-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WQq8MTNl4MWJtpbtMPv4D9EaRVmLrXTh25L3LFuS/lZhfqhCpNm+NSvOaHTcmbKB pJv3QaWRuXvycUxwxRL0lg== 0000950134-02-000918.txt : 20020414 0000950134-02-000918.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950134-02-000918 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER DRILLING CO CENTRAL INDEX KEY: 0000320575 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 742088619 STATE OF INCORPORATION: TX FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08182 FILM NUMBER: 02531077 BUSINESS ADDRESS: STREET 1: 9310 BROADWAY BLDG I CITY: SAN ANTONIO STATE: TX ZIP: 78217 BUSINESS PHONE: 5128287689 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH TEXAS DRILLING CO DATE OF NAME CHANGE: 19810715 FORMER COMPANY: FORMER CONFORMED NAME: SOUTH TEXAS DRILLING & EXPLORATION INC DATE OF NAME CHANGE: 19920703 10-Q 1 d94094e10-q.txt FORM 10-Q FOR QUARTER ENDED DECEMBER 31, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission File Number 2-70145 PIONEER DRILLING COMPANY (Exact name of registrant as specified in its charter) TEXAS 74-2088619 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 9310 Broadway, Bldg. 1, San Antonio, Texas 78217 (Address of principal executive offices) (Zip Code) 210-828-7689 (Registrant's telephone number, including area code) Formerly SOUTH TEXAS DRILLING & EXPLORATION, INC. --------------------------------------------------------------------------- (Former name, address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of February 8, 2002, there were 15,922,459 shares of common stock, par value $0.10 per share, of the registrant issued and outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PIONEER DRILLING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31, ASSETS 2001 2001 ------------ ------------ Current assets: Cash and cash equivalents $ 7,165,258 $ 2,492,934 Securities available for sale 292,825 338,395 Receivables 7,367,520 2,777,467 Contract drilling in progress 1,617,015 2,331,112 Prepaid expenses 1,083,562 312,276 ------------ ------------ Total current assets 17,526,180 8,252,184 ------------ ------------ Property and equipment, at cost 77,752,977 60,309,726 Less accumulated depreciation and amortization 11,155,516 12,115,268 ------------ ------------ Net property and equipment 66,597,461 48,194,458 Other assets 31,690 46,322 ------------ ------------ Total assets $ 84,155,331 $ 56,492,964 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 6,492,435 $ 3,030,000 Subordinated debenture -- 9,000,000 Current installments of long-term debt and capital lease obligations 1,927,018 1,779,146 Accounts payable 6,070,582 7,606,982 Federal income tax 49,108 50,198 Current deferred income taxes 42,454 56,750 Accrued preferred stock dividend -- 766,581 Accrued expenses 2,825,924 1,141,721 Prepaid drilling contracts 417,700 -- ------------ ------------ Total current liabilities 17,825,221 23,431,378 Long-term debt and capital lease obligations, less current installments 26,644,633 10,055,621 Deferred income taxes 6,354,239 5,179,203 ------------ ------------ Total liabilities 50,824,093 38,666,202 ------------ ------------ Shareholders' equity: Preferred stock, Series B, 8%, cumulative, convertible, $16.25 redemption and liquidation value. Authorized 184,615 shares; issued and outstanding 184,615 shares at March 31, 2001 -- 2,999,994 Common stock $.10 par value. Authorized 100,000,000 shares, issued 15,922,459 at December 31 and 12,145,921 shares at March 31, 2001 1,592,245 1,214,592 Additional paid-in capital 38,783,731 26,869,916 Accumulated deficit (7,123,582) (13,367,858) Accumulated other comprehensive income Unrealized gain on securities available for sale 78,844 110,118 ------------ ------------ Total shareholders' equity 33,331,238 17,826,762 ------------ ------------ Total liabilities and shareholders' equity $ 84,155,331 $ 56,492,964 ============ ============
See accompanying notes to condensed consolidated financial statements. 2 PIONEER DRILLING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended December 31, December 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Contract drilling $ 16,514,838 $ 14,571,000 $ 52,451,790 $ 35,554,544 Other 24,058 111,405 155,598 210,973 ------------ ------------ ------------ ------------ Total operating revenues 16,538,896 14,682,405 52,607,388 35,765,517 ------------ ------------ ------------ ------------ Costs and expenses: Contract drilling 12,437,952 12,575,567 34,035,213 30,686,429 Depreciation and amortization 2,325,366 1,114,563 5,892,522 2,469,902 General and administrative 482,299 327,768 1,862,624 768,962 ------------ ------------ ------------ ------------ Total operating costs and expenses 15,245,617 14,017,898 41,790,359 33,925,293 ------------ ------------ ------------ ------------ Earnings from operations 1,293,279 664,507 10,817,029 1,840,224 ------------ ------------ ------------ ------------ Other income (expense): Interest expense (480,506) (326,419) (1,008,033) (632,006) Interest income 39,273 75,409 59,323 264,406 ------------ ------------ ------------ ------------ Total other income (expense) (441,233) (251,010) (948,710) (367,600) ------------ ------------ ------------ ------------ Earnings before income taxes 852,046 413,497 9,868,319 1,472,624 Income taxes 300,766 155,050 3,531,229 182,455 ------------ ------------ ------------ ------------ Net earnings 551,280 258,447 6,337,090 1,290,169 Preferred stock dividend requirements -- 62,630 92,814 214,630 ------------ ------------ ------------ ------------ Net earnings applicable to common stockholders $ 551,280 $ 195,817 $ 6,244,276 $ 1,075,539 ============ ============ ============ ============ Earnings per common share - Basic $ 0.03 $ 0.02 $ 0.42 $ 0.10 ============ ============ ============ ============ Earnings per common share - Diluted $ 0.03 $ 0.02 $ 0.36 $ 0.09 ============ ============ ============ ============ Weighted average number of shares outstanding - Basic 15,919,502 11,985,943 14,847,120 10,816,566 ============ ============ ============ ============ Weighted average number of shares outstanding - Diluted 17,280,475 14,326,470 18,309,123 13,555,706 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 3 PIONEER DRILLING COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 2001 2000 ------------ ------------ Cash flows from operating activities: Net earnings $ 6,337,090 $ 1,290,169 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 5,892,522 2,469,902 Gain on sales of assets (2,462) -- Deferred income taxes 1,175,036 56,500 Changes in current assets and liabilities: Receivables (4,590,053) (1,844,909) Contract drilling in progress 714,097 (2,050,538) Prepaid expenses (771,286) 100,737 Accounts payable (1,536,400) 4,296,634 Federal income tax (1,090) 322,663 Prepaid drilling contracts 417,700 99,900 Accrued expenses 1,684,201 1,168,946 ------------ ------------ Net cash provided by operating activities 9,319,355 5,910,004 ------------ ------------ Cash flows from financing activities: Proceeds from notes payable 37,467,888 12,106,221 Payments of debt (26,268,568) (5,910,505) Decrease in other assets (15,000) -- Proceeds from exercise of options 243,474 14,850 Proceeds from common stock 9,048,000 8,000,000 Payments of preferred dividends (859,395) (160,614) ------------ ------------ Net cash provided by financing activities 19,616,399 14,049,952 ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (24,921,631) (17,953,836) Proceeds from sale of property and equipment 658,201 -- ------------ ------------ Net cash used in investing activities (24,263,430) (17,953,836) ------------ ------------ Net increase in cash 4,672,324 2,006,120 Beginning cash and cash equivalents 2,492,934 1,922,457 ------------ ------------ Ending cash and cash equivalents $ 7,165,258 $ 3,928,577 ============ ============ Supplementary Disclosure: Common stock issued in acquisition -- 768,544 Debt assumed in acquisition -- 1,673,332 Liabilities assumed and deferred tax recorded in acquisition -- 5,344,225 Interest paid 988,509 573,633 Dividends accrued 92,814 214,630 Conversion of preferred stock 2,999,994 800,000 Income taxes paid 2,320,000 --
See accompanying notes to condensed consolidated financial statements. 4 PIONEER DRILLING COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The condensed consolidated financial statements include the accounts of Pioneer Drilling Company (formerly South Texas Drilling & Exploration, Inc.) and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. 2. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 3. We use the asset and liability method of Statement of Financial Accounting Standards ("SFAS") No. 109 for accounting for income taxes. Under this method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 4. On May 18, 2001, we retired our 4.86% subordinated debenture we issued to WEDGE Energy Services, L.L.C. ("WEDGE") on March 30, 2001 in connection with 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, primarily with a short-term bank borrowing. We then sold an additional 2,400,000 shares of our common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share. We used the proceeds from this sale to fund the repayment of the short-term bank borrowing. On May 31, 2001, San Patricio Corporation exercised its option to acquire 150,000 shares of our common stock at $1.50 per share. On August 20, 2001, the holders of our Series B 8% Convertible Preferred Stock converted all of the preferred stock into 1,199,038 shares of our common stock. 5. As of December 31, 2001, we were constructing one new land drilling rig. The cost of this rig will be approximately $8,000,000. As of December 31, 2001, we have recorded costs of approximately $7,415,000, including capitalized interest costs of approximately $223,800, relating to this rig. We were financing the addition of this rig with borrowings under a $6,000,000 (formerly $12,000,000) credit facility and cash flow from operations. The credit facility is scheduled to expire March 29, 2002. Borrowings under the facility are secured by drilling equipment and were also secured by a $6,000,000 letter of credit provided by WEDGE. This letter of credit was released on October 9, 2001 as described in Note 6. 6. On October 9, 2001, we issued a 6.75% five year $18,000,000 convertible subordinated debenture, Series A, to WEDGE. The debenture is convertible into 4,500,000 shares of common stock at $4.00 per share. We used approximately $9,000,000 of the proceeds to complete the rig described in Note 5 and another rig which we accepted delivery of in October 2001. Approximately $6,000,000 was used to reduce the $12,000,000 credit facility described in Note 5 to $6,000,000. Our bank lender released the letter of credit provided by WEDGE. The balance of the proceeds will be used for drilling equipment and working capital. 5 PIONEER DRILLING COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7. The following table presents a reconciliation of the numerators and denominators of the basic EPS and diluted EPS computations as required by SFAS No. 128:
Three Months Ended Nine Months Ended December 31, December 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Basic Net earnings $ 551,280 $ 258,447 $ 6,337,090 $ 1,290,169 Less: Preferred stock dividends -- 62,630 92,814 214,630 ----------- ----------- ----------- ----------- Earnings applicable to common shareholders $ 551,280 $ 195,817 $ 6,244,276 $ 1,075,539 =========== =========== =========== =========== Weighted average shares 15,919,502 11,985,943 14,847,120 10,816,566 =========== =========== =========== =========== Earnings per share $ 0.03 $ 0.02 $ 0.42 $ 0.10 =========== =========== =========== ===========
Three Months Ended Nine Months Ended December 31, December 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Diluted Earnings applicable to common shareholders $ 551,280 $ 195,817 $ 6,244,276 $ 1,075,539 Effect of dilutive securities: Convertible debenture (1) -- -- 184,882 -- Preferred stock -- 62,630 92,814 214,630 ----------- ----------- ----------- ----------- Earnings available to common shareholders and assumed conversion $ 551,280 $ 258,447 $ 6,521,972 $ 1,290,169 =========== =========== =========== =========== Weighted average shares: Outstanding 15,919,502 11,985,943 14,847,120 10,816,566 Options 1,360,973 1,295,713 1,472,679 1,242,974 Convertible debenture (1) -- -- 1,374,545 -- Preferred stock -- 1,044,814 614,779 1,496,166 ----------- ----------- ----------- ----------- 17,280,475 14,326,470 18,309,123 13,555,706 =========== =========== =========== =========== Earnings per share $ 0.03 $ 0.02 $ 0.36 $ 0.09 =========== =========== =========== ===========
(1) Excluded because of the antidilutive effect for the three months ended December 31, 2001. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements we make in the following discussion which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including general economic and business conditions and industry trends, the continued strength or weakness of the contract land drilling industry in the geographic areas in which we operate, decisions about onshore exploration and development projects to be made by oil and gas companies, the highly competitive nature of our business, our future financial performance, including availability, terms and deployment of capital, the continued availability of qualified personnel, and changes in, or our failure or inability to comply with, government regulations, including those relating to the environment. Market Conditions in our Industry The United States contract land drilling services industry is highly cyclical. Volatility in oil and gas prices can produce wide swings in the levels of overall drilling activity in the markets we serve and affect the demand for our drilling services and the dayrates we can charge for our rigs. Past trends in oil and gas prices and the outlook for future oil and gas prices strongly influence the number of wells oil and gas exploration and production companies decide to drill. Oil and natural gas prices rose sharply in calendar year 2000 and through mid 2001. The average price of natural gas for 2000 was $4.32 per mmbtu and for the period from January 1, 2001 through May 31, 2001 was $5.70. The average price of West Texas Intermediate crude for 2000 was $30.38 per barrel and for the period from January 1, 2001 through May 31, 2001 was $28.46. Natural gas prices began falling in mid 2001 and are currently in the $2.00 to $2.25 range. Oil prices have fallen to the $18.00 to $20.00 per barrel range. Primarily as a result of the increase in oil and natural gas prices, exploration and production companies increased their capital spending budgets in 2000 and early 2001. These increased spending budgets increased the demand for contract drilling services. The domestic land rig count climbed to 1,105 on May 31, 2001, representing an increase in the domestic land rig count of 181% since the low in April 1999 and of 23% since December 31, 1997. While market conditions improved in 2000 and into mid 2001, demand for contract land drilling services has declined in the last six months leading to a substantial reduction in the rates we are able to obtain for our services. The domestic land rig count was 714 as of February 1, 2002, a 35% decrease from May 31, 2001. We believe dayrates and rig utilization rates will remain depressed in our industry until prices for oil and natural gas begin to recover from their current levels. Liquidity and Capital Resources Our cash and cash equivalents at December 31, 2001 were $7,165,258 compared to $2,492,934 at March 31, 2001. Our current ratio, which we calculate by dividing our current assets by our current liabilities, at December 31, 2001 was 0.98, compared to 0.35 at March 31, 2001. Our working capital deficit decreased to $299,041 at December 31, 2001 from $15,179,194 at March 31, 2001. The primary reason for the improvement in our current ratio and our working capital deficit was our repayment of $9,000,000 of subordinated debt which was included in current liabilities at March 31, 2001. We also have included in current liabilities $6,000,000 borrowed under our $6,000,000 credit facility at December 31, 2001 as compared to $3,030,000 borrowed at March 31, 2001. Our accounts receivable increased to $7,367,520 at December 31, 2001 from $2,777,467 at March 31, 2001, and contract drilling in progress decreased to $1,617,015 at December 31, 2001 from $2,331,112 at March 31, 2001. The substantial increase in the combination of accounts receivable and contract drilling in progress was due to our utilization of 19 rigs in the quarter ended December 31, 2001 compared to 12 rigs at March 31, 2001, an increase in daywork rates from several longer term contracts and a reduction in the number of turnkey contracts, which are usually paid within 10 days of completion as opposed to daywork, which are usually paid in approximately 30 days. 7 Since March 31, 2001, the additions to our property and equipment were $24,921,631. Additions consisted of the following: Drilling rigs $ 18,485,971 Other drilling equipment 5,664,143 Transportation equipment 594,043 Other 177,474 ------------- $ 24,921,631 =============
Our debt obligations in the form of notes payable and a convertible subordinated debenture increased by a net of $11,199,320 from March 31, 2001 to December 31, 2001. This increase resulted from the issuance of the $18,000,000 convertible debenture described below and additional borrowings on our $6,000,000 credit facility with our primary lender due March 29, 2002. As explained below, the credit facility was reduced from $12,000,000 to $6,000,000. We also made payments of $1,527,526 on our other long-term debt. Borrowings under the credit facility are secured by drilling equipment. Our bank loans contain various covenants pertaining to leverage ratios, cash flow coverage ratios and capitalization or net worth ratios and restrict us from the payment of dividends. Under these credit arrangements, we determine compliance with the ratios on an annual basis, except for the capitalization and net worth ratios, which we determine on a quarterly basis. As of December 31, 2001 we are in compliance with all covenants applicable to our outstanding debt. We are currently in discussions with our primary bank lender about extending the maturity date of the $6,000,000 credit facility due March 29, 2002 or converting it to a term loan payable in monthly installments. On October 9, 2001, we issued a 6.75% five year $18,000,000 convertible subordinated debenture, Series A, to WEDGE. The debenture is convertible into 4,500,000 shares of common stock at $4.00 per share. We used approximately $9,000,000 of the proceeds for the construction and refurbishment of two drilling rigs and approximately $6,000,000 to reduce a $12,000,000 credit facility with our primary lender to $6,000,000. Our primary bank lender released the letter of credit upon our pay down of the credit facility. The balance of the proceeds will be used for drilling equipment and working capital. We have a $1,000,000 line of credit with our primary bank lender. At December 31, 2001, there was no balance outstanding on this line. In addition, our primary bank lender has issued on our behalf two letters of credit totaling $2,050,000 to two workers compensation insurance companies to secure possible future claims under the deductibles on these policies. It is our practice to pay any amounts due under these deductibles as they are incurred. Therefore, we do not anticipate the lender will be required to fund these letters of credit. Long-term debt and capital lease obligations maturing each year subsequent to December 31, 2001 are as follows:
Long term debt Capital Leases -------------- -------------- 2002 1,832,519 94,499 2003 6,636,955 103,079 2004 548,008 112,449 2005 563,238 48,245 2006 18,552,000 11,728 After 2006 68,930 --
Our accounts payable at December 31, 2001 were $6,070,582, a decrease of $1,536,400 from $7,606,982 at March 31, 2001. The decrease in accounts payable was primarily the result of a reduced level of turnkey contracts during the quarter ended December 31, 2001 compared to the quarter ended March 31, 2001. In May 2000, we ordered two new IRI 1700E Series land drilling rigs. These rigs are equipped with several state-of-the-art technological advancements and are capable of drilling wells in the depth range of 10,000 to 18,000 feet. The first of these rigs became operational in August 2001 and we expect the second rig to become operational in February 2002. We also acquired an additional land drilling rig that we refurbished. As of December 31, 2001, we have spent approximately $20,965,000 on the construction of the two new rigs and the refurbishment 8 of the third rig that we contracted for in May 2001. We do not expect the combined cost of these rigs to exceed $22,000,000. On May 18, 2001, we sold an additional 2,400,000 shares of our common stock to WEDGE in a private placement for $9,048,000, or $3.77 per share. We used the proceeds from this sale to fund the repayment of the short-term bank borrowing. On May 31, 2001, San Patricio Corporation exercised its option to acquire 150,000 shares of our common stock for $225,000 ($1.50 per share). On August 20, 2001, the holders of our Series B 8% convertible preferred stock converted all of the preferred stock into 1,199,038 shares of our common stock. Results of Operations We earn our revenues by drilling oil and gas wells. We obtain our contracts for drilling oil and gas wells either through competitive bidding or through direct negotiations with customers. Our drilling contracts generally provide for compensation on either a daywork, turnkey or footage basis. Contract terms we offer generally depend on the complexity and risk of operations, the on-site drilling conditions, the type of equipment used and the anticipated duration of the work to be performed. Generally, our contracts provide for the drilling of a single well and typically permit the customer to terminate on short notice, usually on payment of a fee. However, we currently have several rigs on term contracts to provide drilling services on a daywork basis with expiration dates ranging from March to October of 2002. These term contracts include a per day termination rate approximately equal to 80% of the daywork rate on each contract. Daywork Contracts. Under daywork drilling contracts, we provide a drilling rig with required personnel to our customer who supervises the drilling of the well. We are paid based on a negotiated fixed rate per day while the rig is used. Daywork drilling contracts specify the equipment to be used, the size of the hole and the depth of the well. Under a daywork drilling contract, the customer bears a large portion of out-of-pocket costs of drilling and we generally bear no part of the usual risks associated with drilling, such as time delays and unanticipated costs. Turnkey Contracts. Under a turnkey contract, we agree to drill a well for our customer to a specified depth and under specified conditions for a fixed price, regardless of the time required or the problems encountered in drilling the well. We provide technical expertise and engineering services, as well as most of the equipment and drilling supplies required to drill the well. We often subcontract for related services, such as the provision of casing crews, cementing and well logging. Under typical turnkey drilling arrangements, we do not receive progress payments and are entitled to be paid by our customer only after we have performed the terms of the drilling contract in full. Turnkey contracts generally afford an opportunity to earn a higher return than would normally be available on daywork contracts if the contract can be completed successfully without complications. Due to the current reduced demand for drilling rigs, we have returned to bidding on turnkey contracts in an effort to improve margins and rig utilization. The risks to us under a turnkey contract are substantially greater than on a well drilled on a daywork basis, because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalations and personnel. We employ or contract for engineering expertise to analyze seismic, geologic and drilling data to identify and reduce some of the drilling risks assumed by us. We use the results of this analysis to evaluate the risks of a proposed contract and seek to account for such risks in our bid preparation. We believe that our operating experience, qualified drilling personnel, risk management program, internal engineering expertise and access to proficient third party engineering contractors have allowed us to reduce some of the risks inherent in turnkey drilling operations. We also maintain insurance coverage against some but not all drilling hazards. However, the occurrence of uninsured or under-insured losses or operating cost overruns on our turnkey jobs could have a material adverse effect on our financial position and results of operations. Footage Contracts. Under footage contracts, we are paid a fixed amount for each foot drilled, regardless of the time required or the problems encountered in drilling the well. We typically pay more of the out-of-pocket costs associated with footage contracts compared with daywork contracts. Similar to a turnkey contract, the risks to us on a footage contract are greater because we assume most of the risks associated with drilling operations generally assumed by the operator in a daywork contract, including the risk of blowout, loss of hole, stuck drill pipe, 9 machinery breakdowns, abnormal drilling conditions and risks associated with subcontractors' services, supplies, cost escalation and personnel. As with turnkey contracts, we manage this additional risk through the use of engineering expertise and bid the footage contracts accordingly, and we maintain insurance coverage against some but not all drilling hazards. However, the occurrence of uninsured or under-insured losses or operating cost overruns on our footage jobs could have a material adverse effect on our financial position and results of operations. We recognize revenues on daywork contracts for the days completed based on the dayrate each contract specifies. We recognize revenues from our turnkey and footage contracts on the percentage-of-completion method based on our estimate of the number of days to complete each well. Individual wells are usually completed in less than 60 days. We accrue estimated contract costs on turnkey and footage contracts for each day of work completed based on our estimate of the total cost to complete the contract divided by our estimate of the number of days to complete the contract. Contract costs include labor, materials, supplies, repairs and maintenance and operating overhead allocations. We charge general and administrative expenses to expense as we incur them. Changes in job performance, job conditions and estimated profitability on uncompleted contracts may result in revisions to costs and income, including losses, which we recognize in the period in which we determine the revisions. The asset "contract drilling in progress" represents revenues we have recognized in excess of amounts billed on contracts in progress. At December 31, 2001, contract drilling in progress included $38,110 of revenue on uncompleted turnkey and footage contracts for which no drilling margin was recognized. Our rig utilization rates for the quarters ended December 31, 2001 and 2000 were 75% and 90%, respectively. Our rig utilization rates for the nine months ended December 31, 2001 and 2000 were 87% and 90%, respectively. In our quarter ended December 31, 2001, we completed 1,304 revenue days, as compared to 989 revenue days in the corresponding quarter of 2000, an increase of 32%. For the nine months ended December 31, 2001, we completed 4,144 revenue days compared to 2,461 revenue days in 2000. This increase in revenue days during the periods reflects the increase in our drilling rig fleet from twelve to 19 rigs, including four rigs acquired from Mustang Drilling, Ltd. In mid August 2001, we activated Rig 7, one of the IRI 1700E rigs and in late October 2001 we activated Rig 21. In mid June 2001, we pulled Rig 6, an older rig, out of service to replace its mast and substructure and upgrade other components. We returned Rig 6 to service in September 2001. Two other rigs were pulled from service in late August 2001 for major repairs and upgrades. One of these rigs is returning to service in mid February. During the three and nine months ended December 31, 2001, 10% and 3%, respectively, of our drilling revenues were derived from turnkey contracts, 0% and 2%, respectively, from footage contracts and 90% and 95%, respectively, from daywork contracts. During the same periods of the prior year, 60% and 67%, respectively, of our revenues were derived from turnkey contacts, 1% and 2%, respectively, from footage contracts and 39% and 31%, respectively, from daywork contracts. Costs associated with the drilling of turnkey wells include items such as drilling fluids, casing, cementing, fuel and drill bits which are not provided under daywork contracts. Much more of these types of costs are reflected in revenues and drilling costs in the three and nine months ended December 31, 2000 as compared to the same periods of the current year. Our drilling margin increased to $4,076,886 for our quarter ended December 31, 2001 from $1,995,433 in the same quarter of 2000. Our drilling margin for the nine months ended December 31, 2001 was $18,416,577 compared to $4,868,115 in 2000. The increases in 2001 over 2000 principally resulted from the increase in the number of revenue days we completed in 2001 and increases in drilling rates we charged under our drilling contracts. As a percentage of contract drilling revenue, our drilling margin was 25% for the quarter ended December 31, 2001 compared to 14% in the same period of 2000. For the nine months ended December 31, 2001, our drilling margin was 35% compared to 14% in the prior period. The drilling margins for the three and nine months ended December 31, 2001 included approximately $478,000 and $705,000, respectively, related to footage and turnkey contracts. The margins in the 2000 periods are affected by the additional costs associated with turnkey contracts as described in the previous paragraph. Contract drilling costs for the three months ended December 31, 2001 include a charge of $500,000 related to the settlement of a lawsuit from 1998 involving an injury to a former employee and a $275,000 charge related to severance costs for a corporate officer. For more information about the lawsuit see Legal Proceedings on page 12. 10 On December 20, 2001, we issued 450,000 non-qualified stock options exercisable at $3.00 per share to our new chief operating officer. One hundred fifty thousand of these options vested on December 20, 2001, and 100,000 shares will vest on December 20, 2002, December 20, 2003 and December 20, 2004. Our depreciation and amortization expense in the quarter ended December 31, 2001 increased to $2,325,366 from $1,114,563 in the quarter ended December 31, 2000. Our depreciation and amortization expense for the nine months ended December 31, 2001 increased to $5,892,522 from $2,469,902 in the comparable prior period. The increases in the current period resulted from a combination of increased depreciation expense due to the Mustang Drilling, Ltd. and Pioneer Drilling Co. acquisitions, the purchase of two rigs, the construction of one rig and the major refurbishment of four rigs from our original rig fleet during the prior period. The decrease in accumulated depreciation at December 31, 2001 from March 31, 2001 is due to our write-off of certain fully depreciated asset costs on rigs that we have recently refurbished and fully depreciated cost of drill pipe which is no longer suitable for our use. Our general and administrative expenses increased to $482,299 in the quarter ended December 31, 2001 from $327,768 in the quarter ended December 31, 2000. For the nine months ended December 31, 2001, our general and administrative expenses increased to $1,862,624 from $768,962 in the prior period. The increases resulted from increased payroll costs, legal and professional fees and investor relation costs. Our contract land drilling operations are subject to various federal and state laws and regulations designed to protect the environment. Maintaining compliance with these regulations is part of our day-to-day operating procedures. We are not aware of any potential clean-up obligations that would have a material adverse effect on our financial condition or results of operations. Impact of Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. The Company is required and plans to adopt the provisions of Statement No. 143 beginning April 1, 2003. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. We do not expect the adoption of SFAS No. 143 to have any material effect on our results of operations. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually using a fair-value based approach. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." We will be required to apply these new standards beginning April 1, 2002, except that for any business combinations initiated after June 30, 2001 the new standards will be currently effective. We do not expect the adoption of SFAS Nos. 141 and 142 to have any material effect on our results of operations. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of". However, it retains the fundamental provisions of statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company will be required to apply this standard beginning April 1, 2002. We do not expect the adoption of SFAS No. 144 to have any material effect on our results of operations. 11 Inflation As a result of the relatively low levels of inflation during the past two years, inflation did not significantly affect our results of operations in either of the periods reported. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are subject to market risk exposure related to changes in interest rates on some of our outstanding debt. At December 31, 2001, we had outstanding debt of $16,068,419 that was subject to variable interest rates, in each case based on an agreed percentage-point spread from the lender's prime interest rate. An increase or decrease of 1% in the interest rate would have a corresponding decrease or increase in our net income of approximately $106,000 annually. We did not enter into these debt arrangements for trading purposes. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We have previously reported in our latest Annual Report on Form 10-K and subsequent reports on Form 10-Q that one of our former employees, Jesse J. Sanchez, filed a petition against us in the District Court for the 341st District in Webb County, Texas. The petition asserted a claim for injuries resulting from an accident involving one of our drilling rigs. The petition alleged, among other things, that we intentionally failed to furnish Mr. Sanchez with a safe workplace and that we believed our conduct was substantially certain to cause Mr. Sanchez's injuries and related damages his wife and children allegedly sustained. By his Fifth Amended Original Petition, Mr. Sanchez amended his claim such that he claimed actual damages not exceed $10 million, and continued to seek punitive damages in excess of the minimum jurisdictional limits of the court. On December 19, 2001, we settled this claim for $500,000. The cost of this settlement is included in our results of operations for the quarter ended December 31, 2001. In addition, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including workers' compensation claims and employment-related disputes. In the opinion of our management, none of the pending litigation, disputes or claims against us will have a material adverse effect on our financial condition or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K. We did not file any reports on Form 8-K during the reporting period. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PIONEER DRILLING COMPANY /s/ Wm. Stacy Locke ---------------------------------------- Wm. Stacy Locke President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Representative) Dated: February 8, 2002 12 -----END PRIVACY-ENHANCED MESSAGE-----