**Exhibit4.1**

 

 

**AMENDED ANDRESTATED LOAN AGREEMENT**

 

Between

 
| **PIONEER DRILLING SERVICES, LTD.**9310 Broadway, Building 1San Antonio, Texas 78217  | and    | **THE FROST NATIONAL BANK**100 W. Houston StreetSan Antonio, Texas  78205 |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
|                                                                                       |   |                                                                           |
| **PIONEER DRILLING COMPANY**9310 Broadway, Building 1San Antonio, Texas 78217              |   |                                                                           |

 

 

December 15, 2003

 

**THISAMENDED AND RESTATED LOAN AGREEMENT** (the “Loan Agreement”) will serve to set forth the terms of thefinancing transactions by and between**PIONEER DRILLING SERVICES, LTD.**, a Texas limitedpartnership (“Pioneer Services”), **PIONEER DRILLING COMPANY**, a Texascorporation (“Pioneer Company”), (Pioneer Services and Pioneer Companybeing collectively referred to herein as “Pioneer”) and **THE FROSTNATIONAL BANK**, a national banking association (“Lender”).  This Loan Agreement hereby amends andrestates in its entirety that certain 2003 Consolidated Loan Agreement datedMarch 18, 2003, executed by and between Pioneer Company, Pioneer Servicesand Lender.

 

1.                                       *Credit Facilities*.  Subject to the terms andconditions set forth in this Loan Agreement and the other agreements,instruments and documents evidencing, securing, governing, guaranteeing and/orpertaining to the Loans, as hereinafter defined (collectively, together withthe Loan Agreement, referred to hereinafter as the “Loan Documents”),Lender hereby agrees to provide to Pioneer Services the credit facility orfacilities hereinbelow described (whether one or more, the “CreditFacilities”):

 

(a)                                  Letters of Credit Facility. Subject to the terms and conditions set forth herein, Lender may fromtime to time up to and including December 15, 2004, issue letters ofcredit for the account of Pioneer Services (each, a “Letter of Credit”and collectively, “Letters of Credit”) up to a cumulative maximum faceamount (whether or not advanced) of the lesser of (i) an amount equal to theBorrowing Base (as such term is defined hereinbelow) *less* any amountsoutstanding under the Borrowing Base Line of Credit (as such term is definedhereinbelow), or (ii) $2,500,000.00 (the “Letters of Credit Facility”);provided, that the form and substance of each Letter of Credit shall be subjectto approval by Lender in its sole discretion. Each Letter of Credit shall be issued for a term not to exceed 360 days,as designated by Pioneer Services, provided, that no Letter of Credit shallhave an expiration date subsequent to December 15, 2005.  For each Letter of Credit issued hereunder,Pioneer Services shall pay to Lender, at the time of issuance, a cash letter ofcredit fee of one and one- half percent (1.50%) per annum of the face amount ofsuch Letter of Credit.

 

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(b)                                 Borrowing Base Line of Credit. Subject to the terms and conditions set forth herein, Lender agrees tolend to Pioneer Services, on a revolving basis from time to time during theperiod commencing on the date hereof and continuing through the maturity dateof the promissory note evidencing this Credit Facility from time to time, suchamounts as Pioneer Services may request hereunder; provided, however,the total principal amount outstanding at any time shall not exceed the lesserof (i) an amount equal to the Borrowing Base (as such term is definedhereinbelow) *less* any amounts outstanding under the Letters of CreditFacility, or (ii) $2,500,000.00 (the “Borrowing Base Line of Credit”).  If at any time the aggregate principalamount outstanding under the Borrowing Base Line of Credit shall exceed anamount equal to the Borrowing Base, Pioneer Services agrees to immediatelyrepay to Lender such excess amount, plus all accrued but unpaid interestthereon.  The sums advanced under theBorrowing Base Line of Credit shall be used for support of short term operatingcash needs.

 

(i)                                     Letters of Credit Subfeature.  Asa subfeature under the Borrowing Base Line of Credit, Lender may from time totime up to and including December 15, 2004, issue letters of credit forthe account of Pioneer Services (each, a “Letter of Credit” andcollectively, “Letters of Credit”); provided, that the form andsubstance of each Letter of Credit shall be subject to approval by Lender inits sole discretion; and provided further that the aggregate undrawn amount ofall outstanding Letters of Credit under this subfeature shall not at any timeexceed the lesser of (i) an amount equal to the Borrowing Base *less*any amounts outstanding under the Letters of Credit Facility, or(ii) $2,500,000.00.  Each Letter ofCredit shall be issued for a term not to exceed 360 days, as designated byPioneer Services, provided, that no Letter of Credit shall have an expirationdate subsequent to December 15, 2005. The undrawn amount of all Letters of Credit plus any and all amountspaid by Lender in connection with drawings under any Letter of Credit for whichthe Lender has not been reimbursed shall be reserved under the Borrowing BaseLine of Credit and shall not be available for advances thereunder.  Each draft or other demand for payment paidby Lender under a Letter of Credit shall be deemed an advance under the BorrowingBase Line of Credit and shall be repaid in accordance with the terms of theNote establishing the Borrowing Base Line of Credit; provided, that if theBorrowing Base Line of Credit is not available for any reason whatsoever, atthe time any draft or demand is paid by Lender, or if advances are notavailable under the Borrowing Base Line of Credit in such amount due to anylimitation of borrowing set forth herein, then the full amount of such draftsor demand shall be immediately due and payable, together with interest thereon,from the date such amount is paid by Lender to the date such amount is fullyrepaid by Pioneer Services, at that rate of interest applicable to advancesunder the Borrowing Base Line of Credit. In such event, Pioneer Services agrees that Lender, at Lender’s sole discretionmay debit Pioneer Services’ deposit account with Lender for the amount of suchdraft.  For each Letter of Credit issuedhereunder, Pioneer Services shall pay to Lender, at the time of issuance, acash letter of credit fee of one and one-half percent (1.50%) per annum of theface amount of such Letter of Credit.

 

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(ii)                                  Borrowing Base.  Asused in this Loan Agreement, the term “Borrowing Base” shall have thefollowing meaning:  an amount equal to seventy-fivepercent 75% of the Pioneer Services’ Eligible Accounts.  As used herein, the term “EligibleAccounts” shall mean at any time, an amount equal to the aggregate netinvoice or ledger amount owing on all trade accounts receivable of PioneerServices for goods sold or leased or services rendered in the ordinary courseof business, in which the Lender has a perfected, first priority lien, afterdeducting (without duplication): (i) each such account that is unpaidsixty (60) days or more after the original invoice date thereof, (ii) theamount of all discounts, allowances, rebates, credits and adjustments to suchaccounts, (iii) the amount of all contra accounts, setoffs, defenses orcounterclaims asserted by or available to the account debtors, (iv) allaccounts with respect to which goods are placed on consignment or subject to aguaranteed sale or other terms by reason of which payment by the account debtormay be conditional, (v) all accounts with respect to which PioneerServices has furnished a payment and/or performance bond and that portion ofany account for or representing retainage, if any, until all prerequisites tothe immediate payment of retainage have been satisfied, (vi) all accountsowing by account debtors for which there has been instituted a proceeding inbankruptcy or reorganization under the United States Bankruptcy Code or otherlaw, whether state or federal, now or hereafter existing for relief of debtors,(vii) all accounts owing by any affiliates of Pioneer Services, (viii) allaccounts in which the account debtor is the United States or any department,agency or instrumentality of the United States, except to the extent anacknowledgment of assignment to Lender of such account in compliance with theFederal Assignment of Claims Act and other applicable laws has been received byLender, (ix) all accounts due Pioneer Services by any account debtor whoseprincipal place of business is located outside the United States of America andits territories, (x) all accounts subject to any provision prohibitingassignment or requiring notice of or consent to such assignment, (xi) anyother accounts deemed unacceptable by Lender in its sole and absolutediscretion; provided, however, if more than twenty percent (20%) of the thenbalance owing by any single account debtor does not qualify as an EligibleAccount under the foregoing provisions, then the aggregate amount of allaccounts owing by such account debtor shall be excluded from Eligible Accounts.

 

(c)                                  Term Loan.  Lender has lent to PioneerServices the amount of $5,677,888.84 (the “Term Loan”).  The sums advanced under the Term Loan werefor the purpose of refinancing that certain loan from Lender to Pioneer Companyin the original principal face amount of $9,000,000.00 dated August 11, 2000which was used by Pioneer Company to finance the purchase of the stock ofPioneer Drilling Co. (Pioneer Drilling Co. having since merged into PioneerServices).  The Term Loan shall continueto be governed by the terms of this Agreement.

 

(d)                                 Acquisition Loan.  Subjectto the terms and conditions set forth herein, Lender agrees to lend toBorrower, on a non-revolving basis from time to time during the periodcommencing on the date hereof and continuing through March 15, 2004, anaggregate amount not to exceed $3,000,000 in a single advance or in multipleadvances, as may be requested by Borrower from time to time (the “Acquisition Loan”).  Borrower shall

 

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not beallowed to reborrow under the Acquisition Loan after a repayment.  Thesums advanced under the Acquisition Loan shall be for the purpose of financingthe purchase of one (1) drilling rig designated by Pioneer Services as“Drilling Rig No. 4.”

 

Alladvances under the Credit Facilities shall be collectively called the “Loans”.  Lender reserves the right to require PioneerServices to give Lender not less than one (1) business day prior notice ofeach requested advance under the Credit Facilities, specifying (i) theaggregate amount of such requested advance, (ii) the requested date ofsuch advance, and (iii) the purpose for such advance, with such advancesto be requested in a form satisfactory to Lender.  On or before the issuance date for each Letter of Creditrequested hereunder, Pioneer Services must also complete and deliver to Lenderan application for each requested Letter of Credit in form and substanceacceptable to Lender.

 

2.                                       *Promissory Notes*.

 

(a)                                  The Borrowing Base Line of Credit shall beevidenced by a Revolving Promissory Note of even date herewith in the originalface amount of $2,500,000.00 duly executed by Pioneer Services and payable tothe order of Lender, in form and substance acceptable to Lender (whether one ormore, together with any renewals, extensions and increases thereof, the “RevolvingNote”).

 

(b)                                 The Term Loan is evidenced by that certainPromissory Note dated March 18, 2003 in the original principal face amountof $5,677,888.84 duly executed by Pioneer Services and payable to the order ofLender as amended by that certain Note Modification Agreement datedSeptember 29, 2003 executed by and between Pioneer Services and Lender(together with any renewals, extensions and increases thereof, the “TermNote”).

 

(c)                                  The Acquisition Loan shall be evidenced by aPromissory Note of even date herewith in the original principal face amount of$3,000,000.00 duly executed by Pioneer Services and payable to the order ofLender (together with any renewals, extensions and increases thereof, the “AcquisitionNote”).

 

SuchRevolving Note, Term Note and Acquisition Note, together with any renewals,extensions and increases thereof, shall hereinafter be referred to as the “Notes.”  Interest on the Notes shall accrue at therates set forth therein.  The principalof and interest on the Notes shall be due and payable in accordance with theterms and conditions set forth in the Notes and in this Loan Agreement.

 

3.                                       *Collateral*.

 

(a)                                  As collateral and security for theindebtedness evidenced by the Term Note and any and all other indebtedness orobligations from time to time owing by Pioneer Services to Lender, PioneerServices  granted to Lender, itssuccessors and assigns, pursuant to that certain Security Agreement datedMarch 18, 2003, executed by Pioneer Services, a first and prior lien andsecurity interest in and to the following described property:

 

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equipment,fixtures and inventory (if any) consisting of the Drilling Rigs and relatedequipment designated by Pioneer Services as Rigs 3 (formerly known as No. 17)(National 110-UE), 5 (Gardner-Denver 500), 6 (Skytop Brewster DH-14610), 9(Wiess W-45), 10 (formerly known as No. 4) (Skytop Brewster N-46), 11 (SkytopBrewster N-46), 12 (formerly known as No. 1) (Cabot 900), 14 (Skytop BrewsterN-46), 15 (formerly known as No. 2) (Cabot 750), 17 (Ideco H-725), 18 (BrewsterN-75), 19 (Brewster N-75), 20 (BDW 800), 7 (IRI 1700 E) and 8 (IRI 1700 E),(the “Drilling Rig Collateral”).

 

(b)                                 As collateral and security for theindebtedness evidenced by the Letters of Credit Facility, Revolving Note, TermNote, Acquisition Note, and any and all other indebtedness or obligations fromtime to time owing by Pioneer Services to Lender, Pioneer Services shall grant,and hereby grants to Lender, its successors and assigns, a first and prior lienand security interest in and to the following described property:

 

(i)                                     all present and future “accounts”, as definedin the Texas Business and Commerce Code in effect in the State of Texas on thedate hereof or as it may hereafter be amended from time to time, (includinghealth-care-insurance receivables), together with any and all books of account,customer lists and other records relating in any way to the foregoing(including, without limitation, computer software, whether on tape, disk, card,strip, cartridge or any other form), and in any case where an account arisesfrom the sale of goods, the interest of Pioneer Services in such goods (the “AccountsCollateral”); and

 

(ii)                                  “equipment”, “fixtures” and “inventory” (ifany) consisting of the Drilling Rig and related equipment designated by PioneerServices as Rig 4 (RMI 1000-E/SCR) (the “Rig 4 Collateral”).

 

Theterm Drilling Rig Collateral, Accounts Collateral and Rig 4 Collateral beingreferred to herein as the “Collateral” which shall also include allrecords and data relating to any of the foregoing (including, withoutlimitation, any computer software on which such records and data may belocated).  Pioneer Services agrees toexecute such security agreements, assignments, deeds of trust and otheragreements and documents as Lender shall deem appropriate and otherwise requirefrom time to time to more fully create and perfect Lender’s lien and securityinterests in the Collateral.

 

4.                                       *Guarantors*.  As a condition precedent to theLender’s obligation to make the Loans to Pioneer Services, Pioneer Companyagrees to execute and deliver to Lender contemporaneously herewith a guarantyagreement, in form and substance satisfactory to Lender guaranteeing PioneerServices’ obligations and liabilities under the Loans.

 

5.                                       *Representations and Warranties*. Pioneer hereby represents and warrants, and upon each request for anadvance under the Credit Facilities further represents and warrants, to Lenderas follows:

 

(a)                                  Existence.  Pioneer Services is a limitedpartnership duly organized, validly existing and in good standing under thelaws of the State of Texas and all other states

 

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whereit is doing business, and has all requisite power and authority to execute anddeliver the Loan Documents and Pioneer Company is a corporation duly organized,validly existing and in good standing under the laws of the State of Texas andall other states where it is doing business, and has all requisite power andauthority to execute and deliver the Loan Documents.

 

(b)                                 Binding Obligations.  Theexecution, delivery, and performance of this Loan Agreement and all of theother Loan Documents by Pioneer have been duly authorized by all necessaryaction by Pioneer, and constitute legal, valid and binding obligations ofPioneer, enforceable in accordance with their respective terms, except aslimited by Bankruptcy, insolvency or similar laws of general applicationrelating to the enforcement of creditors’ rights and except to the extentspecific remedies may generally be limited by equitable principles.

 

(c)                                  No Consent.  Theexecution, delivery and performance of this Loan Agreement and the other LoanDocuments, and the consummation of the transactions contemplated hereby andthereby, do not (i) conflict with, result in a violation of, or constitutea default under (A) any provision of its articles or certificate ofincorporation or bylaws, if Pioneer is a corporation, or its partnershipagreement, if Pioneer is a partnership, or any agreement or other instrumentbinding upon Pioneer, or (B) any law, governmental regulation, courtdecree or order applicable to Pioneer, or (ii) require the consent,approval or authorization of any third party.

 

(d)                                 Financial Condition. Each financial statement of Pioneer supplied to the Lender trulydiscloses and fairly presents Pioneer’s financial condition as of the date ofeach such statement.  There has been nomaterial adverse change in such financial condition or results of operations ofPioneer subsequent to the date of the most recent financial statement suppliedto Lender.

 

(e)                                  Litigation.  Except as set forth in theSecurities and Exchange Commission filings of Pioneer Company, copies of whichhave been made available to the Lender, there are no actions, suits orproceedings, pending or, to the knowledge of Pioneer, threatened against oraffecting Pioneer or the properties of Pioneer, before any court orgovernmental department, commission or board, which, if determined adversely toPioneer, would have a material adverse effect on the financial condition,properties, or operations of Pioneer.

 

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

 

6.                                       *Conditions Precedent to Advances*. Lender’s obligation to make any advance under this Loan Agreement andthe other Loan Documents shall be subject to the conditions precedent that, asof the date of such advance and after giving effect thereto (i) allrepresentations and warranties made to Lender in this Loan Agreement and theother Loan Documents shall be true

 

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andcorrect, as of and as if made on such date, (ii) no material adversechange in the financial condition of Pioneer since the effective date of themost recent financial statements furnished to Lender by Pioneer shall haveoccurred and be continuing, (iii) no event has occurred and is continuing,or would result from the requested advance, which with notice or lapse of time,or both, would constitute an Event of Default (as hereinafter defined), and(iv) Lender’s receipt of all Loan Documents appropriately executed byPioneer and all other proper parties.

 

7.                                       *Affirmative Covenants*.  Until (i) the Notes andall other obligations and liabilities of Pioneer under this Loan Agreement andthe other Loan Documents are fully paid and satisfied, and (ii) the Lenderhas no further commitment to lend hereunder, Pioneer agrees and covenants thatit will, unless Lender shall otherwise consent in writing:

 

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

 

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

 

(c)                                  Right to Additional Information. Furnish Lender with such additional information and statements, lists ofassets and liabilities, tax returns, and other reports with respect toPioneer’s financial condition and business operations as Lender may requestfrom time to time.

 

(d)                                 Compliance with Laws. Conduct its business in an orderly and efficient manner consistent withgood business practices, and perform and comply in all material respects withall statutes, rules, regulations and/or ordinances imposed by any governmentalunit upon Pioneer and its businesses, operations and properties (includingwithout limitation, all applicable environmental statutes, rules, regulationsand ordinances).

 

(e)                                  Taxes.  Pay and discharge when dueall of its indebtedness and obligations, including without limitation, allassessments, taxes, governmental charges, levies and liens, of every kind andnature, imposed upon Pioneer or its properties, income, or profits, prior tothe date on which penalties would attach, and all lawful claims that, ifunpaid, might become a lien or charge upon any of Pioneer’s properties, income,or profits; provided, however, Pioneer will not be required to pay anddischarge any such assessment, tax, charge, levy, lien or claim so long as(i) the legality of the same shall be contested in good faith byappropriate judicial, administrative or other legal proceedings, and(ii) Pioneer shall have established on its books adequate reserveswith  respect to such contestedassessment, tax, charge, levy, lien or claim in accordance with generallyaccepted accounting principles, consistently applied.

 

(f)                                    Insurance.  Maintain insurance, includingbut not limited to, fire insurance, comprehensive property damage, publicliability, worker’s compensation and other insurance deemed necessary orotherwise required by Lender.

 

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

 

(h)                                 Notice of Litigation.  Promptlyafter the commencement thereof, notify Lender of all actions, suits andproceedings before any court or any governmental department, commission orboard affecting Pioneer or any of its properties which, if determined adverselyto Pioneer, would have a material adverse effect on the financial condition,properties, or operations of Pioneer.

 

(i)                                     Notice of Material Adverse Change. Promptly inform Lender of (i) any and all material adverse changesin Pioneer’s financial condition, and (ii) all claims made against Pioneerwhich could materially affect the financial condition of Pioneer.

 

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

 

8.                                       *Negative Covenants*.  Until (i) the Notes andall other obligations and liabilities of Pioneer under this Loan Agreement andthe other Loan Documents are fully paid and satisfied, and (ii) the Lenderhas no further commitment to lend hereunder, Pioneer will not, without theprior written consent of Lender:

 

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

 

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

 

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

 

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

 

(e)                                  Indebtedness. Create, incur or assume any indebtedness for borrowed money or issue orassume any other note, debenture, bond or other evidences of indebtedness, orguarantee any such indebtedness or such evidences of indebtedness of others,other than (i) borrowings from Lender, (ii) borrowings from lendersother than Lender, except that during the term of the Loan, Pioneer shall bepermitted to incur or have

 

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outstandingindebtedness to other lenders provided that the aggregate principal balance ofall such debt outstanding at any time shall not exceed $17,500,000.00(exclusive of the subordinated debt in the total amount of $28,000,000.00described in that certain Subordination Agreement dated as of July 3, 2002,as amended (the “Convertible Subordinated Debentures”) and (iii) theConvertible Subordinated Debentures.

 

(f)                                    Transfer of Ownership. Permit the sale, pledge or other transfer of any of the ownershipinterests in Pioneer.

 

(g)                                 Change in Management. Permit a change in the senior management of Pioneer Company (as usedherein, “a change in senior management” shall mean that Michael E.Little shall have ceased to hold the title of Chairman of the Board or Wm.Stacy Locke shall have ceased to hold the titles of President and ChiefExecutive Officer); provided, however, should Michael E. Little or Wm. StacyLocke die, become disabled or be terminated for cause (an “InvoluntaryChange of Management”), Pioneer shall not be in default hereunder if andonly if Pioneer Company shall  (i)immediately, but in no event more than thirty days following such InvoluntaryChange of Management, name a replacement reasonably acceptable to Lender toexercise the duties and hold the office(s) and positions held by Michael E.Little and Wm. Stacy Locke on an interim basis; and (ii) as soon as practical,but in no event more than (270) days following such Involuntary Change ofManagement, name a replacement acceptable to Lender in it reasonable discretionto exercise the duties and hold the office(s) and positions held by Michael E.Little and Wm. Stacy Locke.

 

(h)                                 Loans.  Make any loans to any personor entity, other than, in the  loansmade in the ordinary course of business to entities affiliated with Pioneer andnot exceeding $250,000.00 principal outstanding to all Pioneers in theaggregate at any time.

 

(i)                                     Transactions with Affiliates. Enter into any transaction, including, without limitation, the purchase,sale or exchange of property or the rendering of any service, with any Affiliate(as hereinafter defined) of Pioneer, except in the ordinary course of andpursuant to the reasonable requirements of the business of either of them andupon fair and reasonable terms no less favorable to Pioneer as the case may bethan would be obtained in a comparable arm’s-length transaction with a personor entity not an Affiliate of Pioneer. As used herein, the term “Affiliate” means any individual orentity directly or indirectly controlling, controlled by, or under commoncontrol with, another individual or entity.

 

(j)                                     Distributions. Pioneer Services agrees not to declare or pay any distributions on anyof Pioneer Services’ partnership interests, make any other distributions withrespect to any payment on account of the purchase, redemption, or otheracquisition or retirement of any of Pioneer Services’ partnership interests, ormake any other distribution, sale, transfer or lease of any of PioneerServices’ assets other than in the ordinary course of business, unless any suchamounts are directly utilized for the payment of principal or interest onindebtedness and obligations owing from time to time by Pioneer Services toLender.  The above notwithstanding, thePioneer Services may make distributions with respect to Pioneer Services’partnership interests, for the purposes of (i) providing funds to pay taxes(including federal income taxes and franchise taxes) of the partners of

 

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PioneerServices attributable to ownership of an interest in Pioneer Services, (ii)providing operating capital to Pioneer Company in an amount not exceeding$250,000.00 distributed in any one fiscal year, (iii) providing sufficientfunds for the retirement of term bank debt owed by Pioneer Company to MerrillLynch Capital; and (iv) providing sufficient funds for payment of interest ondebt owed by Pioneer Company to Wedge Energy Services, L.L.C.

 

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

 

9.                                       *Financial Covenants*.  Until (i) the Notes andall other obligations and liabilities of Pioneer under this Loan Agreement andthe other Loan Documents are fully paid and satisfied, and (ii) the Lenderhas no further commitment to lend hereunder, Pioneer will maintain thefollowing financial covenants (on a consolidated basis):

 

(a)                                  **Leverage Ratio**.  Pioneer will maintain, at alltimes, to be tested quarterly on the last day of each fiscal quarter ofPioneer, a Leverage Ratio not to exceed 3.00 to 1.00.  Defined as:

 

 

| Funded Bank Debt                                                        |
|-------------------------------------------------------------------------|
| Consolidated EBITDA (for the most-recently ended four fiscal  quarters) |

 

(b)                                 **Fixed Charge Coverage Ratio**. Pioneer will maintain, at all times, to be tested quarterly on the lastday of each fiscal quarter of Pioneer a fixed charge coverage ratio of not lessthan 1.00 to 1.00—such ratio being defined as:

 

 
| Consolidated EBITDA – Maintenance Capital Expenditures (each for the  most-recently ended four fiscal quarters)                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Interest Expense + scheduled maturities of principal  indebtedness + cash taxes paid (each for the most-recently ended four fiscal  quarters) |

 

(c)                                  **Senior Cash Flow Coverage Ratio**. Pioneer will maintain, at all times, to be tested quarterly on the lastday of each fiscal quarter of Pioneer, a senior cash flow coverage ratio of notless than 1.50 to 1.00—such ratio being defined as:

 
| Consolidated EBITDA - Maintenance Capital Expenditures (each for the  most-recently ended four fiscal quarters)                                                                                            |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Consolidated Interest Expense (excluding interest on Subordinated  Debt) + scheduled maturities of principal indebtedness  + cash taxes paid (each for the  most-recently ended four fiscal quarters) |

 

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(d)                                 **Debt to Worth Ratio**.  Pioneer will maintain, at alltimes, to be tested quarterly on the last day of each fiscal quarter ofPioneer, a ratio of (a) total liabilities *less*any SubordinatedDebt, to (b) Tangible Net Worth *plus* Subordinated Debt of not greaterthan 1.00 to 1.00.

 

Asused herein, the following terms shall have the following meanings:

 

“EBITDA” means NetIncome + Interest + Taxes + Depreciation + Amortization –Distributions.

 

“Funded Bank Debt”means all outstanding principal on loans and capital leases. excluding (i) anyinsurance premium notes with an original maturity date of one year or less, and(ii) the outstanding balance of all Subordinated Debt.

 

“MaintenanceCapital Expenditures” means amounts actually paid for the routine maintenanceof equipment, to the extent such maintenance is required to keep that equipmentin operating  condition.

 

“TangibleNet Worth” means, as of any date, Pioneer’s total assets excluding allintangible assets, less total liabilities excluding any SubordinatedDebt.

 

“Scheduled maturities ofprincipal indebtedness” shall exclude payments made on loans and capitalleases with an original maturity date of one year or less and any payments madein excess of regularly scheduled payments.

 

“SubordinatedDebt” means any indebtedness owing by Pioneer which has been subordinatedby written agreement to all indebtedness now or hereafter owing by Pioneer toLender, such agreement to be in form and substance acceptable to Lender.

 

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

 

(a)                                  Interim Financial Statements.  Assoon as available, and in any event within forty-five (45) days after the endof each month of each fiscal year of Pioneer, (i) a balance sheet, incomestatement and statement of cash flows of Pioneer as of the end of such fiscalmonth; (ii) an accounts receivable aging report; (iii) a Borrowing BaseCertificate; and (iv) a Rig Schedule/Utilization Report; each in form andsubstance and in reasonable detail satisfactory to Lender and duly certified(as to item (i), subject to year-end review adjustments) by the Presidentand/or Chief Financial Officer of Pioneer Company and the President and/orChief Financial Officer of the general partner of Pioneer Services and/or ChiefAccounting Officer of Pioneer Services (A) as being true and correct inall material aspects to the best of his or her knowledge and (B) (as toitem (i) only), as having been prepared in accordance with generally acceptedaccounting principles, consistently applied.

 

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(b)                                 Quarterly Statements. Within sixty (60) days after the end of each quarter of each fiscal yearof Pioneer, (i) a copy of the 10-Q Report of Pioneer Company, as filed with theSecurities Exchange Commission and (ii) acertificate signed by the President and/or Chief Financial Officer of PioneerCompany and the President and/or Chief Financial Officer of the general partnerof Pioneer Services and/or Chief Accounting Officer of Pioneer Services,stating that Pioneer is in full compliance with all of its obligations underthis Loan Agreement and all other Loan Documents and is not in default of anyterm or provisions hereof or thereof, and demonstrating compliance with allfinancial ratios and covenants set forth in this Loan Agreement.

 

(c)                                  Annual Reporting.  Assoon as available and in any event within one hundred twenty days (120) daysafter the end of each fiscal year of Pioneer, (i) a copy of the 10-K Report ofPioneer Company, as filed with the Securities Exchange Commission, togetherwith (ii) a certificate signed by thePresident and/or Chief Financial Officer of Pioneer Company and the Presidentand/or Chief Financial Officer of the general partner of Pioneer Servicesand/or Chief Accounting Officer of Pioneer Services, stating that Pioneer is infull compliance with all of its obligations under this Loan Agreement and allother Loan Documents and is not in default of any term or provisions hereof orthereof, and demonstrating compliance with all financial ratios and covenantsset forth in this Loan Agreement.

 

11.                                 *Events of Default*.  Each of the following shallconstitute an “Event of Default” under this Loan Agreement:

 

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

 

(b)                                 The failure of Pioneer Services or anyObligated Party (as defined below) to timely and properly observe, keep orperform any covenant, agreement, warranty or condition required herein or inany of the other Loan Documents and the failure of Pioneer Services or anyObligated Party to cure such default within 30 days after written noticefrom Lender specifying such default, provided that if such default or violationis susceptible of being remedied, but such remedy can not reasonably beaccomplished within the initial 30-day cure period, no Event of Default shallbe deemed to have occurred so long as Pioneer Services or the appropriateObligated Party is diligently pursuing such remedy and is successful in curingthe default or violation to the reasonable satisfaction of Lender within suchadditional period of time as may be necessary to effect the remedy, not toexceed in any event an additional 60 days following the end of the initialcure period.

 

(c)                                  The occurrence of an event of default underany of the other Loan Documents or under any other agreement now existing orhereafter arising between Lender and Pioneer Services after the giving of anyrequired notice and expiration of any applicable cure period.

 

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(d)                                 Any representation contained herein or in anyof the other Loan Documents made by Pioneer Services or any Obligated Party isfalse or misleading in any material respect.

 

(e)                                  The occurrence of any event which permits theacceleration of the maturity of any indebtedness in excess of $100,000.00 owingby Pioneer to any third party under any agreement or understanding, or  any default in the terms, conditions orcovenants of that certain Term Loan and Security Agreement dated on or aboutDecember 20, 2002 between Pioneer Services and Merrill Lynch Capital orany documents executed in connection therewith and any renewals thereof.

 

(f)                                    If Pioneer Services or any Obligated Party:(i) becomes insolvent, or makes a transfer in fraud of creditors, or makesan assignment for the benefit of creditors, or admits in writing its inabilityto pay its debts as they become due; (ii) generally is not paying itsdebts as such debts become due; (iii) has a receiver, trustee or custodianappointed for, or take possession of, all or substantially all of the assets ofsuch party, either in a proceeding brought by such party or in a proceedingbrought against such party and such appointment is not discharged or suchpossession is not terminated within sixty (60) days after the effective datethereof or such party consents to or acquiesces in such appointment orpossession; (iv) files a petition for relief under the United StatesBankruptcy Code or any other present or future federal or state insolvency,bankruptcy or similar laws (all of the foregoing hereinafter collectivelycalled “Applicable Bankruptcy Law”) or an involuntary petition forrelief is filed against such party under any Applicable Bankruptcy Law and suchinvoluntary petition is not dismissed within sixty (60) days after the filingthereof, or an order for relief naming such party is entered under anyApplicable Bankruptcy Law, or any composition, rearrangement, extension,reorganization or other relief of debtors now or hereafter existing isrequested or consented to by such party; (v) fails to have discharged within aperiod of thirty (30) days any attachment, sequestration or similar writ leviedupon any property of such party; or (vi) fails to pay within thirty (30)days any final money judgment against such party.

 

(g)                                 If Pioneer Services or any Obligated Party isan entity, the liquidation, dissolution, merger or consolidation of any suchentity or, if Pioneer Services or any Obligated Party is an individual, thedeath or legal incapacity of any such individual.

 

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

 

Nothingcontained in this Loan Agreement shall be construed to limit the events ofdefault enumerated in any of the other Loan Documents and all such events ofdefault shall be cumulative.  The term “ObligatedParty”, as used herein, shall mean Pioneer Company and any party other thanPioneer Services who secures, guarantees and/or is otherwise obligated to payall or any portion of the indebtedness evidenced by the Notes.

 

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

 

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

 

14.                                 *Waiver and Agreement*.  Neither the failure nor anydelay on the part of Lender to exercise any right, power or privilege herein orunder any of the other Loan Documents shall operate as a waiver thereof, norshall any single or partial exercise of such right, power or privilege precludeany other or further exercise thereof or the exercise of any other right, poweror privilege.  No waiver of anyprovision in this Loan Agreement or in any of the other Loan Documents and nodeparture by Pioneer Services therefrom shall be effective unless the sameshall be in writing and signed by Lender, and then shall be effective only inthe specific instance and for the purpose for which given and to the extentspecified in such writing.  Nomodification or amendment to this Loan Agreement or to any of the other LoanDocuments shall be valid or effective unless the same is signed by the partyagainst whom it is sought to be enforced.

 

15.                                 *Benefits*.  This Loan Agreement shall be binding uponand inure to the benefit of Lender and Pioneer Services, and their respectivesuccessors and assigns, provided, however, that Pioneer Services may not,without the prior written consent of Lender, assign any rights, powers, dutiesor obligations under this Loan Agreement or any of the other Loan Documents.

 

16.                                 *Notices*.  All notices, requests, demands or othercommunications required or permitted to be given pursuant to this Agreementshall be in writing and given by (i) personal delivery,(ii) expedited delivery service with proof of delivery, or(iii) United States mail, postage prepaid, registered or certified mail,return receipt requested, sent to the intended addressee at the address setforth on the first page hereof and shall be deemed to have been receivedeither, in the case of personal delivery, as of the time of personal delivery,in the case of expedited delivery service, as of the date of first attempteddelivery at the address and in the manner provided herein, or in the case ofmail, upon deposit in a depository receptacle under the care and custody of theUnited States Postal Service.  Eitherparty shall have the right to change its address for notice hereunder to anyother location within the continental United States by notice to the otherparty of such new address at least thirty (30) days prior to the effective dateof such new address.

 

17.                                 *Construction*.  This Loan Agreement and theother Loan Documents have been executed and delivered in the State of Texas,shall be governed by and construed in accordance

 

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withthe laws of the State of Texas, and shall be performable by the parties heretoin the county in Texas where the Lender’s address set forth on the first pagehereof is located.

 

18.                                 *Invalid Provisions*.  If any provision of this LoanAgreement or any of the other Loan Documents is held to be illegal, invalid orunenforceable under present or future laws, such provision shall be fullyseverable and the remaining provisions of this Loan Agreement or any of theother Loan Documents shall remain in full force and effect and shall not beaffected by the illegal, invalid or unenforceable provision or by itsseverance.

 

19.                                 *Expenses*.  Pioneer Services shall pay all costs andexpenses (including, without limitation, reasonable attorneys’ fees) inconnection with (i) any action required in the course of administration ofthe indebtedness and obligations evidenced by the Loan Documents, and(ii) any action in the enforcement of Lender’s rights upon the occurrenceof Event of Default.

 

20.                                 *Participation of the Loans*. Pioneer Services agrees that Lender may, at its option, sell interestsin the Loans and its rights under this Loan Agreement to a financialinstitution or institutions and, in connection with each such sale, Lender maydisclose any financial and other information available to Lender concerningPioneer Services to each prospective purchaser.

 

21.                                 *Conflicts*.  In the event any term orprovision hereof is inconsistent with or conflicts with any provision of theother Loan Documents, the terms and provisions contained in this Loan Agreementshall be controlling.

 

22.                                 *Counterparts*.  This Loan Agreement may beseparately executed in any number of counterparts, each of which shall be anoriginal, but all of which, taken together, shall be deemed to constitute oneand the same instrument.

 

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

 

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

 

NOTICE TO COMPLY WITH STATE LAW

 

Forthe purpose of this Notice, the term “WRITTEN AGREEMENT” shall include thedocument set forth above, together with each and every other document relatingto and/or securing the same loan transaction, regardless of the date ofexecution.

 

**THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEENTHE PARTIES AND MAY NOT BE CONTRADICTED BY**

 

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**EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORALAGREEMENTS OF THE PARTIES.**

 

**THERE ARENO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.**

 

 

**[Balance ofPage Intentionally Left Blank]**

 

**[SignaturesAppear on Next Page]**

 

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| **PIONEER SERVICES****:**                                                                                                                   |                                   | **LENDER****:**                                           |
|---------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------|-----------------------------------------------------------|
|                                                                                                                                        |                                   |                                                      |
| **PIONEER DRILLING SERVICES, LTD.**,  a Texas limited partnership                                                                           |                                   | **THE FROST NATIONAL BANK**a national banking association |
|                                                                                                                                        |                                   |                                                      |
| By:                                                                                                                                         | PDC  Mgmt. Co., a Texas corporation,   |                                                      |   |
|                                                                                                                                        | General  Partner                       |                                                      | By: | /s/  W. Casey Shaeffer |   |
|                                                                                                                                        |                                   |                                                      |   | W.  Casey Shaeffer |
| By:                                                                                                                                         | /s/  Wm. Stacy Locke                   |                                                      |   |   | Vice  President |
|                                                                                                                                        | Wm.  Stacy Locke                       |                                                      |   |
|                                                                                                                                        | President  and Chief Executive Officer |                                                      |   |
|                                                                                                                                        |                                   |                                                      |
|                                                                                                                                        |                                   |                                                      |
| **PIONEER COMPANY****:**                                                                                                                    |                                   |                                                      |
|                                                                                                                                        |                                   |                                                      |
| **PIONEER DRILLING COMPANY,** a Texas corporation (executing for  purposes of joining in certain specific provisions, as noted above)  |                                   |                                                      |
|                                                                                                                                        |                                   |                                                      |   |
| By:                                                                                                                                         | /s/  Wm. Stacy Locke                   |                                                      |   |   |
|                                                                                                                                        | Wm.  Stacy Locke                       |                                                      |   |
|                                                                                                                                        | President  and Chief Executive Officer |                                                      |   |
|                                                                                                                                        |                                   |                                                      |   |
|                                                                                                                                             |                                        |                                                           |  |  |  |  |  |

 

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