued and outstanding                                                                                                               |   |               |        |   |   |
| Common stock $.10 par value; 100,000,000  shares authorized; 27,300,126 shares and 21,700,792 shares issued and  outstanding at March 31, 2004 and March 31, 2003, respectively |   | 2,730,012          |        | 2,170,079 |   |
| Additional paid-in capital                                                                                                                                                                |   | 82,124,368         |        | 57,730,188 |   |
| Accumulated deficit                                                                                                                                                                       |   | (14,018,062        | )           | (12,228,005 | ) |
| Total shareholders’ equity                                                                                                                                                           |   | 70,836,318         |        | 47,672,262 |   |
| Total liabilities and shareholders’ equity                                                                                                                                           |   | $                  | 143,731,155 |   | $ | 119,694,317 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

29

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**PIONEERDRILLING COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS**

 
|                                                     |   | **Years  Ended March 31,** |        |
|----------------------------------------------------------|--------|---------------------------------|-------------|
|                                                     |   | **2004**                        |        | **2003** |   | **2002** |   |
|                                                     |   |                            |        |   |   |   |   |
| Contract drilling revenues                               |   | $                               | 107,875,533 |   | $ | 80,183,486 |   | $ | 68,627,486 |   |
|                                                     |   |                            |        |   |   |   |   |
| Costs and expenses:                                      |   |                            |        |   |   |   |   |
| Contract drilling                                        |   | 88,504,102                      |        | 70,823,310 |   | 46,145,364 |   |
| Depreciation and amortization                            |   | 16,160,494                      |        | 11,960,387 |   | 8,426,082 |   |
| General and administrative                               |   | 2,772,730                       |        | 2,232,390 |   | 2,855,274 |   |
| Bad debt expense                                         |   | —                          |        | 110,000 |   | — |   |
|                                                     |   |                            |        |   |   |   |   |
| Total operating costs and expenses                       |   | 107,437,326                     |        | 85,126,087 |   | 57,426,720 |   |
| Income (loss) from operations                            |   | 438,207                         |        | (4,942,601 | ) | 11,200,766 |   |
|                                                     |   |                            |        |   |   |   |   |
| Other income (expense):                                  |   |                            |        |   |   |   |   |
| Interest expense                                         |   | (2,807,822                      | )           | (2,698,529 | ) | (1,616,984 | ) |
| Interest income                                          |   | 101,584                         |        | 94,235 |   | 80,932 |   |
| Other                                                    |   | 51,675                          |        | 37,614 |   | 72,096 |   |
| Gain on sale of securities                               |   | —                          |        | 203,887 |   | — |   |
| Total other income (expense)                             |   | (2,654,563                      | )           | (2,362,793 | ) | (1,463,956 | ) |
|                                                     |   |                            |        |   |   |   |   |
| Income (loss) before income taxes                        |   | (2,216,356                      | )           | (7,305,394 | ) | 9,736,810 |   |
| Income tax (expense) benefit                             |   | 426,299                         |        | 2,219,776 |   | (3,418,525 | ) |
|                                                     |   |                            |        |   |   |   |   |
| Net earnings (loss)                                      |   | (1,790,057                      | )           | (5,085,618 | ) | 6,318,285 |   |
| Preferred stock dividend requirement                     |   | —                          |        | — |   | 92,814 |   |
| Net earnings (loss) applicable to common  shareholders   |   | $                               | (1,790,057  | ) | $ | (5,085,618 | ) | $ | 6,225,471 |   |
|                                                     |   |                            |        |   |   |   |   |
| Earnings (loss) per common share - Basic                 |   | $                               | (0.08       | ) | $ | (0.31 | ) | $ | 0.41 |   |
|                                                     |   |                            |        |   |   |   |   |
| Earnings (loss) per common share - Diluted               |   | $                               | (0.08       | ) | $ | (0.31 | ) | $ | 0.35 |   |
|                                                     |   |                            |        |   |   |   |   |
| Weighted average number of shares  outstanding - Basic   |   | 22,585,612                      |        | 16,163,098 |   | 15,112,272 |   |
|                                                     |   |                            |        |   |   |   |   |
| Weighted average number of shares  outstanding - Diluted |   | 22,585,612                      |        | 16,163,098 |   | 19,221,256 |   |

 

*Seeaccompanying notes to consolidated financial statements.*

 

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**PIONEERDRILLING COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFSHAREHOLDERS’ 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, 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, net of related expenses                                                 |   | 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                            |       |
| Comprehensive income:                                                         |   |               |       |                  |       |               |       |          |       |                             |       |                     |       |                                          |       |                                  |       |
| Net loss                                                                      |   | —             |       | —                |       | —             |       | —        |       | —                           |       | (5,085,618               | )          | —                                        |       | (5,085,618                            | )          |
| Net unrealized change in securites available for  sale, net of tax of $56,366 |   | —             |       | —                |       | —             |       | —        |       | —                           |       | —                   |       | (109,416                                      | )          | (109,416                              | )          |
| Total comprehensive loss                                                      |   | —             |       | —                |       | —             |       | —        |       | —                           |       | —                   |       | —                                        |       | (5,195,034                            | )          |
| Issuance of common stock for:                                                 |   |               |       |                  |       |               |       |          |       |                             |       |                     |       |                                          |       |                                  |       |
| Sale, net of related expenses of $657,499                                     |   | 5,333,333          |       | —                |       | 533,334            |       | —        |       | 18,809,167                       |       | —                   |       | —                                        |       | 19,342,501                            |       |
| Exercise of options                                                           |   | 445,000            |       | —                |       | 44,500             |       | —        |       | 137,290                          |       | —                   |       | —                                        |       | 181,790                               |       |
| Balance as of March 31, 2003                                             |   | 21,700,792         |       | —                |       | 2,170,079          |       | —        |       | 57,730,188                       |       | (12,228,005              | )          | —                                        |       | 47,672,262                            |       |
| Comprehensive income:                                                         |   |               |       |                  |       |               |       |          |       |                             |       |                     |       |                                          |       |                                  |       |
| Net loss                                                                      |   | —             |       | —                |       | —             |       | —        |       | —                           |       | (1,790,057               | )          | —                                        |       | (1,790,057                            | )          |
| Total comprehensive loss                                                      |   | —             |       | —                |       | —             |       | —        |       | —                           |       | —                   |       | —                                        |       | (1,790,057                            | )          |
| Issuance of common stock for:                                                 |   |               |       |                  |       |               |       |          |       |                             |       |                     |       |                                          |       |                                  |       |
| Sale, net of related expenses of $1,654,753                                   |   | 4,400,000          |       | —                |       | 440,000            |       | —        |       | 21,665,247                       |       | —                   |       | —                                        |       | 22,105,247                            |       |
| Equipment acquisitions                                                        |   | 477,000            |       | —                |       | 47,700             |       | —        |       | 2,074,950                        |       | —                   |       | —                                        |       | 2,122,650                             |       |
| Exercise of options and related income tax  benefits                          |   | 722,334            |       | —                |       | 72,233             |       | —        |       | 653,983                          |       | —                   |       | —                                        |       | 726,216                               |       |
| Balance as of March 31, 2004                                             |   | 27,300,126         |       | —                |       | $                  | 2,730,012  |          | $          | —                           |       | $                        | 82,124,368 |                                          | $          | (14,018,062                           | )          | $ | — |   | $ | 70,836,318 |   |

 

*See accompanying notes to consolidated financialstatements.*

 

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**PIONEERDRILLING COMPANY AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                         |   | **Years  Ended March 31,** |       |
|----------------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                                         |   | **2004**                        |       | **2003** |   | **2002** |   |
| Cash flows from operating activities:                                                        |   |                            |       |   |   |   |   |
| Net earnings (loss)                                                                          |   | $                               | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,318,285 |   |
| Adjustments to reconcile net earnings  (loss) to net cash provided by operating activities:  |   |                            |       |   |   |   |   |
| Depreciation and amortization                                                                |   | 16,160,494                      |       | 11,960,387 |   | 8,426,082 |   |
| Allowance for doubtful accounts                                                              |   | —                          |       | 110,000 |   | — |   |
| Gain on sale of securities                                                                   |   | —                          |       | (203,887 | ) | — |   |
| Loss (gain) on dispositions of properties  and equipment                                     |   | 816,104                         |       | 279,054 |   | (2,237 | ) |
| Change in deferred income taxes                                                              |   | 119,038                         |       | (1,511,744 | ) | 1,991,458 |   |
| Changes in current assets and liabilities:                                                   |   |                            |       |   |   |   |   |
| Receivables                                                                                  |   | (11,103,862                     | )          | 242,126 |   | (4,172,470 | ) |
| Prepaid expenses                                                                             |   | (422,150                        | )          | (279,440 | ) | (322,471 | ) |
| Accounts payable                                                                             |   | (935,597                        | )          | 7,699,417 |   | (1,099,813 | ) |
| Federal income taxes                                                                         |   | 444,900                         |       | 435,168 |   | (930,266 | ) |
| Accrued expenses                                                                             |   | 1,576,096                       |       | 743,814 |   | 836,321 |   |
| Net cash provided by operating activities                                                    |   | 4,864,966                       |       | 14,389,277 |   | 11,044,889 |   |
|                                                                                         |   |                            |       |   |   |   |   |
| Cash flows from financing activities:                                                        |   |                            |       |   |   |   |   |
| Proceeds from notes payable                                                                  |   | 4,110,019                       |       | 23,573,501 |   | 19,556,286 |   |
| Proceeds from subordinated debenture                                                         |   | —                          |       | 10,000,000 |   | 18,000,000 |   |
| Increase in other assets                                                                     |   | (40,000                         | )          | (253,698 | ) | (195,000 | ) |
| Payment of preferred dividends                                                               |   | —                          |       | — |   | (859,395 | ) |
| Proceeds from exercise of options and  warrants                                              |   | 673,794                         |       | 181,790 |   | 243,474 |   |
| Proceeds from common stock, net of offering  cost of $1,654,753 in 2004 and $657,499 in 2003 |   | 22,105,247                      |       | 19,342,501 |   | 9,048,000 |   |
| Payments of debt                                                                             |   | (4,048,744                      | )          | (18,714,311 | ) | (27,026,538 | ) |
| Net cash provided by financing activities                                                    |   | 22,800,316                      |       | 34,129,783 |   | 18,766,827 |   |
| Cash flows from investing activities:                                                        |   |                            |       |   |   |   |   |
| Purchases of property and equipment                                                          |   | (42,722,094                     | )          | (33,588,972 | ) | (27,597,265 | ) |
| Proceeds from sale of marketable securities                                                  |   | —                          |       | 375,414 |   | — |   |
| Proceeds from sale of property and  equipment                                                |   | 419,658                         |       | 314,366 |   | 675,660 |   |
| Net cash used in investing activities                                                        |   | (42,302,436                     | )          | (32,899,192 | ) | (26,921,605 | ) |
| Net increase (decrease) in cash and cash  equivalents                                        |   | (14,637,154                     | )          | 15,619,868 |   | 2,890,111 |   |
| Beginning cash and cash equivalents                                                          |   | 21,002,913                      |       | 5,383,045 |   | 2,492,934 |   |
| Ending cash and cash equivalents                                                             |   | $                               | 6,365,759  |   | $ | 21,002,913 |   | $ | 5,383,045 |   |
| Supplementary disclosure:                                                                    |   |                            |       |   |   |   |   |
| Interest paid                                                                                |   | $                               | 2,821,041  |   | $ | 2,785,177 |   | $ | 1,046,943 |   |
| Income taxes paid (refunded)                                                                 |   | (990,237                        | )          | (1,143,200 | ) | 2,342,006 |   |
| Dividends accrued                                                                            |   | —                          |       | — |   | 92,814 |   |
| Conversion of preferred stock                                                                |   | —                          |       | — |   | 2,999,994 |   |
| Acquisition - common stock issued                                                            |   | 2,122,650                       |       | — |   | — |   |
| Tax benefit from exercise of nonqualified  options                                           |   | 52,423                          |       | 2,720 |   | — |   |

 

*See accompanying notes toconsolidated financial statements.*

 

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**PIONEERDRILLING COMPANY AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

1.                                       Organizationand Summary of Significant Accounting Policies

 

*Business and Principles of Consolidation*

* *

Pioneer Drilling Company provides contract landdrilling services to oil and gas exploration and production companies in theNorth, South and East Texas markets.  Weconduct our operations through our principal operating subsidiary, PioneerDrilling Services, Ltd.  Theaccompanying consolidated financial statements include our accounts and theaccounts of our wholly owned subsidiaries. We have eliminated all intercompany accounts and transactions inconsolidation.

 

We have prepared the accompanying consolidatedfinancial statements in accordance with accounting principles generallyaccepted in the United States of America. In preparing the financial statements, we make various estimates andassumptions that affect the amounts of assets and liabilities we report as ofthe dates of the balance sheets and income and expenses we report for theperiods shown in the income statements and statements of cash flows.  Our actual results could differsignificantly from those estimates. Material estimates that are particularly susceptible to significantchanges in the near term relate to our recognition of revenues and costs forturnkey contracts, our estimate of the allowance for doubtful accounts, ourestimate of the self-insurance portion of our health and workers’ compensationinsurance, our estimate of asset impairments, our estimate of deferred taxesand our determination of depreciation and amortization expense.

 

*Income Taxes*

* *

Pursuant to Statement of Financial AccountingStandards (“SFAS”) No. 109, “Accounting for Income Taxes,” we follow the assetand liability method of accounting for income taxes, under which we recognizedeferred tax assets and liabilities for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  We measure our deferred tax assets andliabilities by using the enacted tax rates we expect to apply to taxable incomein the years in which we expect to recover or settle those temporarydifferences.  Under SFAS No. 109, we reflectin income the effect of a change in tax rates on deferred tax assets andliabilities in the period during which the change occurs.

 

*Earnings (Loss) Per Common Share*

* *

We compute and present earnings (loss) per commonshare in accordance with SFAS No. 128 “Earnings per Share.”  This standard requires dual presentation ofbasic and diluted earnings (loss) per share on the face of our statement ofoperations.  For fiscal 2004 and 2003,we did not include the effects of convertible subordinated debt and stockoptions on loss per common share because they were antidilutive.

 

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*Stock-based Compensation*

* *

We have adopted SFAS No. 123, “Accounting forStock-Based Compensation.”  SFASNo. 123 allows a company to adopt a fair value based method of accountingfor a stock-based employee compensation plan or to continue to use theintrinsic value based method of accounting prescribed by Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  We have elected to continue accounting forstock-based compensation under the intrinsic value method.  Under this method, we record no compensationexpense for stock option grants when the exercise price of the options grantedis equal to the fair market value of our common stock on the date ofgrant.  If we had elected to recognizecompensation cost based on the fair value of the options we granted at theirrespective grant dates as SFAS No. 123 prescribes, our net earnings (loss) andnet earnings (loss) per share would have been reduced to the pro forma amountsthe table below indicates:

 
|                                                                                                                                              |   | **Year Ended  March 31,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                                                                              |   | **2004**                       |       | **2003** |   | **2002** |   |
| Net earnings (loss)-as reported                                                                                                                   |   | $                              | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,318,285 |   |
| Deduct:   Total stock-based employee compensation expense determined under fair  value based method for all awards net of related tax effect |   | (662,933                       | )          | (385,671 | ) | (582,258 | ) |
| Net earnings (loss)-pro forma                                                                                                                     |   | $                              | (2,452,990 | ) | $ | (5,471,289 | ) | $ | 5,736,027 |   |
| Net earnings (loss) per share-as reported-basic                                                                                                   |   | $                              | (0.08      | ) | $ | (0.31 | ) | $ | (0.41 | ) |
| Net earnings (loss) per share-as  reported-diluted                                                                                                |   | (0.08                          | )          | (0.31 | ) | (0.35 | ) |
| Net earnings (loss) per share-pro  forma-basic                                                                                                    |   | $                              | (0.11      | ) | $ | (0.34 | ) | $ | (0.38 | ) |
| Net earnings (loss) per share-pro forma  diluted                                                                                                  |   | (0.11                          | )          | (0.34 | ) | (0.32 | ) |
| Weighted-average fair value of options  granted during the year                                                                                   |   | $                              | 4.46       |   | $ | 3.50 |   | $ | 3.11 |   |

 

We estimate the fair value of each option grant onthe date of grant using a Black-Scholes options-pricing model.  This model assumed expected volatility of94%, 69% and 90% and weighted average risk-free interest rates of  3.3%, 3.2% and 4.5% for grants in 2004, 2003and 2002, respectively, and an expected life of five years.  As we have not declared dividends since webecame a public company, we did not use a dividend yield.  In each case, the actual value that will berealized, if any, will depend on the future performance of our common stock andoverall stock market conditions.  Thereis no assurance the value an optionee actually realizes will be at or near thevalue we have estimated using the Black-Scholes model.

 

*Revenue and Cost Recognition*

* *

We earn our contract drilling revenues underdaywork, turnkey and footage contracts. We recognize revenues on daywork contracts for the days completed basedon the dayrate each contract specifies. We recognize revenues from our turnkey and footage contracts on thepercentage-of-completion method based on our estimate of the number of days tocomplete each well.  Individual wellsare usually completed in less than 60 days.

 

Our management has determined that it is appropriateto use the percentage-of-completion method to recognize revenue on our turnkeyand footage contracts.  Although ourturnkey and footage contracts do not have express terms that provide us withrights receive payment for the work that we perform prior to drilling wells tothe agreed on depth, we use this method because, as provided in applicableaccounting literature, we believe we achieve a continuous sale for ourwork-in-progress and believe, under applicable state law, we ultimately couldrecover the fair value of our work-in-progress even in the event we were unableto drill to the agreed on depth in breach of the applicable contract.  However, ultimate recovery of that value, inthe event we were unable to drill to the agreed on depth in breach of thecontract, would be subject to negotiations with the customer and thepossibility of litigation.

 

If a customer defaults on its payment obligation tous under a turnkey or footage contract, we would need to rely on applicable lawto enforce our lien rights, because our turnkey and footage contracts do notexpressly grant to us a security interest in the work we have completed underthe contract and we have no ownership rights in the work-in-progress orcompleted drilling work, except any rights arising under the applicable lienstatute on foreclosure.  If we wereunable to drill to the agreed on depth in breach of the contract, we also wouldneed to rely on equitable remedies outside of the contract, including *quantummeruit*, available in applicable courts to recover the fair value ofour work-in-progress under a turnkey or footage contract.

 

We accrue estimated costs on turnkey and footagecontracts for each day of work completed based on our estimate of the totalcost to complete the contract divided by our estimate of the number of days tocomplete the contract.  Contract costsinclude labor, materials, supplies, repairs, maintenance, operating overheadallocations and allocations of depreciation and amortization 

 

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expense. We charge generaland administrative expenses to expense as we incur them. Changes in jobperformance, job conditions and estimated profitability on uncompleted contractsmay result in revisions to costs and income. When we encounter, during the course of our drilling operations,conditions unforeseen in the preparation of our original cost estimate, weimmediately increase our cost estimate for the additional costs to complete thecontract.  If we anticipate a loss on acontract in progress at the end of a reporting period due to a change in ourcost estimate, we immediately accrue the entire amount of the estimated lossincluding all costs that are included in our revised estimated cost to completethat contract in our consolidated statement of operations for that reportingperiod.

 

The asset “contract drilling in progress” representsrevenues we have recognized in excess of amounts billed on contracts inprogress.

 

*Prepaid Expenses*

* *

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

 

*Property and Equipment*

* *

We provide for depreciation of our drilling, transportationand other equipment using the straight-line method over useful lives that wehave estimated and that range from three to 15 years.  We record the same depreciation expense whether a rig is idle orworking.

 

We charge our expenses for maintenance and repairsto operations.  We charge our expensesfor renewals and betterments to the appropriate property and equipmentaccounts.  Our gains and losses on thesale of our property and equipment are recorded in drilling costs.  During fiscal 2004 and 2003, we capitalized$106,395 and $96,079, respectively, of interest costs incurred during theconstruction periods of certain drilling equipment.  At March 31, 2004 and 2003, costs incurred on rigs underconstruction were approximately $2,800,000 and $2,415,000, respectively.

 

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

 

*Cash Equivalents*

* *

For purposes of the statements of cash flows, weconsider all highly liquid debt instruments purchased with a maturity of threemonths or less to be cash equivalents. Cash equivalents consist of investments in corporate and government moneymarket accounts and auction rate seven day taxable preferred securities.  Cash equivalents at March 31, 2004 and2003 were $6,118,000 and $1,060,000, respectively.

 

*Investment Securities*

* *

We carry our available-for-sale investmentsecurities at their fair values. Investment securities consist of common stock.  Unrealized holding gains and losses, net of the related taxeffect, on available-for-sale securities are excluded from earnings and arereported as a separate component of other comprehensive income untilrealized.  Realized gains and lossesfrom the sale of available-for-sale securities are determined on a specificidentification basis. As of March 31, 2002, these securities had anaggregate cost of $171,527, a gross unrealized gain of $165,782 and anaggregate fair value of $337,309.  Wesold all of our investment securities in April 2002, realizing a gain of$203,887.

 

*Trade Accounts Receivable*

* *

We record trade accounts receivable at the amount weinvoice our customers.  These accountsdo not bear interest.  The allowance fordoubtful accounts is our best estimate of the amount of probable credit lossesin our accounts receivable as of the balance sheet date. We determine theallowance based on the credit worthiness of our customers and general economicconditions.   Consequently, an adversechange in those factors could affect our estimate of our allowance for doubtfulaccounts.  We review our allowance fordoubtful accounts monthly.  Balancesmore than 90 days past due are reviewed individually for collectibility.  We charge off account balances against theallowance after we have exhausted all reasonable means of collection anddetermined that the potential for recovery is remote.  We do not have any off-balance-sheet credit exposure related toour customers.  At March 31, 2004and 2003 our allowance for doubtful accounts was $110,000.

 

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*OtherAssets*

 

Other assets consist of cash deposits related to thedeductibles on our workers compensation insurance policies, loan fees net ofamortization and intangibles related to acquisitions, net of amortization.  Loan fees are amortized over the terms ofthe related debt.  Intangibles relatedto acquisitions, primarily customer lists, are amortized over their estimatedbenefit periods of up to 18 months.

 

*Derivative Instruments and Hedging Activities*

* *

We do not have any free standing derivativeinstruments and we do not engage in hedging activities.

 

*RecentlyIssued Accounting Standards*

 

On April 1, 2003, we adopted SFAS No. 143, *Accounting for Asset Retirement Obligations*,which addresses financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  The standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development and/or normal use of theasset.  In that connection, we wererequired to identify all our legal obligations relating to asset retirementsand determine the fair value of these obligations as of April 1,2003.  Our adoption of SFAS No. 143 didnot have a material effect on our financial position or results of operations.

 

On July 1, 2003, we adopted SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities.*  This statement amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments in other contracts (collectively referred to asderivatives) and for hedging activities under SFAS No. 133, *Accountingfor Derivative Instrument and Hedging Activities*. The provisions ofthis statement are effective for contracts entered into or modified afterJune 30, 2003 and hedging relationships designated after June 30,2003.  Except for the provisions relatedto SFAS No. 133, all provisions of this statement will be appliedprospectively.  In addition, paragraphs7(a) and 23(a) of this statement, which relate to forward purchases or sales ofwhen-issued securities or other securities that do not yet exist, should beapplied to both existing contracts and new contracts entered into afterJune 30, 2003.  Our adoption ofSFAS No. 149 did not have a material effect on our financial position or resultsof operations.

 

On July 1, 2003, we adopted SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity.*  This statementrequires issuers to classify as liabilities (or assets in some circumstance)three classes of freestanding financial instruments that embody obligations ofthe issuer. The provisions of this statement are effective for financialinstruments entered into or modified after May 31, 2003, and otherwise areeffective at the beginning of the first interim period beginning afterJune 15, 2003.  Our adoption ofSFAS No. 150 did not have a material effect on our financial position orresults of operations.

 

*Reclassifications*

 

Certain amounts in the financial statements for theprior years have been reclassified to conform to the current year’spresentation.

 

**2.**                                      **Acquisitions**

 

On May 28, 2002, we acquired all the land contractdrilling 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 purchase was accounted for as anacquisition of assets, and the purchase price was allocated to drillingequipment and related assets based on their relative fair values at the date ofacquisition.

 

  OnAugust 1, 2003, we purchased two land drilling rigs, associated spareparts and equipment and vehicles from Texas Interstate Drilling Company, L. P.for $2,500,000 in cash and the issuance of 477,000 shares of our common stockat $4.45 per share.  The purchase wasaccounted for as an acquisition of a business, and we have included the resultsof operations of these assets in our statement of operations since the date ofacquisition. We allocated the purchase price to drilling equipment and relatedassets, including intangibles, based on their relative fair values at the dateof acquisition.

 

OnDecember 15, 2003, we acquired for approximately $3,770,000 a rig we hadpreviously been leasing from International Drilling Services, Inc.  This purchase was accounted for as anacquisition of assets.

 

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On March 2, 2004, we acquired 23 used righauling trucks and associated trailers and equipment from A & R TrejoTrucking for $1,200,000.  This purchasewas accounted for as an acquisition of assets, and the purchase price wasallocated to the trucks and related assets based on their relative fair valuesat the date of acquisition.

 

On March 4, 2004, we acquired a seven-rigdrilling fleet from Sawyer Drilling & Services, Inc. for $12,000,000. Thispurchase was accounted for as an acquisition of a business, and we haveincluded the results of operations of these assets in our statement ofoperations since the date of acquisition. We allocated the purchase price to drilling equipment and relatedassets, including intangibles, based on their relative fair values at the dateof acquisition.

 

On March 12, 2004, we acquired one drilling rigfrom SEDCO Drilling Co., Ltd. for $2,015,000. This purchase was accounted foras an acquisition of assets, and we have included the results of operations ofthese assets in our statement of operations since the date of acquisition.  We allocated the purchase price to drillingequipment and related assets, including intangibles, based on their relativefair values at the date of acquisition.

 

**3.****                                     ****Long-term Debt, SubordinatedDebt and Note Payable**

 

Ourlong-term debt is described below:

 
|                                                                                                                                                                                                                                                      |   | **March 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|
|                                                                                                                                                                                                                                                      |   | **2004**           |       | **2003** |   |
| Convertible subordinated debentures due July 2007  at 6.75% (1)                                                                                                                                                                                      |   | $                  | 28,000,000 |   | $ | 28,000,000 |   |
|                                                                                                                                                                                                                                                      |   |               |       |   |   |
| Note payable to Merrill Lynch Capital,  secured by drilling equipment, due in monthly payments of $172,619 plus  interest at a floating rate equal to the 3-month LIBOR rate (1.1% at  March 31, 2004) plus 385 basis points, due December 2007 |   | 13,119,048         |       | 14,500,000 |   |
|                                                                                                                                                                                                                                                      |   |               |       |   |   |
| Note payable to Frost National Bank,  secured by drilling equipment, due in monthly payments of $107,143 plus  interest at prime (4.0% at March 31, 2004) plus 1.0%, due  August 2007                                                           |   | 4,392,174          |       | 5,677,889 |   |
|                                                                                                                                                                                                                                                      |   |               |       |   |   |
| Note payable to Small Business  Administration, secured by second lien on land and improvements, due in  monthly payments of $912 including interest at 6.71%, due November 2015  (paid off April, 2003)                                             |   | —             |       | 87,897 |   |
|                                                                                                                                                                                                                                                      |   |               |       |   |   |
| Note payable to Frost National Bank,  secured by drilling equipment, due in monthly payments of $42,401, including  interest at prime plus (4.0% at March 31, 2004) plus 1.0%, beginning  April 15, 2004, due March 15, 2007 (2)           |   | 3,000,000          |       | — |   |
|                                                                                                                                                                                                                                                      |   | 48,511,222         |       | 48,265,786 |   |
|                                                                                                                                                                                                                                                      |   |               |       |   |   |
| Less current installments                                                                                                                                                                                                                                 |   | (3,724,302         | )          | (2,671,269 | ) |
|                                                                                                                                                                                                                                                      |   | $                  | 44,786,920 |   | $ | 45,594,517 |   |

 

----

(1)          Wedge Energy Services, LLC (“WEDGE”) holds $27,000,000 of theconvertible subordinated debentures and William H.  White, a former director of our company, holds $1,000,000.  WEDGE owns 26.5% of our common stock (40.2%if the debentures were converted). Beginning July 3, 2004, we have the option to redeem all or part ofthe debentures by paying a premium of 5% through July 2, 2005, 4% throughJuly 2, 2006, 3% through July 2, 2007 and 0% thereafter.

 

(2)          We incurred this debt to finance the purchase of the rig we werepreviously leasing.

 

37

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Long-termdebt maturing each year subsequent to March 31, 2004 is as follows:

 
| **Year Ended  March 31,** |   |       |      |
|--------------------------------|--------|------------|-----------|
| 2005                           |   | $          | 3,724,302 |   |
| 2006                           |   | 3,743,087  |      |
| 2007                           |   | 5,604,040  |      |
| 2008                           |   | 35,439,793 |      |
| 2009                           |   | —     |      |
| 2010 and thereafter            |   | —     |      |
|                                |        |            |           |  |

 

On October 9, 2001, we issued a 6.75% five-year$18,000,000 convertible subordinated debenture, Series A, to WEDGE EnergyServices, L.L.C. (“WEDGE”). The debenture was convertible into 4,500,000 sharesof common stock at $4.00 per share.  Weused approximately $9,000,000 of the proceeds to complete the construction oftwo drilling rigs.  Approximately$6,000,000 was used to reduce a $12,000,000 credit facility.  The balance of the proceeds was used fordrilling equipment and working capital. On July 3, 2002, we issued anadditional $10,000,000 of 6.75% convertible subordinated debt to WEDGE with aneffective conversion rate of $5.00 per share. The transaction was effected by an agreement between Pioneer and WEDGEunder which WEDGE agreed to provide the additional $10,000,000 in financing andto cancel the previously issued debenture in the principal amount of$18,000,000 in exchange for $28,000,000 in new 6.75% convertible subordinateddebentures.  The new debentures areconvertible into 6,500,000 shares of common stock at $4.31 per share, whichresulted from a pro rata blending of the $5.00 conversion rate of the new$10,000,000 financing and the $4.00 conversion rate of the $18,000,000debenture being cancelled.  WEDGE funded$7,000,000 of the $10,000,000 on July 3, 2002 and $2,000,000 on July 29,2002.   William H. White, a formerDirector of our Company and the former President of WEDGE, purchased theremaining $1,000,000 on July 29, 2002. Unlike the cancelled debenture, which was not redeemable by Pioneer, thenew debentures are redeemable at a scheduled premium.  We used $7,000,000 of the proceeds to pay down bank debt and$3,000,000 for the purchase of drilling equipment.

 

We have a $2,500,000 line of credit available fromFrost National Bank.  Any borrowingsunder this line of credit are secured by our trade receivables and bearinterest at a rate of prime (4.00% at March 31, 2004) plus 1.0%.   The sum of draws under this line and theamount of all outstanding letters of credit issued by the bank for our accountare limited to 75% of eligible accounts receivable.  Therefore, if 75% of our eligible accounts receivable is lessthan $2,500,000 plus any outstanding letters of credit issued by the bank onour behalf, our ability to draw under this line would be reduced.  At March 31, 2004, we had no outstandingadvances under this line of credit, letters of credit were $1,664,000 and 75%of eligible accounts receivable was approximately $8,030,000.  The letters of credit are issued to twoworkers’ compensation insurance companies to secure possible future claims thatdo not exceed the deductibles on these policies.  It is our practice to pay any amounts due that do not exceedthese deductibles as they are incurred. Therefore, we do not anticipate the lender will be required to fund anydraws under these letters of credit.

 

At March 31, 2004, we were in compliance withall covenants applicable to our outstanding debt.  Those covenants include, among others, leverage, cash flowcoverage, fixed charge coverage, net worth ratios and restrict us from payingdividends.

 

Notespayable at March 31, 2004 consists of a $558,070 insurance premium notedue in monthly installments of $112,355 through August 26, 2004 whichbears interest at the rate of 2.65% per year.

 

**4.****                                     ****Leases**

 

We are obligated under capital leases covering several trucks thatexpire at various dates through January 2007.   At

March 31, 2004 and 2003, the gross amount of transportationequipment and related amortization recorded under capital

leases were as follows:

 
|                          |   | **March 31,** |    |
|-------------------------------|--------|--------------------|---------|
|                          |   | **2004**           |    | **2003** |   |
| Transportation equipment      |   | $                  | 665,195 |   | $ | 647,822 |   |
| Less accumulated amortization |   | 413,797            |    | 248,070 |   |
|                          |   | $                  | 251,398 |   | $ | 399,752 |   |

 

Amortization of assets held under capital leases is included withdepreciation expense.

 

38

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Welease real estate in Henderson, Texas; Alice, Texas; and Decatur, Texas andvarious office equipment under non-cancelable operating leases expiring through2006.

 

Rent expense under these operating leases for theyears ended March 31, 2004, 2003 and 2002 was $278,746, $344,752 and $208,150,respectively.

 

Future lease obligations and minimum capital leasepayments as of March 31, 2004 were as follows:

 
| **Year Ended  March 31,**                                           |   | **Operating  Leases** |    | **Capital  Leases** |   |
|--------------------------------------------------------------------------|--------|-----------------------|---------|---------------------|--------|
| 2005                                                                     |   | $                     | 121,608 |                | $      | 166,604 |   |
| 2006                                                                     |   | 122,940               |    | 70,446              |   |
| 2007                                                                     |   | 69,912                |    | 34,106              |   |
| 2008                                                                     |   | —                |    | —              |   |
| Total minimum lease payments                                             |   | $                     | 314,460 |                | $      | 271,156 |   |
|                                                                     |   |                  |    |                |   |
| Less amounts representing interest (at rates ranging from 5.8% to  9.5%) |   | (25,468               | )       |
| Present value of net minimum capital lease payments                      |   | 245,688               |    |
| Less current installments of capital lease obligations                   |   | (140,934              | )       |
| Capital lease obligations, excluding current installments                |   | $                     | 104,754 |                |

 

5.                                       **Income Taxes**

 

Ourprovision for income taxes consists of the following:

 
|                         |   | **Years  Ended March 31,** |     |
|------------------------------|--------|---------------------------------|----------|
|                         |   | **2004**                        |     | **2003** |   | **2002** |   |
|                         |   |                            |     |   |   |   |   |
| Current tax - federal        |   | $                               | —   |   | $ | (708,032 | ) | $ | 1,427,067 |   |
| Deferred tax - federal       |   | (426,299                        | )        | (1,511,744 | ) | 1,991,458 |   |
| Income tax expense (benefit) |   | $                               | (426,299 | ) | $ | (2,219,776 | ) | $ | 3,418,525 |   |

 

In fiscal years 2004, 2003 and 2002, our expected tax, which we computeby applying the federal statutory rate of 34% to income (loss) before income taxes, differs from our income taxexpense as follows:

 
|                                           |   | **Years  Ended March 31,** |     |
|------------------------------------------------|--------|---------------------------------|----------|
|                                           |   | **2004**                        |     | **2003** |   | **2002** |   |
|                                           |   |                            |     |   |   |   |   |
| Expected tax expense (benefit)                 |   | $                               | (753,561 | ) | $ | (2,483,834 | ) | $ | 3,310,515 |   |
| Non taxable interest income                    |   | —                          |     | (10,400 | ) | (9,429 | ) |
| Club dues, meals and entertainment             |   | 13,941                          |     | 10,443 |   | 10,115 |   |
| Reimbursement of food costs for rig  employees |   | 314,622                         |     | 275,338 |   | 270,000 |   |
| Other                                          |   | (1,301                          | )        | (11,323 | ) | (162,676 | ) |
|                                           |   | $                               | (426,299 | ) | $ | (2,219,776 | ) | $ | 3,418,525 |   |

 

39

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Deferred income taxes arise from temporary differences between the taxbasis of assets and liabilities and their reported amounts in the consolidatedfinancial statements.  The components ofour deferred income tax liabilities were as follows:

 
|                                                                    |   | **March 31,** |      |
|-------------------------------------------------------------------------|--------|--------------------|-----------|
|                                                                    |   | **2004**           |      | **2003** |   |
|                                                                    |   |               |      |   |   |
| Deferred tax assets:                                                    |   |               |      |   |   |
| Workers compensation and vacation expense accruals                      |   | $                  | 224,985   |   | $ | 94,972 |   |
| Bad debt expense                                                        |   | 37,400             |      | 37,400 |   |
| Net operating loss carryforwards                                        |   | 7,825,126          |      | 5,105,730 |   |
| Alternative minimum tax credit                                          |   | 181,770            |      | 181,770 |   |
| Loss accrual on turnkey contracts                                       |   | 23,000             |      | 48,619 |   |
| Total deferred tax assets                                               |   | 8,292,281          |      | 5,468,491 |   |
| Deferred tax liabilities:                                               |   |               |      |   |   |
| Property and equipment, principally due to differences in  depreciation |   | 14,017,813         |      | 11,127,408 |   |
| Total deferred tax liabilities                                          |   | 14,017,813         |      | 11,127,408 |   |
| Net deferred tax liabilities                                            |   | $                  | 5,725,532 |   | $ | 5,658,917 |   |

 

In assessing our ability to realize deferredtax assets, we consider whether it is more likely than not that some portion orall of the deferred tax assets will not be realized.  Our ultimate realization of deferred tax assets depends on thegeneration of future taxable income during the periods in which those temporarydifferences become deductible.  Weconsider the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment.  Based on the level of historical taxable incomeand projections for future taxable income over the periods during which thedeferred tax assets are deductible, we believe it is more likely than not thatwe will realize the benefits of these deductible differences.

 

AtMarch 31, 2004, we had net operating loss carryforwards for federal incometax purposes of approximately $25,500,000 which will expire if not utilized asof the end of our fiscal years ending as follows:

 
| **Year** |   | **Amount** |   |
|----------|--------|------------|--------|
| 2023     |   | 15,000,000 |   |
| 2024     |   | 10,500,000 |   |

 

**6.****                                     ****Fair Value of FinancialInstruments**

 

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

 

The carrying amounts of our cash and cashequivalents, trade receivables, payables and short-term debt approximate theirfair values.

 

*Long-term debt:*

 

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

 

40

----

 

**7.****                                     ****Earnings (Loss) Per CommonShare**

 

The following table presents a reconciliation of thenumerators and denominators of the basic EPS and diluted EPS comparisons asrequired by SFAS No. 128:

 
|                                                                     |   | **Years  Ended March 31,** |       |
|--------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                     |   | **2004**                        |       | **2003** |   | **2002** |   |
|                                                                     |   |                            |       |   |   |   |   |
| Basic                                                                    |   |                            |       |   |   |   |   |
| Net earnings (loss)                                                      |   | $                               | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,318,285 |   |
| Less:   Preferred stock dividends                                   |   | —                          |       | — |   | 92,814 |   |
| Earnings (loss) applicable to common  shareholders                       |   | $                               | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,225,471 |   |
| Weighted average shares                                                  |   | 22,585,612                      |       | 16,163,098 |   | 15,112,272 |   |
| Earning (loss) per share                                                 |   | $                               | (0.08      | ) | $ | (0.31 | ) | $ | 0.41 |   |
|                                                                     |   |                            |       |   |   |   |   |
|                                                                     |   |                            |       |   |   |   |   |
| Diluted                                                                  |   |                            |       |   |   |   |   |
| Earnings (loss) applicable to common  shareholders                       |   | $                               | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,225,471 |   |
| Effect of dilutive securities:                                           |   |                            |       |   |   |   |   |
| Convertible subordinated debenture                                       |   | —                          |       | — |   | 385,358 |   |
| Preferred stock                                                          |   | —                          |       | — |   | 92,814 |   |
| Earnings (loss) available to common  shareholders and assumed conversion |   | $                               | (1,790,057 | ) | $ | (5,085,618 | ) | $ | 6,703,643 |   |
| Weighted average shares:                                                 |   |                            |       |   |   |   |   |
| Outstanding                                                              |   | 22,585,612                      |       | 16,163,098 |   | 15,112,272 |   |
| Options                                                                  |   | —                          |       | — |   | 1,500,589 |   |
| Convertible subordinated debenture                                       |   | —                          |       | — |   | 2,145,205 |   |
| Preferred stock                                                          |   | —                          |       | — |   | 463,190 |   |
|                                                                     |   | 22,585,612                      |       | 16,163,098 |   | 19,221,256 |   |
| Earnings (loss) per share                                                |   | $                               | (0.08      | ) | $ | (0.31 | ) | $ | 0.35 |   |

 

Theweighted average number of diluted shares in 2004 and 2003 excludes 7,612,924and 7,185,995, respectively, of shares for options and convertible debt due totheir antidilutive effect.

 

**8.****                                     ****Equity Transactions**

 

On May 18, 2001, we retired the 4.86%subordinated debenture we issued to WEDGE on March 30, 2001 in connectionwith the Mustang Drilling, Ltd. acquisition. 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-termbank borrowing.  We then sold 2,400,000shares of our common stock to WEDGE in a private placement for $9,048,000, or$3.77 per share.  We used the proceedsfrom this sale to fund the repayment of the short-term bank borrowing.

 

In accordance with the terms of the Series BPreferred Stock Agreement that we entered into on January 20, 1998, theconversion price for our Series B convertible preferred stock was revised from$3.25 per share to $2.50 per share as of January 20, 2001.  This revision was based on the averagetrading price of our common stock for the 30 trading days preceding thatdate.  In August 2001, the holdersconverted all of their 184,615 shares of our Series B convertible preferredstock into 1,199,038 shares of our common stock at $2.50 per share.

 

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

 

OnMarch 31, 2003, we sold 5,333,333 shares of our common stock to ChesapeakeEnergy Corporation for $20,000,000 ($3.75 per share), before related offeringexpenses.  In connection with that sale,we granted Chesapeake Energy a preemptive right

 

41

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to acquire equity securities we may issue in the future, underspecified circumstances, in order to permit Chesapeake Energy to maintain itsproportionate ownership of our outstanding shares of common stock.  We also granted Chesapeake Energy a right,under certain circumstances, to request registration of the acquired sharesunder the Securities Act of 1933.  AtMarch 31, 2004, Chesapeake Energy owned 19.54% of our outstanding commonstock.  During the year endedMarch 31, 2004, we recognized revenues of approximately $924,000 andrecorded contract drilling costs of approximately $745,000, excludingdepreciation, on one daywork contract with Chesapeake Energy Corporation.  Although our normal payment terms are 30days from date of invoice, Chesapeake Energy Corporation requires 60 daypayment terms.

 

OnFebruary 20, 2004, we sold 4,400,000 shares of our common stock at $5.40per share in a private placement for $23,760,000 in proceeds, before relatedoffering expenses.  Although we issuedthose shares without registration under the Securities Act of 1933 in relianceon the exemption that Section 4(2) of that Act provides for transactionsnot involving any public offering, we filed a registration statement on FormS-3 to register those shares.  Theregistration statement became effective on June 22, 2004.

 

Directorsand employees exercised stock options for the purchase of 722,334 shares ofcommon stock at prices ranging from $.625 to $3.20 per share during the yearended March 31, 2004, 445,000 shares of common stock at prices rangingfrom $.375 to $2.50 per share during the year ended March 31, 2003 and27,500 shares of common stock at prices ranging from $0.375 to $1.00 per shareduring the year ended March 31, 2002.

 

**9.**                                      **Stock Options, Warrants and Stock Option Plan**

 

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

 

The following table provides information relating toour outstanding stock options at March 31, 2004, 2003 and 2002:

 
|                |   | **2004**                                      |   | **2003**                       |      | **2002**                                      |      |
|---------------------|--------|-----------------------------------------------|--------|--------------------------------|-----------|-----------------------------------------------|-----------|
|                |   | **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   |   | 1,825,000                                     |   | $                              | .375-5.15 |                                          | 2,320,000 |   | $ | 0.375-5.15 |   | 2,177,500 |   | $ | 0.375-4.60 |   |
| Granted             |   | 1,000,000                                     |   | $                              | 3.67-4.99 |                                          | 65,000    |   | $ | 3.20-4.50 |   | 585,000 |   | $ | 3.00-5.15 |   |
| Exercised           |   | (722,334                                      | )      | $                              | .625-3.20 |                                          | (445,000  | ) | $ | 0.375-2.50 |   | (177,500 | ) | $ | 0.375-1.50 |   |
| Canceled            |   | (46,000                                       | )      | $                              | 2.25      |                                          | (115,000  | ) | $ | 2.25-4.60 |   | (265,000 | ) | $ | 2.25 |   |
| Balance Outstanding |   |                                          |   |                           |      |                                          |      |   |   |   |   |   |   |
| End of year         |   | 2,056,666                                     |   | $                              | .375-5.15 |                                          | 1,825,000 |   | $ | 0.375-5.15 |   | 2,320,000 |   | $ | 0.375-5.15 |   |
| Options Exercisable |   |                                          |   |                           |      |                                          |      |   |   |   |   |   |   |
| End of year         |   | 884,001                                       |   |                           |      | 1,437,334                                     |      |   |   | 1,734,000 |   |   |   |

 

As of March 31, 2004, there were no outstandingwarrants.

 

At March 31, 2004, the weighted averageexercise price of our outstanding options was $3.24 per share and the weightedaverage exercise price of our exercisable options was $1.95 per share.

 

**10.**                               **EmployeeBenefit****Plans and Insurance**

 

We maintain a 401(k) retirement plan for oureligible employees.  Under this plan, wemay contribute, on a discretionary basis, a percentage of an eligibleemployee’s annual contribution, which we determine annually.  Our contributions for fiscal 2004, 2003 and2002 were approximately $76,000, $92,000 and $153,000, respectively.

 

We maintain a self-insurance program, for majormedical, hospitalization and dental coverage for employees and theirdependents, which is partially funded by payroll deductions.  We have provided for both reported andincurred but not reported medical costs in the accompanying consolidatedbalance sheets.  We have a maximumliability of $100,000 per employee/dependent per year.  Amounts in excess of the stated maximum arecovered under a separate policy provided by an insurance company.

 

42

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Accrued expenses atMarch 31, 2004 include approximately $280,000 for our estimate of incurredbut unpaid costs related to the self-insurance portion of our health insurance.

 

We are self-insured for up to $250,000 for allworkers’ compensation claims submitted by employees for on-the-jobinjuries.  We have provided for bothreported and incurred but not reported costs of workers’ compensation coveragein the accompanying consolidated balance sheets.  Accrued expenses at March 31, 2004 include approximately$400,000 for our estimate of incurred but unpaid costs related to workers’compensation claims.  Based upon ourpast experience, management believes that we have adequately provided forpotential losses.  However, futuremultiple occurrences of serious injuries to employees could have a materialadverse effect on our financial position and results of operations.

 

**11.****                              ****Business Segments and Supplementary Earnings Information**

 

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

 

During the fiscal year ended March 31,2004, our three largest customers accounted for 10.5%, 6.4% and 4.9%,respectively, of our total contract drilling revenue.  Two of these customers were customers of ours in 2003.  In fiscal 2003, our three largest customersaccounted for 10.8%, 6.5% and 5.4%, of our total contract drillingrevenue.  Two of these customers werecustomers of ours in fiscal 2002.  Infiscal 2002, our three largest customers accounted for 13.7%, 12.2% and 11.1%of our total contract drilling revenue.

 

**12.**                               **Commitmentsand Contingencies**

 

Weare in the process of constructing, primarily from used components, a 1000-hpelectric drilling rig.  As ofMarch 31, 2004, we have incurred approximately $2,800,000 of constructioncosts.  We anticipate additionalconstruction costs of $1,200,000 to $1,700,000.  The rig began moving to its first drilling location on May 28,2004.

 

Inaddition, 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 ourbusiness activities, including workers’ compensation claims andemployment-related disputes.  In theopinion of our management, none of the pending litigation, disputes or claimsagainst us will have a material adverse effect on our financial condition,results of operations or cash flow from operations and there is only a remotepossibility that any such matter will require any additional loss accrual.

 

**13.****                              ****Quarterly Results of Operations (unaudited)**

 

The following table summarizes quarterly financialdata for our fiscal years ended March 31, 2004 and 2003 (in thousands,except per share data):

 
|                          |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|-------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
| 2004                          |   |               |   |                |   |               |   |                |   |      |   |
| Revenues                      |   | $                  | 23,850 |                | $      | 24,244             |   | $                   | 26,414 |      | $      | 33,368 |   | $ | 107,876 |   |
| Income (loss) from operations |   | (789               | )      | (166                | )      | 9                  |   | 1,384               |   | 438       |   |
| Net earnings (loss)           |   | (1,056             | )      | (621                | )      | (522               | )      | 409                 |   | (1,790    | )      |
| Earnings (loss) per share:    |   |               |   |                |   |               |   |                |   |      |   |
| Basic                         |   | (.05               | )      | (.03                | )      | (.02               | )      | .02                 |   | (.08      | )      |
| Diluted                       |   | (.05               | )      | (.03                | )      | (.02               | )      | .02                 |   | (.08      | )      |
|                          |   |               |   |                |   |               |   |                |   |      |   |
| 2003                          |   |               |   |                |   |               |   |                |   |      |   |
| Revenues                      |   | $                  | 18,452 |                | $      | 17,042             |   | $                   | 19,795 |      | $      | 24,894 |   | $ | 80,183 |   |
| Income (loss) from operations |   | 153                |   | (1,251              | )      | (1,840             | )      | (2,005              | )      | (4,943    | )      |
| Net earnings (loss)           |   | (172               | )      | (1,302              | )      | (1,704             | )      | (1,908              | )      | (5,086    | )      |
| Earnings (loss) per share:    |   |               |   |                |   |               |   |                |   |      |   |
| Basic                         |   | (.01               | )      | (.08                | )      | (.11               | )      | (.11                | )      | (.31      | )      |
| Diluted                       |   | (.01               | )      | (.08                | )      | (.11               | )      | (.11                | )      | (.31      | )      |

 

43

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## ***Item 9.***          Changes in andDisagreements With Accountants on Accounting and Financial Disclosure

## *** ***

Not applicable.

 

***Item 9A*****.****                        ****Controls andProcedures**

 

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this report.  Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of March 31, 2004 to providereasonable assurance that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

There has been no change in our internal controls overfinancial reporting that occurred during the three months ended March 31,2004 that has materially affected, or is likely to materially affect, ourinternal controls over financial reporting.

 

# **PART III**

#  

In Items 10, 11, 12 and 13 below, we are incorporatingby reference the information we refer to in those Items from the definitiveproxy statement for our 2004 Annual Meeting of Shareholders.  We intend to file that definitive proxystatement with the SEC by July 15, 2004.

 

## ***Item 10.***   Directors and ExecutiveOfficers of the Registrant

## *** ***

Please see the information appearing under theheadings “Proposal No. 1—Election of Directors” and “Executives and ExecutiveCompensation” in the definitive proxy statement for our 2004 Annual Meeting ofShareholders for the information this Item 10 requires.

 

## ***Item 11.***   Executive Compensation

## *** ***

Please see the information appearing under theheading “Executives and Executive Compensation” in the definitive proxystatement for our 2004 Annual Meeting of Shareholders for the information thisItem 11 requires.

 

## ***Item 12.***   Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters

## *** ***

Please see the information appearing (1) under theheading “Equity Compensation Plan Information” in Item 5 of this report and (2)under the heading “Security Ownership of Certain Beneficial Owners andManagement” in the definitive proxy statement for our 2004 Annual Meeting ofShareholders for the information this Item 12 requires.

 

## ***Item 13.***   Certain Relationships andRelated Transactions

## *** ***

Please see the information appearing under theheading “Certain Transactions” in the definitive proxy statement for our 2004Annual Meeting of Shareholders for the information this Item 13 requires.

 

## ***Item 14.***   Principal Accountant Feesand Services

## *** ***

Please see the informationappearing under the heading “Ratification of Appointment of IndependentAuditors” in the definitive proxy statement for our 2004 Annual Meeting ofShareholders for the information this Item 14 requires.

 

44

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**PARTIV**

 

***Item 15.* Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 
| (a)(1) |   | *Financial Statements.*                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                          |
|   |   | See Index to Consolidated Financial Statements on page 27.                                                                                                                    |
|   |   |                                                                                                                                                                          |
| (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 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. 1-8182, Exhibit 2.2)).                 |
|                |   |                                                                                                                                                                                                                                                                   |
| 2.2*                | -      | 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. 1-8182, Exhibit 2.3)).                                             |
|                |   |                                                                                                                                                                                                                                                                   |
| 2.3*                | -      | 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. (Form 10-K for the year ended March 31, 2002 (File  No. 1-8182, Exhibit 2.4))             |
|                |   |                                                                                                                                                                                                                                                                   |
| 2.4*                | -      | 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. (Form 10-K for the year ended  March 31, 2002 (File No. 1-8182, Exhibit 2.5)) |
|                |   |                                                                                                                                                                                                                                                                   |
| 3.1*                | -      | Articles of Incorporation of Pioneer Drilling Company, as amended  (Form 10-K for the year ended March 31, 2001 (File No. 1-8182, Exhibit  3.1)).                                                                                                                 |
|                |   |                                                                                                                                                                                                                                                                   |
| 3.2*                | -      | Articles of Amendment to the Articles of Incorporation of Pioneer  Drilling Company (Form 10-Q for the quarter ended September 30, 2001  (File No. 1-8182, Exhibit 3.1)).                                                                                         |
|                |   |                                                                                                                                                                                                                                                                   |
| 3.3*                | -      | Amended and Restated Bylaws of Pioneer Drilling Company (Form 10-Q  for the quarter ended December, 2003 (File No. 1-8182, Exhibit 3.3)).                                                                                                                              |
|                |   |                                                                                                                                                                                                                                                                   |
| 4.1*                | -      | Debenture Agreement Dated July 3, 2002 by and between WEDGE  Energy Service, L.L.C. and Pioneer Drilling Company (Form 8-K filed  July 18, 2002 (File No. 1-8182, Exhibit 4.1)).                                                                             |
|                |   |                                                                                                                                                                                                                                                                   |
| 4.2*                | -      | Debenture Purchase Agreement dated July 3, 2002 by and between  WEDGE Energy Services, L.L.C. and Pioneer Drilling Company (Form 8-K filed  July 18, 2002 (File No. 1-8182, Exhibit 4.2)).                                                                   |
|                |   |                                                                                                                                                                                                                                                                   |
| 4.3*                | -      | Subordination Agreement dated July 3, 2002 by and between The  Frost National Bank, WEDGE Energy Services, L.L.C., Pioneer Drilling Company  and Pioneer Drilling Services, Ltd. (Form 8-K filed July 18, 2002 (File  No 1-8182, Exhibit  4.3)).        |

 

45

----

 
| 4.4 *  | -      | First Amendment to Debenture Purchase Agreement dated  December 23, 2002 between WEDGE Energy Services, L.L.C., and Pioneer  Drilling Company (Form 10-Q for quarter ended December 31, 2002 (File  No. 1-8182, Exhibit 4.18)).                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.5*   | -      | First Amendment to Debenture Agreement dated December 23, 2002  between William H.White and Pioneer Drilling Company (Form 10-Q for quarter  ended December 31, 2002 (File No. 1-8182, Exhibit 4.19)).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.6*   | -      | Term Loan and Security Agreement dated December 23, 2002 by and  between Pioneer Drilling Services, Ltd. and Merrill Lynch Capital, a division  of Merrill Lynch Business Financial Services, Inc. (Form 8-K filed  January 3, 2003 (File No. 1-8182, Exhibit 5.1)).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.7*   | -      | Collateral Installment Note dated December 23, 2002 by and  between Pioneer Drilling Services, Ltd. and Merrill Lynch Capital, a division  of Merrill Lynch Business Financial Services, Inc. (Form 8-K filed  January 3, 2003 (File No. 1-8182, Exhibit 5.2)).                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.8*   | -      | Consolidated Loan Agreement dated March 18, 2003 between Pioneer  Drilling Services, Ltd, Pioneer Drilling Company and The Frost National Bank.  (Form 10-K for year ended March 31, 2003 (File No. 1-8182, Exhibit  4.9)).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.9*   | -      | Promissory Note dated March 18, 2003 between Pioneer Drilling  Services, Ltd. and The Frost National Bank. (Form 10-K for year ended  March 31, 2003 (File No. 1-8182, Exhibit 4.10)).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.10*  | -      | Revolving Promissory Note dated March 18, 2003 between Pioneer  Drilling Services, Ltd. and The Frost National Bank. (Form 10-K for year  ended March 31, 2003 (File No. 1-8182, Exhibit 4.11)).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.11*  | -      | Amendment No. 1 dated March 31, 2003 to the Term Loan and  Security Agreement dated December 23, 2002 between Pioneer Drilling  Services, Ltd. and Merrill Lynch Capital, a division of Merrill Lynch  Business Financial Services, Inc. (Form 10-K for year ended March 31,  2003 (File No. 1-8182, Exhibit 4.12)). |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.12*  | -      | Amended and Restated Loan Agreement dated December 15, 2003,  between Pioneer Drilling Services, Ltd., Pioneer Drilling Company and The  Frost National Bank (Form 10-Q for the quarter ended December 31, 2003  (File No. 1-8182, Exhibit 4.1)).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.13*  | -      | First Amendment to Amended and Restated Loan Agreement dated  January 29, 2004 between Pioneer Drilling Services, Ltd., Pioneer  Drilling Company and The Frost National Bank (Form 10-Q for the quarter ended  December 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.14*  | -      | Common Stock Purchase agreement dated March 31, 2003, between  Pioneer Drilling Company and Chesapeake Energy Corporation (Form 8-K filed  March 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.15*  | -      | Registration Rights Agreement dated March 31, 2003, among  Pioneer Drilling Company, WEDGE Energy Service, L.L.C., William H. White, an  individual, and Chesapeake Energy Corporation (Form 8-K filed March 31,  2003 (File No. 1-8182, Exhibit 4.2)).                                                                   |

 

46

----

 
| 4.16*  | -      | Note Modification Agreement dated September 29, 2003, between  Pioneer Drilling Services, Ltd. and The Frost National Bank (Form 8-K filed  November 6, 2003 (File No. 1-8182, Exhibit 4.3)).                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                         |
| 4.17*  | -      | Form of Certificate representing Common Stock of Pioneer Drilling  Company (Form S-8 filed November 18, 2003 (Reg.  No. 333-110569, Exhibit 4.3)).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                         |
| 4.18*  | -      | Form of Purchase Agreement dated February 13, 2004 between  Pioneer Drilling Company and the several purchasers (Form S-3 filed February 24,  2004 (Reg. No. 333-113036, Exhibit 4.1)).                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.1*  | -      | 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.  1-8182, Exhibit 9.1)).                                     |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.2*  | -      | Voting Agreement dated May 11, 2000 between Wm. Stacy 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. 1-8182, Exhibit 9.2)).                                                              |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.3*  | -      | 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). (Form 10-K for  year ended March 31, 2003 (File No. 1-8182, Exhibit 10.3)). |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.4+* | -      | 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. 1-8182, Exhibit 10.1+)).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.5+* | -      | 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. 1-8182, Exhibit  10.4+)).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.6+* | -      | 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. 1-8182,  Exhibit 10.5+)).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                         |
| 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. 1-8182,  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. 1-8182, 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. 1-8182, 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.  1-8182, Exhibit 10.10)).                                                                           |

 

47

----

 
| 10.11* | -      | 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. 1-8182, Exhibit 10.12)).                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                   |
| 10.12* | -      | Equipment Lease dated effective the 8th of February, 2002 between  Pioneer Drilling Services, Ltd. and International Drilling Services, Inc.  (Form 10-K for the year ended March 31, 2002 (File No. 1-8182, Exhibit  10.13)).                    |
|   |   |                                                                                                                                                                                                                                                   |
| 10.13* | -      | Common Stock Purchase Agreement dated March 31, 2003, between  Pioneer Drilling Company and Chesapeake Energy Corporation (Form 8-K filed  March 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                   |
|   |   |                                                                                                                                                                                                                                                   |
| 10.14* | -      | Pioneer Drilling Company 2003 Stock Plan (Form S-8 filed  November 18, 2003 (File No. 333-110569, Exhibit 4.4)).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                   |
| 21.1   | -      | Subsidiaries of Pioneer Drilling Company.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                   |
| 23.1   | -      | Consent of KPMG LLP.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                   |
| 31.1   | -      | Certification by Wm. Stacy Locke, President and Chief Executive  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                     |
|   |   |                                                                                                                                                                                                                                                   |
| 31.2   | -      | Certification by William D. Hibbetts, Senior Vice President and Chief  Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the  Securities Exchange Act of 1934.                                                                     |
|   |   |                                                                                                                                                                                                                                                   |
| 32.1   | -      | Certification by Wm. Stacy Locke, President and Chief Executive  Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                 |
|   |   |                                                                                                                                                                                                                                                   |
| 32.2   | -      | Certification by William D. Hibbetts, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,  United States Code). |

 

----

*                                         Incorporatedby reference to the filing indicated.

 

+                                         Managementcontract or compensatory plan or arrangement.

 

(b)                                 *Reports on Form 8-K*.  On February 5, 2004 we filed a currentreport on Form 8-K (information furnished not filed) relating to the pressrelease we issued on February 5, 2004 with respect to our results of operations for the third quarter (endedDecember 31, 2003) of our fiscal year ending March 31, 2004.  On February 24, 2004, we filed acurrent report on Form 8-K relating to our sale of 4,400,000 shares of ourcommon stock on February 20, 2004 at $5.40 per share in a privateplacement for $23.8 million in gross proceeds and the press release we issuedon February 23, 2004 for the private placement.

 

48

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SIGNATURES

 

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

 

 
|               | PIONEER DRILLING COMPANY |
|--------------------|--------------------------|
|               |                     |
| June 28, 2004 | By:                      | /s/ Wm. Stacy Locke |   |
|               |                     |   Wm. Stacy Locke |
|               |                     |   Chief Executive Officer and  President |

 

 

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

 
| **Signature**           |   | **Title** |                                                                                                             | **Date** |
|-------------------------|--------|-----------|------------------------------------------------------------------------------------------------------------------|----------|
|                    |   |      |                                                                                                             |     |
| /s/ Michael E. Little   |   |      |                                                                                                             |     |   |
| Michael E. Little       |   |      | Chairman                                                                                                         |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
| /s/ Wm. Stacy Locke     |   |      |                                                                                                             |     |   |
| Wm. Stacy Locke         |   |      | President, Chief Executive Officer and Director (Principal Executive  Officer)                                   |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
| /s/ William D. Hibbetts |   |      |                                                                                                             |     |   |
| William D. Hibbetts     |   |      | Senior Vice President, Chief Financial Officer and Secretary  (Principal Financial and Accounting  Officer) |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
| /s/ C. John Thompson    |   |      |                                                                                                             |     |   |
| C. John Thompson        |   |      | Director                                                                                                         |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
|                    |   |      |                                                                                                             |     |   |
| /s/ James M. Tidwell    |   |      |                                                                                                             |     |   |
| James M. Tidwell        |   |      | Director                                                                                                         |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
|                    |   |      |                                                                                                             |     |   |
| /s/ C. Robert Bunch     |   |      |                                                                                                             |     |   |
| C. Robert Bunch         |   |      | Director                                                                                                         |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
|                    |   |      |                                                                                                             |     |   |
| /s/ Dean A. Burkhardt   |   |      |                                                                                                             |     |   |
| Dean A. Burkhardt       |   |      | Director                                                                                                         |     | June 28, 2004 |
|                    |   |      |                                                                                                             |     |   |
|                    |   |      |                                                                                                             |     |   |
| /s/ Michael F. Harness  |   |      |                                                                                                             |     |   |
| Michael F. Harness      |   |      | Director                                                                                                         |     | June 28, 2004 |

 

49

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Index To Exhibits

 
| 2.1*   | -      | 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. 1-8182, Exhibit 2.2)).                 |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                   |
| 2.2*   | -      | 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. 1-8182, Exhibit 2.3)).                                             |
|   |   |                                                                                                                                                                                                                                                                   |
| 2.3*   | -      | 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. (Form 10-K for the year ended March 31, 2002 (File  No. 1-8182, Exhibit 2.4))             |
|   |   |                                                                                                                                                                                                                                                                   |
| 2.4*   | -      | 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. (Form 10-K for the year ended  March 31, 2002 (File No. 1-8182, Exhibit 2.5)) |
|   |   |                                                                                                                                                                                                                                                                   |
| 3.1*   | -      | Articles of Incorporation of Pioneer Drilling Company, as amended  (Form 10-K for the year ended March 31, 2001 (File No. 1-8182, Exhibit  3.1)).                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                   |
| 3.2*   | -      | Articles of Amendment to the Articles of Incorporation of Pioneer  Drilling Company (Form 10-Q for the quarter ended September 30, 2001  (File No. 1-8182, Exhibit 3.1)).                                                                                         |
|   |   |                                                                                                                                                                                                                                                                   |
| 3.3*   | -      | Amended and Restated Bylaws of Pioneer Drilling Company (Form 10-Q  for the quarter ended December, 2003 (File No. 1-8182, Exhibit 3.3)).                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.1*   | -      | Debenture Agreement Dated July 3, 2002 by and between WEDGE  Energy Service, L.L.C. and Pioneer Drilling Company (Form 8-K filed  July 18, 2002 (File No. 1-8182, Exhibit 4.1)).                                                                             |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.2*   | -      | Debenture Purchase Agreement dated July 3, 2002 by and between  WEDGE Energy Services, L.L.C. and Pioneer Drilling Company (Form 8-K filed  July 18, 2002 (File No. 1-8182, Exhibit 4.2)).                                                                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.3*   | -      | Subordination Agreement dated July 3, 2002 by and between The  Frost National Bank, WEDGE Energy Services, L.L.C., Pioneer Drilling Company  and Pioneer Drilling Services, Ltd. (Form 8-K filed July 18, 2002 (File  No 1-8182, Exhibit 4.3)).              |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.4 *  | -      | First Amendment to Debenture Purchase Agreement dated  December 23, 2002 between WEDGE Energy Services, L.L.C., and Pioneer  Drilling Company (Form 10-Q for quarter ended December 31, 2002 (File  No. 1-8182, Exhibit 4.18)).                              |

 

50

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| 4.5*   | -      | First Amendment to Debenture Agreement dated December 23, 2002  between William H.White and Pioneer Drilling Company (Form 10-Q for quarter  ended December 31, 2002 (File No. 1-8182, Exhibit 4.19)).                                                                                                                    |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.6*   | -      | Term Loan and Security Agreement dated December 23, 2002 by and  between Pioneer Drilling Services, Ltd. and Merrill Lynch Capital, a division  of Merrill Lynch Business Financial Services, Inc. (Form 8-K filed  January 3, 2003 (File No. 1-8182, Exhibit 5.1)).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.7*   | -      | Collateral Installment Note dated December 23, 2002 by and  between Pioneer Drilling Services, Ltd. and Merrill Lynch Capital, a division  of Merrill Lynch Business Financial Services, Inc. (Form 8-K filed  January 3, 2003 (File No. 1-8182, Exhibit 5.2)).                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.8*   | -      | Consolidated Loan Agreement dated March 18, 2003 between Pioneer  Drilling Services, Ltd, Pioneer Drilling Company and The Frost National Bank.  (Form 10-K for year ended March 31, 2003 (File No. 1-8182, Exhibit  4.9)).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.9*   | -      | Promissory Note dated March 18, 2003 between Pioneer Drilling  Services, Ltd. and The Frost National Bank. (Form 10-K for year ended  March 31, 2003 (File No. 1-8182, Exhibit 4.10)).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.10*  | -      | Revolving Promissory Note dated March 18, 2003 between Pioneer  Drilling Services, Ltd. and The Frost National Bank. (Form 10-K for year  ended March 31, 2003 (File No. 1-8182, Exhibit 4.11)).                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.11*  | -      | Amendment No. 1 dated March 31, 2003 to the Term Loan and  Security Agreement dated December 23, 2002 between Pioneer Drilling  Services, Ltd. and Merrill Lynch Capital, a division of Merrill Lynch  Business Financial Services, Inc. (Form 10-K for year ended March 31,  2003 (File No. 1-8182, Exhibit 4.12)). |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.12*  | -      | Amended and Restated Loan Agreement dated December 15, 2003,  between Pioneer Drilling Services, Ltd., Pioneer Drilling Company and The  Frost National Bank (Form 10-Q for the quarter ended December 31, 2003  (File No. 1-8182, Exhibit 4.1)).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.13*  | -      | First Amendment to Amended and Restated Loan Agreement dated  January 29, 2004 between Pioneer Drilling Services, Ltd., Pioneer  Drilling Company and The Frost National Bank (Form 10-Q for the quarter ended  December 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.14*  | -      | Common Stock Purchase agreement dated March 31, 2003, between  Pioneer Drilling Company and Chesapeake Energy Corporation (Form 8-K filed  March 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.15*  | -      | Registration Rights Agreement dated March 31, 2003, among  Pioneer Drilling Company, WEDGE Energy Service, L.L.C., William H. White, an  individual, and Chesapeake Energy Corporation (Form 8-K filed March 31,  2003 (File No. 1-8182, Exhibit 4.2)).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                |
| 4.16*  | -      | Note Modification Agreement dated September 29, 2003, between  Pioneer Drilling Services, Ltd. and The Frost National Bank (Form 8-K filed  November 6, 2003 (File No. 1-8182, Exhibit 4.3)).                                                                                                                             |

 

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| 4.17*  |   | Form of Certificate representing Common Stock of Pioneer Drilling  Company (Form S-8 filed November 18, 2003 (Reg. No. 333-110569, Exhibit  4.3)).                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                         |
| 4.18*  |   | Form of Purchase Agreement dated February 13, 2004 between  Pioneer Drilling Company and the several purchasers (Form S-3 filed  February 24, 2004 (Reg. No. 333-113036, Exhibit 4.1)).                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.1*  | -      | 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.  1-8182, Exhibit 9.1)).                                     |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.2*  | -      | Voting Agreement dated May 11, 2000 between Wm. Stacy 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. 1-8182, Exhibit 9.2)).                                                              |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.3*  | -      | 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). (Form 10-K for  year ended March 31, 2003 (File No. 1-8182, Exhibit 10.3)). |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.4+* | -      | 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. 1-8182, Exhibit 10.1+)).                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.5+* | -      | 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. 1-8182, Exhibit  10.4+)).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.6+* | -      | 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. 1-8182,  Exhibit 10.5+)).                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                         |
| 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. 1-8182,  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. 1-8182, 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. 1-8182, 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.  1-8182, Exhibit 10.10)).                                                                           |
|   |   |                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.11* | -      | 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. 1-8182, Exhibit 10.12)).                                                                   |
|   |   |                                                                                                                                                                                                                                                                                         |
| 10.12* | -      | Equipment Lease dated effective the 8th of February, 2002 between  Pioneer Drilling Services, Ltd. and International Drilling Services, Inc.  (Form 10-K for the year ended March 31, 2002 (File No. 1-8182, Exhibit  10.13)).                                                          |

 

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| 10.13* | -      | Common Stock Purchase Agreement dated March 31, 2003, between  Pioneer Drilling Company and Chesapeake Energy Corporation (Form 8-K filed  March 31, 2003 (File No. 1-8182, Exhibit 4.1)).                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                   |
| 10.14* | -      | Pioneer Drilling Company 2003 Stock Plan (Form S-8 filed  November 18, 2003 (File No. 333-110569, Exhibit 4.4)).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                   |
| 21.1   | -      | Subsidiaries of Pioneer Drilling Company.                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                   |
| 23.1   | -      | Consent of KPMG LLP.                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                   |
| 31.1   | -      | Certification by Wm. Stacy Locke, President and Chief Executive  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                     |
|   |   |                                                                                                                                                                                                                                                   |
| 31.2   | -      | Certification by William D. Hibbetts, Senior Vice President and Chief  Financial Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the  Securities Exchange Act of 1934.                                                                     |
|   |   |                                                                                                                                                                                                                                                   |
| 32.1   | -      | Certification by Wm. Stacy Locke, President and Chief Executive  Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                 |
|   |   |                                                                                                                                                                                                                                                   |
| 32.2   | -      | Certification by William D. Hibbetts, Senior Vice President and Chief  Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18,  United States Code). |

 

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*                                         Incorporatedby reference to the filing indicated.

 

+                                         Managementcontract or compensatory plan or arrangement.

 

53

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