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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: May 16, 1997
Date of earliest event reported: May 5, 1997
DI INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-8226 74-2144774
(State of Incorporation) (Commission File Number) (IRS Employer Identification
No.)
</TABLE>
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042-4136
(Address of Registrant's principal executive offices)
(713) 435-6100
(Registrant's telephone number, including area code)
450 GEARS ROAD, SUITE 625
HOUSTON, TEXAS 77077
(Former name or former address, if changed since last report)
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This Report contains, or incorporates by reference, certain statements that
may be deemed "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
statements, other than statements of historical facts so included in this Report
that address activities, events or developments that the Company expects,
projects, believes or anticipates will or may occur in the future, including,
without limitation, statements regarding the Company's business strategy, plans
and objectives; statements expressing beliefs and expectations regarding future
rig utilization rates, day rates and other events and conditions that may
influence the land rig drilling market and the Company's performance in the
future; statements concerning future rig refurbishment plans, including the
anticipated level of capital expenditure for, and the nature and scheduling of,
rig refurbishment; statements regarding future redeployment of the Company's
rigs to different markets; trends in the land drilling business and other such
matters are forward-looking statements. Such statements are based on certain
assumptions and analyses made by management of the Company in light of its
experience and its perception of historical trends, current conditions, expect
future developments and other factors it believes to be appropriate. The
forward-looking statements included in this Report are also subject to a number
of material risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are discussed under
the caption "Risk Factors" contained in the Company's Registration Statements on
Form S-3 (No. 333-26519) and Form S-4 (No. 333-25811). Prospective investors are
cautioned that such forward-looking statements are not guarantees of future
performance and that actual results, developments and business decisions may
differ from those envisaged by such forward-looking statements.
ITEM 5. OTHER EVENTS
On May 5, 1997, DI Industries, Inc. (the "Company") filed a Registration
Statement on Form S-3 (the "Senior Notes Prospectus") covering a proposed
underwritten public offering (the "Senior Notes Offering") by the Company of
$125.0 million "high-yield," unsecured debt securities (the "Senior Notes"). The
Senior Notes Prospectus contains an updated description of (i) the Company's
business and properties, including the assets of Grey Wolf (as defined below),
(ii) the Company's Bank Credit Facility (as defined below) and (iii) the Senior
Notes. The Company is filing the information in this Current Report in order to
update disclosure of such matters under the Exchange Act.
BUSINESS
The following information concerning the business and properties of the
Company assumes that: (i) the acquisition of Grey Wolf Drilling Company, a Texas
corporation ("Grey Wolf"), has received Grey Wolf shareholder approval, (ii)
Grey Wolf has been merged with and into Drillers, Inc., a wholly-owned
subsidiary of the Company, and (iii) Grey Wolf's assets and operations have been
consolidated to form the Company's Gulf Coast Division. Additional information
about the pending acquisition of Grey Wolf is contained in the Company's Current
Report on Form 8-K filed March 10, 1997, and in its Registration Statement on
Form S-4 (No. 333-25811).
GENERAL
The Company is a leading provider of contract land drilling services in the
U.S. with a domestic fleet of 102 rigs, of which 78 are currently marketed. The
Company believes it has the largest or second largest active rig fleet in each
of its three domestic core markets, which are served by its Ark-La-Tex, Gulf
Coast and South Texas Divisions. The Company believes these markets have
historically maintained higher utilization and day rates than other domestic
markets. In addition to its domestic operations, the Company operates in
Venezuela where the Company intends to increase its market presence by upgrading
its current fleet of six rigs and deploying additional deep drilling rigs as
warranted by market conditions. The Company has an inventory of 24 rigs, of
which 21 are diesel electric SCR rigs, available for refurbishment and
redeployment as demand warrants.
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In 1996, the Company initiated a reorganization of its operations in which
the Company (i) replaced substantially all of its board of directors, (ii) hired
a new management team, substantially all of whom joined the Company after August
1996 and (iii) implemented a new operating strategy. The Company believes the
reorganization has positioned the Company to benefit from recent improvements in
the land drilling industry.
INDUSTRY OVERVIEW
The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that during 1996 and the first quarter of
1997, six land rig companies have completed or have pending at least 17
transactions in which a combined total of approximately 341 rigs have been or
are proposed to be acquired. Recent and pending transactions by the Company
accounted for five of these consolidating acquisitions in which it acquired 65
rigs, of which 44 were actively marketed at the time of acquisition and 21 were
stacked.
Industry sources estimate that there are approximately 1,400 land drilling
rigs available for work in the U.S. as compared to over 5,000 domestic land
drilling rigs in 1982 and approximately 2,000 land drilling rigs as recently as
1990. The Company believes the demand for land drilling rigs in the Company's
core markets has increased principally due to improved oil and gas drilling and
production economics resulting from increased use of 3-D seismic, directional
drilling and enhanced recovery techniques. For the first three months of 1997,
the average active domestic land rig count was 715 as compared to 652 for the
full year 1996, and 595 for the first three months of 1996. The Company's
utilization rates in its core domestic markets averaged over 90% for the first
three months of 1997. The convergence of land drilling rig supply and demand in
its core domestic markets have contributed to improved financial results for the
Company.
OPERATING STRATEGY
The Company's operating strategy, which was initiated in connection with
its change of management, is to achieve increased cash flow and earnings by:
Acquiring Land Drilling Rigs. The Company intends to continue to be an
active consolidator of the land drilling industry. Since August 1996, the
Company has acquired 65 land drilling rigs in five significant
transactions. Four of these acquisitions were of land drilling companies
with long histories of operating in the Gulf Coast and South Texas markets.
The fifth acquisition provided the Company with an inventory of diesel
electric SCR drilling rigs suited for deployment to the Company's core
domestic markets and Venezuela.
Focusing on Core Markets. The Company intends to focus its operations
in its core markets, the Ark-La-Tex, Gulf Coast, South Texas and Venezuelan
markets. In each of its domestic core markets the Company believes it has
the largest or second largest active rig fleet, and intends to maintain a
leading market position. Management believes these markets have
historically maintained higher demand and utilization rates than other
domestic markets and that the Company's leading presence in these domestic
markets enables it to achieve economies of scale and maintain the operating
infrastructure to facilitate the deployment of inventoried drilling rigs
into these markets in a cost effective manner. In Venezuela, the Company
intends to increase its market presence by upgrading its current fleet of
six rigs and deploying additional diesel electric rigs as warranted by
market conditions.
Refurbishing Rigs. The Company seeks to grow internally by
capitalizing on its rig inventory. The Company has 24 rigs available for
refurbishment and return to marketable status. Twenty-one of these rigs are
diesel electric SCR drilling rigs which are currently in demand because of
their suitability for directional and deep drilling applications. During
the last quarter of 1996 and the first quarter of 1997, the Company
refurbished and placed in service four drilling rigs. An additional six
rigs are currently in various stages of refurbishment and are expected to
be available for service by the end of the third quarter of 1997. The
Company anticipates that during 1997 it may commence the refurbishment of
up to an additional 15 rigs, depending upon a variety of factors, including
management's assessment of existing and anticipated demand and day rates
for land drilling rigs in the Company's domestic and Venezuelan markets and
the Company's success in bidding for drilling contracts. See "-- Rig
Inventory and Rig Refurbishments."
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Attracting and Retaining Qualified Personnel. The Company intends to
attract and retain qualified personnel by offering a combination of wage
rates, benefits and training programs that it believes will distinguish it
from its competitors. Whenever possible, management intends to retain
qualified operating personnel employed by drilling businesses acquired by
the Company. In the Diamond M and Flournoy Acquisitions (as defined below),
the Company employed substantially all of the seller's rig personnel. The
Company expects to retain substantially all the rig personnel of Grey Wolf.
The Company has maintained a strong equity capitalization to provide it
with the financial flexibility to pursue acquisitions and rig refurbishments as
opportunities arise. In all but one of the completed Transactions, the
acquisition price for the business or assets acquired by the Company consisted
entirely or primarily of the Company's common stock par value $.10 per share
("Common Stock"), resulting in an increase in shareholders' equity of $87.8
million. Additionally, the Company has increased its equity capitalization by
raising $4.1 million in cash through a private placement of its Common Stock in
December 1996.
RECENT AND PENDING TRANSACTIONS
Grey Wolf Acquisition. On March 7, 1997, the Company entered into a
definitive agreement (the "Merger Agreement") to merge Grey Wolf into Drillers,
Inc, a wholly-owned subsidiary of the Company ("Drillers"). This merger is
referred to herein as the "Grey Wolf Acquisition." Grey Wolf is a land drilling
contractor operating primarily in South Louisiana and along the Texas Gulf
Coast, and its principal operating assets are a fleet of 18 deep drilling land
rigs, related equipment and vehicles. All of Grey Wolf's 18 rigs are currently
working. The closing of the Grey Wolf Acquisition is subject to obtaining Grey
Wolf shareholders' approval and to certain other conditions. It is anticipated
that the proceeds from the Senior Notes Offering will be used, in part, to fund
the cash portion of the Grey Wolf Acquisition. The closing of the Senior Notes
Offering is expected to be contingent upon the simultaneous closing of the Grey
Wolf Acquisition.
The Merger Agreement provides that Grey Wolf's shareholders will receive up
to $61.6 million in cash and approximately 14.0 million shares of Common Stock.
The Merger Agreement provides, however, that if the "DI Common Stock Price" (as
defined below) is less than $3.00 or more than $4.00, the number of shares of
Common Stock to be issued will be adjusted. If the DI Common Stock Price is less
than $3.00, the number of shares of Common Stock to be issued will be increased
to a number of shares equal to $42.0 million divided by the DI Common Stock
Price. If the DI Common Stock Price is more than $4.00, the number of shares of
Common Stock to be issued will be decreased to the greater of (i) 11,666,667
shares, or (ii) a number of shares equal to $56.0 million divided by the DI
Common Stock Price. Additionally, the Merger Agreement provides for the decrease
of the cash consideration and a corresponding increase in the number of shares
issued so that at least 45% of the value of the consideration consists of Common
Stock. The "DI Common Stock Price" means an amount equal to the average of the
closing sales price of DI Common Stock on the American Stock Exchange
Consolidated Tape as reported by The Wall Street Journal (Southwest Edition) on
each of the ten consecutive trading days immediately preceding the third trading
day before the closing of the Grey Wolf Acquisition. Grey Wolf has agreed that
it will not, and has agreed that it will request each of its officers and
directors to agree that they will not, engage in trading in Common Stock during
the 20 consecutive days immediately preceding the closing of the Grey Wolf
Acquisition. The Merger Agreement provides that a post-closing escrow
arrangement will be established for certain Grey Wolf litigation matters with
$5.0 million of the cash consideration otherwise payable in the Merger to Grey
Wolf's shareholders. If the Grey Wolf Acquisition had closed on May 1, 1997, the
aggregate consideration would have consisted of $57.0 million in cash and 18.7
million shares of Common Stock. Additional information concerning the Grey Wolf
Acquisition is set forth in the Company's Current Report on 8-K filed March 10,
1997.
The Grey Wolf Acquisition is intended to qualify as a tax free
reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to common Stock
received by Grey Wolf shareholders. Arthur Andersen LLP has rendered an opinion
for the benefit of the parties to the Grey Wolf Acquisition, including Grey Wolf
and its shareholders, that the Grey Wolf Acquisition qualifies as such a
reorganization. The opinion is based on a number of assumptions of fact, which
are supported by certificates from the Company, Grey Wolf and certain Grey Wolf
shareholders. A principal assumption is that the shareholders of Grey Wolf will
satisfy the continuity of proprietary interest
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standard with respect to Common Stock received in the Grey Wolf Acquisition.
Thus, under present Internal Revenue Service ("IRS") guidelines, dispositions of
Common Stock by Grey Wolf shareholders during the five years following the Grey
Wolf Acquisition could cause the IRS to assert that the Grey Wolf Acquisition
does not qualify as a tax free reorganization. If the Grey Wolf Acquisition
fails to qualify as a tax free reorganization for this or any other reason, the
receipt of Common Stock will be taxable to the Grey Wolf shareholders at the
time of the Grey Wolf Acquisition, and Grey Wolf will be deemed to have sold all
of its assets in a taxable exchange triggering a corporate tax liability to Grey
Wolf estimated to be in excess of $30.0 million. The Company's wholly-owned
subsidiary, Drillers, as the surviving corporation of the Grey Wolf Acquisition,
would be liable for any such corporate tax.
Flournoy Acquisition. On January 31, 1997, the Company acquired the
operating assets of Flournoy Drilling Company ("Flournoy") for approximately
12.4 million shares of Common Stock and cash of approximately $800,000, which
was utilized to repay certain indebtedness of Flournoy (the "Flournoy
Acquisition"). The assets acquired included 13 land drilling rigs, 17 rig
hauling trucks, a yard and office facility in Alice, Texas and various other
equipment and drill pipe. Under the purchase method of accounting, the Company
valued the Common Stock issued in the Flournoy Acquisition at $31.1 million. The
Company agreed to issue additional shares of the Common Stock to Flournoy's
shareholders if, and to the extent that, on January 31, 1998 the aggregate
market value of one-half of the shares received by the Flournoy shareholders,
plus the gross proceeds from certain sales of Common Stock received in the
transaction by the Flournoy shareholders prior to January 31, 1998, is, in
total, less than $12.4 million.
Diamond M Acquisition. On December 31, 1996, the Company completed the
acquisition of certain assets of Diamond M Onshore, Inc. ("Diamond M") for
approximately $26.0 million in cash (the "Diamond M Acquisition"). The assets
acquired consisted of ten land drilling rigs, all of which are currently
operating in South Texas, 19 rig hauling trucks, a yard and office facility in
Alice, Texas and various other drill pipe and equipment.
Mesa Acquisition. On October 3, 1996, the Company acquired all of the South
Texas operating assets of Mesa Drilling, Inc. ("Mesa") in exchange for 5.5
million shares of Common Stock (the "Mesa Acquisition"). The assets acquired
consist of six diesel electric SCR rigs, three of which are currently operating
in South Texas. Under the purchase method of accounting, the Company valued the
Common Stock issued in the Mesa Acquisition transaction at $7.5 million.
RTO/LRAC and Somerset Acquisitions. On August 29, 1996, the Company
completed the Acquisition of R. T. Oliver, Inc. ("RTO") and Land Rig Acquisition
Corporation ("LRAC") in which approximately 39.4 million shares of Common Stock
were exchanged for 18 inactive, deep drilling land rigs (the "RTO/LRAC
Acquisition"). The rigs acquired in the RTO/LRAC Acquisition include five 3,000
horsepower and nine 2,000 horsepower land rigs rated for depths of 25,000 feet
or greater. Contemporaneously with the closing of the RTO/LRAC Acquisition, the
Company completed the acquisition of Somerset Investment Corp. ("Somerset") in
which it issued approximately 39.4 million shares of Common Stock for $25.0
million in cash (the "Somerset Acquisition"). Under the purchase method of
accounting, the Company valued the Common Stock issued in the RTO/LRAC
Acquisition and the Somerset Acquisition at $25.0 million and $24.6 million,
respectively. The recipients of the shares issued in the RTO/LRAC and Somerset
Acquisitions were also issued warrants to acquire up to an aggregate of 3.4
million shares of Common Stock (the "Shadow Warrants"), exercisable upon the
occurrence of certain events. As of April 30, 1996, approximately 2.9 million of
the Shadow Warrants have been terminated unexercised. The $25.0 million capital
infusion from the Somerset Acquisition was used for rig fleet refurbishment,
debt repayment and general corporate purposes.
Western Sale. On June 24, 1996, the Company completed the sale of all of
the operational assets of Western Oil Well Service Co. ("Western"), a
wholly-owned subsidiary of the Company for $3.9 million in cash (the "Western
Sale"). The Company's Western Division provided well workover services in
Montana, Utah and North Dakota. The Western Division consisted of 23
carrier-mounted workover rigs and certain real estate owned by the Company in
Glendive, Montana and Roosevelt, Utah. Pursuant to the purchase agreement, the
buyer assumed the obligations of the Company under its real and personal
property leases
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relating to the division. The Company recognized a gain of approximately $2.8
million on the sale of this division.
DOMESTIC OPERATIONS
Giving effect to the Grey Wolf Acquisition, the Company has a total
domestic rig fleet of 102 rigs, 78 of which are being actively marketed and 24
of which are held in inventory for refurbishment. See "-- Rig Inventory and
Refurbishments." The following table summarizes the Company's domestic rig
fleet, by horsepower rating and drive system:
<TABLE>
<CAPTION>
HORSEPOWER RATING DIESEL ELECTRIC MECHANICAL TOTAL
----------------- --------------- ---------- -----
<S> <C> <C> <C>
300- 999........................................... 1 37 38
1,000-1,999......................................... 19 13 32
2,000-3,000......................................... 28 3 31
4,000......................................... 1 -- 1
----- -- ---
Total..................................... 49 53 102
===== == ===
</TABLE>
The Company's domestic drilling operations are conducted through five
operating divisions in the United States organized by geographic area. The
market area covered by each of the Company's divisions is depicted on the map
located in the inside front cover of this Prospectus.
Ark-La-Tex Division. The Ark-La-Tex Division provides drilling services
primarily in Northeast Texas, Northern Louisiana and Southern Arkansas, and
currently markets a fleet of 16 rigs. The majority of drilling in the Ark-La-Tex
market is directed to three of the five principal target geologic formations in
the region, generally located at depths ranging from 8,900 to 13,000 feet. For
these target formations, 700 to 1,000 horsepower mechanical rigs are typically
utilized in the Ark-La-Tex market. Thirteen of the division's rigs are suited
for drilling to these depths, ten of which are mechanical, two of which are
electrical and one is an SCR rig. The other two principal geologic targets in
the market, the Austin Chalk and Pinnacle Reef formations, are located at
substantially greater depths, typically from 15,500 to 22,000 feet. The Company
has three marketable rigs suitable for these drilling targets. One of these deep
drilling rigs is a 2,000 horsepower diesel electrical rig with a depth rating of
25,000 feet, the second is a 2,000 horsepower diesel electric SCR rig rated for
25,000 feet and the third is a 3,000 horsepower diesel electric SCR rig with a
depth rating of 30,000 feet.
During 1996, approximately 42% of the division's revenues were generated
from daywork contracts, 3% from footage contracts and 55% from turnkey
contracts. For the first quarter of 1997, the percentage of its contract
revenues provided by daywork, footage and turnkey contracts was 46%, 5% and 49%,
respectively. The average revenues per day for the division during 1996 and the
first quarter of 1997, were $7,685 and $7,916, respectively, and for the same
periods its average rig utilization rates were 86% and 92%, respectively.
South Texas Division. The South Texas Division markets a fleet of 29 rigs
consisting of 14 trailer mounted rigs with rated depth capacities ranging from
9,000 to 13,000 feet, seven diesel electric SCR rigs with rated depth capacities
from 12,000 to 25,000 feet and eight conventional mechanical rigs with rated
depth capacities ranging from 10,000 to 13,000 feet. The Company believes that
trailer mounted rigs and 1,500 to 2,000 horsepower diesel electric SCR rigs are
in highest demand in this market. Trailer mounted rigs are relatively more
mobile than conventional rigs, thus decreasing the time and expense to the
customer of moving the rig to and from the drillsite. Under ordinary conditions,
the Company's trailer mounted rigs are capable of drilling an average of two
10,000 foot wells per month. The Company believes it operates the largest
trailer mounted rig fleet in this market. The South Texas Division also operates
a fleet of 35 trucks, which are used exclusively to move the Company's rigs.
Most drilling in this market is for natural gas at depths ranging from 10,000 to
15,000 feet.
During 1996, approximately 75% of the division's revenues were generated
from daywork contracts, 14% from footage contracts and 11% from turnkey
contracts. For the first quarter of 1997, the percentage of its contract
revenues provided by daywork, footage and turnkey contracts was 47%, 15% and
38%, respectively.
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The average revenues per day for the division during 1996 and the first quarter
of 1997, were $5,522 and $7,992, respectively, and for the same periods its
average rig utilization rates were 85% and 98%, respectively.
Gulf Coast Division. Upon completion of the Grey Wolf Acquisition, Grey
Wolf's assets and personnel will establish the Company's Gulf Coast Division.
Grey Wolf's drilling services are provided to operators in South Louisiana and
along the upper Texas Gulf Coast. Grey Wolf's rig fleet consists of 18 deep
drilling rigs, including ten diesel electric rigs with rated depth capacities of
20,000 to 25,000 feet, four diesel electric SCR rigs with rated depth capacities
of 14,000 to 20,000 feet and four conventional mechanical rigs with rated depth
capacities of 18,000 to 25,000 feet.
During Grey Wolf's fiscal year ended October 31, 1996, approximately 48% of
its revenues were generated from daywork contracts, 10% from footage contracts
and 42% from turnkey contracts. For its first fiscal quarter ended January 31,
1997, the percentage of its contract revenues provided by daywork, footage and
turnkey contracts was 51%, 5% and 44%, respectively. The average revenues per
day for Grey Wolf during 1996 and the its first fiscal quarter of 1997, were
$9,558 and $10,395, respectively, and for the same periods its average rig
utilization rates were 95% and 98%, respectively.
Eastern Division. The Eastern Division markets a fleet of five rigs,
primarily in Ohio. The Eastern Division principally drills gas wells at depths
of 7,000 feet or less using air drilling techniques. This division typically
contracts to drill packages of several wells.
During 1996, approximately 30% of the division's revenues were generated
from daywork contracts and 70% from footage contracts. For the first quarter of
1997, the percentage of its contract revenues provided by daywork and footage
contracts was 11% and 89%, respectively. The average revenues per day for the
division during 1996 and the first quarter of 1997, were $4,944 and $4,923,
respectively, and for the same periods its average rig utilization rates were
72% and 88%, respectively.
INDRILLERS Division. In 1996, the Company and Dart Energy Corp. ("Dart")
formed INDRILLERS L.L.C. ("INDRILLERS") in which the Company has a 65% economic
interest and Dart has a 35% economic interest. Rights to manage the company are
shared equally. This division drills oil and gas wells principally in Michigan
at depths of 1,000 to 16,000 feet. Nine of the ten rigs in this division have
depth ratings ranging from 5,500 to 10,500 feet, and one is rated to 17,000
feet.
During 1996, approximately 62% of the division's revenues were generated
from daywork contracts, 22% from footage contracts and 16% from turnkey
contracts. For the first quarter of 1997, the percentage of its contract
revenues provided by daywork, footage and turnkey contracts was 69%, 23% and 8%,
respectively. The average revenues per day for the division during 1996 and the
first quarter of 1997, were $5,936 and $4,923, respectively, and for the same
periods its average rig utilization rates were 31% and 19%, respectively.
FOREIGN OPERATIONS
Venezuela Division. The Company began operating in Venezuela in 1994, and
intends to upgrade the performance capabilities of its rig fleet in Venezuela
and intensify its marketing efforts there in response to increased demand for
land rig drilling services. The Company believes this demand has resulted
principally from changes in Venezuelan government policies and legislation
encouraging private sector participation in oil and gas exploration and
production. In recent years, the Venezuelan national oil company, Petroleos de
Venezuela, S.A. ("PDVSA"), has permitted international oil companies to enter
into operating agreements with one of PDVSA's three main operating subsidiaries
to rehabilitate, reactivate and develop certain of its older fields.
Additionally, the Venezuelan government has enacted legislation enabling
multinational oil companies to conduct exploration and development operations in
Venezuela through production sharing arrangements with PDVSA and its
subsidiaries. Through March 1997, eight large undeveloped properties have been
awarded to multinational oil companies for development through production
sharing arrangements. In November 1996, PDVSA solicited tenders from private
companies for the rehabilitation, reactivation and development of 20 additional
areas. The new operating agreements (referred to by PDVSA as the "Third
Operating Round") are expected to cover 12 areas described by PDVSA as "onshore"
locations covering a combined area of approximately 2,600 square kilometers
(approximately 1,003 square miles). The Company
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believes that Third Operating Round operations will require drilling and
workover rigs ranging from 4,000 to 18,000 feet in capacity.
Drilling contractors operating in Venezuela generally obtain contracts
through a bidding process open only to drilling contractors previously approved
for inclusion on the "bid list" of the customer and PDVSA.
Drilling contracts are sometimes awarded on a long-term basis, for periods of up
to 24 months. In the Company's experience, bid specifications for Venezuelan
drilling contracts typically require premium quality, intermediate and deep
drilling rigs with 1,500 to 3,000 horsepower ratings equipped with top drive
mechanisms. The Company believes that 3,000 horsepower rigs are currently
highest in demand, but it anticipates that demand for intermediate capacity
1,500 to 2,000 horsepower rigs may improve in response to the Third Operating
Round.
Management has implemented measures to enhance the Company's Venezuelan
operations, and has recently added local management having substantial
experience with competing drilling contractors in Venezuela. The Company has
since been restored to PDVSA's bid list from which it had been previously
removed. The Venezuela Division is currently marketing four land drilling rigs
with rated depths of 10,000 to 15,000 feet and two workover rigs, none of which
is currently under contract. To improve the marketability of its existing
Venezuelan rig fleet, the Company has scheduled all of its Venezuelan rigs for
capital improvements and is actively seeking contracts for the improved rigs
upon completion. The Company has budgeted $2.4 million for these capital
improvements.
To further increase its market presence and deep drilling capabilities in
Venezuela, the Company is evaluating plans to refurbish and to deploy Venezuela
two 3,000 horsepower diesel electric SCR rigs and two additional 800 horsepower,
10,000 foot drilling capacity rigs, each of which will require refurbishment to
operate in the Venezuelan market. Its decision to refurbish and deploy such rigs
in Venezuela will depend upon a variety of factors, including market conditions,
management's assessment of existing and anticipated demand and day rates and the
Company's success in bidding for drilling contracts. The Venezuelan Division
generally provides its drilling services under daywork contracts and workover
services under hourly contracts. Hourly contracts call for the Company to
provide a rig and crew, for which it is paid on an hourly basis. Historically,
the Venezuelan Division has contracted to provide crews to man rigs owned by the
customer, and may do so in the future.
Prior Foreign Operations. Foreign operations contributed approximately 36%,
53% and 21% of the Company's operating revenues for the years ended December 31,
1996 and 1995 and for the nine month period ended December 31, 1994, but
accounted for approximately 71%, 68% and 15%, respectively, of the Company's
total losses from continuing operations for the same three periods. For each of
the same periods, the Company's foreign operations were conducted principally in
Mexico and South America.
Consistent with the Company's decision to redeploy its rigs to more
productive markets, the Company has withdrawn from both the Argentine and
Mexican markets. All four of the Company's drilling rigs previously located in
Mexico have been returned to the United States. Of the four repatriated rigs,
three have been refurbished and placed in service in the Company's Ark-La-Tex or
South Texas Divisions and one is held for sale. In April 1997, the Company sold
three of its six drilling rigs and certain other assets located in Argentina for
$1.5 million. The remaining three rigs are being mobilized to the United States
for refurbishment and redeployment over the second and third quarters of 1997.
Although management has determined to concentrate its foreign operations in
Venezuela, the Company will, from time to time, consider expansion into
additional selected international markets as opportunities arise.
RIG INVENTORY AND REFURBISHMENTS
As of the date of this Report, 24 rigs, or approximately 22% of the
Company's rig fleet, are held in inventory for possible refurbishment and
deployment as demand may warrant. One of these inventory rigs, a diesel electric
SCR rig rated at 4,000 horsepower with a rated drilling capacity of 40,000 feet,
was acquired in May 1997 for $4.0 million in cash. Management believes that the
demand for land drilling rigs in the Company's Ark-La-Tex, Gulf Coast, South
Texas and Venezuelan markets have improved sufficiently to
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justify a program to restore certain of its stacked rigs to marketable
condition, including its recently acquired 4,000 horsepower rig.
During the last quarter of 1996 and the first quarter of 1997, the Company
commenced and completed the refurbishment of four rigs at an aggregate cost of
approximately $3.2 million. Of these four recently refurbished rigs, one was a
3,000 horsepower diesel electric SCR rig with a rated drilling capacity of
30,000 feet. The diesel electric SCR rig was a previously stacked rig acquired
in the RTO/LRAC Acquisition. The other three refurbished rigs were previously
marketable rigs that were returned to the U.S. following the Company's
withdrawal from the Mexican market in late 1996. These rigs included three
mechanical rigs, rated at 750, 900 and 1,000 horsepower, with rated drilling
capacities of 9,000, 10,000 and 15,000 feet, respectively. All four recently
refurbished rigs are now assigned to the Company's Ark-La-Tex and South Texas
Divisions.
The Company is currently refurbishing six diesel electric SCR rigs. Four of
these rigs are rated at 2,000 horsepower with rated drilling capacities of
25,000 feet. The fifth rig is rated at 1,500 horsepower with a rated drilling
capacity of 18,000 feet, while the sixth rig is rated at 3,000 horsepower with a
rated drilling capacity of 30,000 feet. The Company presently anticipates that
of the refurbished rigs, two will be deployed to each of the Company's
Ark-La-Tex, South Texas and Gulf Coast markets.
The Company anticipates that during 1997 it may commence the refurbishment
of up to an additional 15 rigs, depending upon a variety of factors, including
management's assessment of trends in the demand and day rates in the Company's
domestic and foreign markets, the Company's capital resources and other factors
that may be pertinent at the time. The refurbishment cost for rigs to be
deployed in the Company's core domestic markets is estimated to average
approximately $1.5 million each, while refurbishment costs for 2,000 to 3,000
horsepower rigs for the Venezuelan market are estimated to average approximately
$12.0 million, in each case including the cost of the associated drill string.
Refurbishment and drill string costs for the Company's 4,000 horsepower rig
acquired in May 1997 are estimated to be approximately $3.1 million.
RIG FLEET
A land drilling rig consists of engines, drawworks, a mast, substructure,
pumps to circulate drilling fluid, blowout preventers, drill string and related
equipment. The actual drilling capacity of a rig may be less than its rated
drilling capacity due to numerous factors, including the length of its drill
string. The intended well depth and the drill site conditions determine the
amount of drill string and other equipment needed to complete the well.
Generally, land rigs operate domestically with crews of five to six persons and
in Venezuela with crews of ten to 12 persons. The following table further sets
forth certain information regarding the rigs owned and operated by the Company
and Grey Wolf as of May 15, 1997.
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<S> <C> <C> <C> <C> <C> <C>
ARK-LA-TEX DIVISION
1 1957/1980 Brewster N-85 Mechanical 900 15,000 Active
2 1957/1981 Brewster N-85 Mechanical 900 15,000 Active
3 1960/1982 Continental-Emsco A-550 Mechanical 700 13,500 Active
6 1957/1980 Brewster N-85 Mechanical 900 15,000 Active
7 1978 National 55 Mechanical 700 12,500 Active
10 1964/1989 Gardner-Denver 800 Mechanical 1,000 14,000 Active
12 1980 Gardner-Denver 700 Mechanical 800 12,500 Active
13 1981 Brewster N-75B Mechanical 1,000 13,000 Active
15 1965/1989 National 610 Mechanical 750 14,000 Active
19 1981/1997 National 80-B Mechanical 1,000 15,000 Active
39 1980/1989 Gardner-Denver 800 Diesel Electric 1,000 16,000 Active
40 1979 Gardner-Denver 1100E Diesel Electric 1,500 20,000 Active
42 1981 Continental-Emsco Elec. II Diesel Electric SCR 2,000 25,000 Active
44 1982 Gardner-Denver 1500E Diesel Electric 2,000 25,000 Active
48 1981/1997 Ideco E-3000 Diesel Electric SCR 3,000 30,000 Active
75 1982/1996 Continental-Emsco D-3-E Diesel Electric SCR 1,000 16,000 Active
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SOUTH TEXAS DIVISION
31 1980/1994 Cabot 750 Mechanical 750 9,000 Active
33 1981/1992 National 80 UE Diesel Electric SCR 1,000 14,000 Active
34 1981/1992 Superior 700 UE Diesel Electric SCR 700 12,000 Active
37 1981/1992 Continental-Emsco Elec. Diesel Electric SCR 2,000 25,000 Active
II
43 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Active
70 1981/1997 Ideco BIR 800 Mechanical 900 10,000 Active
301 1990 Mid-Continent U-36A Mechanical 900 12,000 Active
302 1964/1988 RMI 750 Mechanical 900 10,500 Active
303 1966/1995 Brewster N-75 Mechanical 1,000 14,000 Active
304 1969/1975 Cabot 750 Mechanical 750 9,500 Active
305 1973/1990 Cabot 1000 Mechanical 1,000 13,000 Active
306 1990/1997 RMI 1000 Diesel Electric SCR 1,000 13,500 Active
307 1993/1995 Ideco E-1200 Mechanical 1,200 17,000 Active
308 1975/1992 Ideco BIR 800 Mechanical 900 10,000 Active
309 1976/1990 Gardner-Denver 500 Mechanical 800 10,000 Active
310 1980/1995 Brewster N-46 Mechanical 850 12,000 Active
311 1981/1996 Ideco BIR 800 Mechanical 900 10,000 Active
312 1982 Gardner-Denver 1100E Diesel Electric SCR 1,500 17,000 Active
314 1996 Cabot 750 Mechanical 750 9,500 Active
840 1981/1994 Oilwell 840E Diesel Electric SCR 1,500 18,000 Active
851 1982/1994 National 80-B Mechanical 1,000 14,000 Active
859 1978/1991 Brewster N-75 Mechanical 1,000 14,000 Active
860 1976/1995 Cabot 750 Mechanical 750 9,500 Active
861 1978/1993 Cabot 900 Mechanical 900 11,000 Active
862 1976 Cabot 900 Mechanical 900 13,000 Active
863 1978/1988 Cabot 1000 Mechanical 1,000 13,000 Active
864 1975/1994 Cabot 1000 Mechanical 1,000 13,000 Active
865 1979/1993 Cabot 1200 Mechanical 1,200 14,000 Active
866 1982/1993 Cabot 1200 Mechanical 1,200 14,000 Active
GULF COAST DIVISION (GREY WOLF FLEET)(3)
502 1987 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
503 1991 National 1320 UE Diesel Electric 2,000 25,000 Active
504 1990 National 110 M Mechanical 1,500 18,000 Active
505 1995 National 1320 UE Diesel Electric 2,000 25,000 Active
506 1977 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
507 1979 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
508 1981 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
509 1982 Continental-Emsco C-II Diesel Electric 2,000 25,000 Active
510 1983 Continental-Emsco C-I Mechanical 1,500 25,000 Active
511 1984 National 110 M Mechanical 1,500 20,000 Active
514 1990 National 110 UE Diesel Electric SCR 1,500 16,000 Active
515 1990 Oilwell 760 E Diesel Electric SCR 1,000 14,000 Active
516 1990 Oilwell 760 E Diesel Electric SCR 1,000 14,000 Active
517 1990 Oilwell 860 M Mechanical 1,000 20,000 Active
518 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
519 1991 Continental-Emsco C-I-II Diesel Electric 1,500 20,000 Active
520 1995 Oilwell 840 E Diesel Electric SCR 1,500 20,000 Active
521 1997 National 1320 UE Diesel Electric 2,000 25,000 Active
EASTERN DIVISION
202 1981 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
203 1980 Wilson Mogul 42 Mechanical-Air 450 8,000 Active
204 1979 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
208 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
215 1980 Wilson Mogul 42 Mechanical-Air 450 6,500 Active
INDRILLERS DIVISION
1 1980 Challenger 320 Mechanical 350 5,500 Idle
2 1979 Ideco H-37 Mechanical 300 7,000 Idle
3 1980 Challenger 320 Mechanical 350 5,500 Idle
4 1980 Challenger 320 Mechanical 350 5,500 Idle
5 1980 Ideco BIR 800 Mechanical 900 10,000 Active
41 1981 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Idle
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
MAXIMUM
RATED
YEAR BUILT/ HORSEPOWER DRILLING
RIG NO. REBUILT DRAWWORKS DRIVE SYSTEM(1) RATING DEPTH STATUS(2)
- ------- ----------- --------- --------------- ---------- --------- ---------
(IN FEET)
<S> <C> <C> <C> <C> <C> <C>
53 1976 Cabot 550 Mechanical 450 6,500 Active
56 1980 Ideco DIR 700 Mechanical 700 8,500 Idle
57 1977 Ideco BIR 550 Mechanical 422 6,500 Active
58 1977 Ideco DIR 700 Mechanical 700 8,500 Active
VENEZUELAN DIVISION
407 1980 Cooper LT0 350 Mechanical-WO 350 14,000 Idle
423 1981/1996 Mid-Continent 712-U Mechanical 1,500 15,000 Idle
441 1980 Wilson Mogul 42 Mechanical-WO 350 12,000 Idle
451 1981 Cabot 900 Mechanical 900 10,000 Idle
452 1975/1994 Cabot 900 Mechanical 900 10,000 Idle
453 1982/1994 Ideco H-35 Mechanical 450 10,000 Idle
RIGS HELD IN INVENTORY
38 1981 Oilwell 840E Diesel Electric SCR 1,500 18,000 Inventory
47 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
49 1982 Ideco E-1200 Diesel Electric SCR 1,200 17,000 Inventory
76 1982 Continental-Emsco D-3-E Diesel Electric SCR 1,000 16,000 Inventory
77 1981 Mid-Continent 914 EC Diesel Electric SCR 1,400 20,000 Inventory
78 1981 Continental-Emsco C-2-E Diesel Electric SCR 2,000 25,000 Inventory
79 1981 National 110 UE Diesel Electric SCR 1,500 18,000 Inventory
80 1981/1982 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
81 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
82 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
83 1981 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
84 1982 Oilwell E-2000 Diesel Electric SCR 2,000 25,000 Inventory
85 1981 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
86 1981 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
87 1979 National 1320 UE Diesel Electric SCR 2,000 25,000 Inventory
88 1981 Continental-Emsco C-3 Diesel Electric SCR 3,000 30,000 Inventory
89 1981 Oilwell E-3000 Diesel Electric SCR 3,000 30,000 Inventory
90 1980/1981 National 1625 DE Diesel Electric SCR 3,000 30,000 Inventory
91 1980/1981 National 1625 DE Diesel Electric SCR 3,000 30,000 Inventory
92 1980/1981 National 1625 DE Diesel Electric SCR 3,000 30,000 Inventory
454 1981 Ideco BIR 800 Mechanical 900 10,000 Inventory
455 1981 Ideco BIR 800 Mechanical 900 10,000 Inventory
473 1981/1994 Cabot 900 Mechanical 900 10,000 Inventory
558 1982 Dreco 4000-E Diesel Electric SCR 4,000 40,000 Inventory
</TABLE>
- ---------------
(1) "SCR" means silicone controlled rectifier; and "WO" means workover rig.
(2) The Company considers a rig that is presently working to be an "active" rig.
Rigs that are not working but which are currently being actively marketed
are viewed as "idle." "Inventory" rigs are rigs that are not working, are
not currently being actively marketed and will require additional capital
expenditures to activate them for service.
(3) To become the Company's Gulf Coast Division upon completion of the Grey Wolf
Acquisition.
CONTRACTS
The Company's contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by the Company are generally dependent on the complexity
and risk of operations, on-site drilling conditions, type of equipment used and
the anticipated duration of the work to be performed. Generally, domestic
drilling contracts are for a single well, while foreign drilling contracts are
for multiple wells. The contracts typically obligate the Company to pay certain
operating expenses, including wages of drilling personnel, maintenance expenses,
incidental rig supplies, equipment and local office facilities. Domestic
drilling contracts are typically subject to termination by the customer on short
notice, usually upon payment of a fee. Foreign drilling contracts generally
require longer notice periods for termination and also may require that the
customer pay for the mobilization and demobilization costs.
11
<PAGE> 12
The Company's drilling contracts generally provide for compensation on
either a daywork, turnkey or footage basis. See "-- Domestic Operations" for the
percentage of revenues by contract type for each domestic division.
Daywork Contracts. Under daywork drilling contracts, the Company provides a
drilling rig with required personnel to the operator, who supervises the
drilling of the well. The Company is paid based on a negotiated fixed rate per
day while the rig is utilized. Daywork drilling contracts generally specify the
type of 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 the Company generally bears no part of the
usual capital risks associated with oil and gas exploration (such as time delays
for various reasons, including stuck drill pipe and blowout.)
Turnkey Contracts. Under a turnkey contract, the Company contracts to drill
a well to an agreed-upon depth under specified conditions for a fixed price,
regardless of the time required or the problems encountered in drilling the
well. The Company provides technical expertise and engineering services, as well
as most of the equipment required for the well, and is compensated when the
contract terms have been satisfied. Turnkey contracts afford an opportunity to
earn a higher return than would normally be available on daywork or footage
contracts if the contract can be completed successfully without complications.
The risks to the Company under a turnkey contract are substantially greater
than on a well drilled on a daywork basis because the Company assumes most of
the risks associated with drilling operations generally assumed by the operator
in a daywork contract, including risk of blowout, loss of hole, stuck drill
pipe, machinery breakdowns, abnormal drilling conditions and risks associated
with subcontractors' services, supplies, cost escalation and personnel. The
Company employs or contracts for engineering expertise to analyze seismic,
geologic and drilling data to identify and reduce many of the drilling risks
assumed by the Company. Management uses the results of this analysis to evaluate
the risks of a proposed contract and seeks to account for such risks in its bid
preparation. The Company believes that its operating experience, qualified
drilling personnel, risk management program, internal engineering expertise and
access to proficient third party engineering contractors have allowed it to
reduce the risks inherent in turnkey drilling operations. The Company also
maintains insurance coverage against some but not all drilling hazards.
Footage Contracts. Under footage contracts, the Company is paid a fixed
amount for each foot drilled, regardless of the time required or the problems
encountered in drilling the well. The Company pays more of the out-of-pocket
costs associated with footage contracts compared with daywork contracts. Similar
to a turnkey contract, the risks to the Company on a footage contract are
greater because it assumes most of the risks associated with drilling operations
generally assumed by the operator in a daywork contract, including risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, the Company manages this
additional risk through the use of engineering expertise and bid the footage
contracts accordingly. The Company also maintains insurance coverage against
certain drilling hazards.
CUSTOMERS AND MARKETING
The Company's contract drilling customers include independent producers,
major oil companies and national petroleum companies. One unaffiliated customer
accounted for 18% of the Company's revenues for the quarter ended March 31,
1997. No customer accounted for more than 10% of DI's consolidated revenues for
three months ended March 31, 1996, the years ended December 31, 1996 and 1995 or
the nine months ended December 31, 1994.
The Company primarily markets its drilling rigs on a regional basis through
employee salesmen. These salesmen utilize personal contacts and industry
periodicals and publications to determine which operators are planning to drill
oil and gas wells in the immediate future. Once the Company has been placed on
the "bid list" for an operator, the Company will typically be given the
opportunity to bid on all future wells for that operator in the area.
12
<PAGE> 13
The Company from time to time enters into informal, nonbinding commitments
with its customers to provide drilling rigs for future periods at agreed upon
rates plus fuel and mobilization charges, if applicable, and escalation
provisions. This practice is customary in the land drilling business during
times of tightening rig supply. Although neither the Company nor the customer is
legally required to honor these commitments, the Company strives to satisfy such
commitments in order to maintain good customer relations.
COMPETITION
The land drilling industry has recently experienced a period of
consolidation. All of the Company's markets, however, continue to be highly
competitive among several drilling contractors. Competition is generally based
on price, workforce experience, equipment suitability and availability,
reputation, expertise and financial capability. The Company believes that in
each of its markets, it has a significant presence in terms of equipment and
workforce experience. Several of the Company's competitors have greater
financial and other resources than the Company and may commit more capital and
human resources than the Company to these important factors. If demand for
drilling rigs increases in the future, rig and crew availability may become more
critical competitive factors. Although competition is primarily on a regional
basis, rigs can be moved from one region to another in response to changes in
levels of drilling activity, subject to crew availability, mobilization expenses
and the suitability of the rigs for drilling in another region.
EQUIPMENT AND SUPPLIES
Although equipment and supplies used in the Company's business are
generally available from multiple sources, there is a general shortage of
drilling equipment and supplies. The Company believes these shortages may
intensify. The costs and delivery times of equipment and supplies are
substantially greater than in prior periods and are currently escalating. In
response to this trend, the Company in 1996 formed an alliance with a major
drill pipe manufacturer. The alliance enables the Company to take delivery
through 1998 of agreed maximum quantities of drill pipe in commonly used
diameters at fixed prices plus possible escalations for increases in the
manufacturer's cost of raw materials. As is common in the industry, the drill
pipe supply alliance is not a formal contractual agreement but represents an
informal arrangement in which both parties undertake to satisfy the supply
objectives of the alliance. Due in part to its alliance arrangement, the Company
is not currently experiencing any material shortages of, or material price
increases in, drill pipe. The Company may, however, experience drill pipe
shortages and price increases in the future with respect to quantities in excess
of, and varieties of drill pipe not covered by, its drill pipe alliance. The
Company is also attempting to establish arrangements to assure adequate
availability of certain other necessary drilling equipment and supplies on
satisfactory terms, but there can be no assurance that it will be able to do so.
REGULATION
General. The drilling of oil and gas wells is subject to various federal,
state, local and foreign laws, rules and regulations, including regulations that
control the discharge of materials into the environment or require remediation
of contamination. Many of the Company's activities are conducted in or near
ecologically sensitive areas, such as wetlands, inland waterways, and coastal
environments. Numerous federal and state environmental laws regulate drilling
activities and impose liability for causing pollution in inland, coastal and
offshore waters. State and federal legislation also provide special protections
to animal and marine life that could be affected by the Company's activities. In
general, under various applicable environmental programs, the Company may
potentially be subject to regulatory enforcement action in the form of
injunctions, cease and desist orders, and administrative, civil and criminal
penalties for violations of environmental laws. The Company may also be subject
to liability for natural resource damages and other civil claims arising out of
a pollution event.
Environmental regulation has led to higher drilling costs, a more difficult
and lengthy well permitting process and, in general, has adversely affected many
oil companies' drilling decisions. Prohibitions on drilling in certain
ecologically sensitive areas are likely to remain in effect or even be extended.
13
<PAGE> 14
Laws and regulations protecting the environment have become more stringent
in recent years, and may, in certain circumstances, impose strict liability
rendering a person liable for environmental damage without regard to negligence
or fault on the part of such person. Such laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others, or for
acts of the Company which were in compliance with all applicable laws at the
time such acts were performed. The application of these requirements or adoption
of new requirements could have a material adverse effect on the Company.
The primary environmental statutory and regulatory programs that affect the
Company's operations include:
Oil Pollution Act and Clean Water Act. The Oil Pollution Act of 1990
("OPA") amends certain provisions of the Federal Water Pollution Control
Act of 1972, commonly referred to as the Clean Water Act ("CWA"), and other
statutes as they pertain to the prevention of and response to hazardous
substances and oil spills into navigable waters. Under OPA, a person owning
a facility or equipment from which there is a discharge or threat of a
discharge of oil into or upon navigable waters and adjoining shorelines is
liable as a "responsible party" for removal costs and damages. Federal law
imposes strict, joint and several liability on facility owners for
containment and clean-up costs and certain other damages, including natural
resource damages, arising from a spill.
Responsible parties under OPA include owners or operators of onshore
or offshore drilling facilities. OPA requires responsible parties to
maintain proof of financial responsibility to cover some portion of the
cost of a potential spill and to prepare an oil spill contingency plan.
Failure to comply with these requirements or inadequate cooperation in a
spill event may subject a responsible party to civil or criminal
enforcement action.
Wetlands. The CWA regulates the discharge of dredged or fill material
and pollutants to wetlands areas. Many of the Company's activities are
conducted in or near ecologically sensitive areas, such as wetlands,
coastal environment and inland waterways. An oil spill in a wetland or
inland waterway could produce substantial damage to the environment,
including wildlife and natural resources.
Clean Air Act. The operations of the Company are subject to the Clean
Air Act ("CAA"), as amended, and comparable state statutes. Traditional air
quality programs relating to prevention of significant deterioration of air
quality in areas with unacceptable pollution levels ("nonattainment areas")
restrict drilling in affected areas. Amendments to the CAA contain
provisions that may result in the imposition over the next decade of
certain requirements with respect to air emissions, which requirements may
require capital expenditures by the Company. The Environmental Protection
Agency ("EPA") is currently developing regulations to implement these
requirements which may result in more stringent air quality standards.
Regulations mandating stricter emissions controls in nonattainment areas
would increase the cost associated with operations in those areas.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), commonly referred to as the "Superfund" law,
imposes strict, joint and several liability on certain classes of persons
with respect to the release or threatened release of a hazardous substance
to the environment. These persons include: (i) the owner and operator of a
facility from which hazardous substances are released; (ii) owners and
operators of a facility at the time any hazardous substances were disposed;
(iii) generators of hazardous substances that were released at such
facility; and (iv) parties who arranged for the transportation of hazardous
substances to such facility. The Company may be responsible under CERCLA
for all or part of the costs to clean up sites at which hazardous
substances have been released. To date, however, the Company has not been
named a potentially responsible party under CERCLA or any similar state
Superfund laws.
Hazardous Waste Disposal. The Company's operations involve the
generation or handling of materials that are classified as hazardous waste,
and that are subject to the federal Resource Conservation and Recovery Act
("RCRA") and comparable state statutes. The EPA and various state agencies
have limited the disposal options for certain hazardous and nonhazardous
wastes and is considering the adoption of stricter handling and disposal
standards for nonhazardous wastes.
14
<PAGE> 15
NORM. Oil and gas exploration and production activities have been
identified as generators of naturally-occurring radioactive materials
("NORM"). The generation, handling and disposal of NORM due to oil and gas
exploration and production activities is currently regulated in Louisiana.
NORM regulations also have been adopted recently in Texas. The Company does
not believe that its compliance with such regulations will have a material
effect on its operations or financial condition, but there can be no
assurance in this regard.
Right-To-Know. Title III of the Federal Superfund Amendment and
Reauthorization Act ("SARA Title III") of 1986, commonly known as the
Emergency Planning and Community Right-to-Know Act ("EPCRA"), requires
owners and operators of facilities that store, use or release hazardous and
extremely hazardous chemicals over specified threshold amounts to report
information about those chemicals. Non-manufacturing operations, including
oil and gas exploration and producing facilities, are subject to EPCRA and
similar state statutes. Regulations implementing EPCRA require the facility
owner and operator to notify state and local authorities of certain
chemicals on site, to report releases of these chemicals and to submit an
annual inventory of chemicals at the facility. Administrative, civil and
criminal penalties may be assessed for regulatory violations. The Company
will likely be required to increase its expenditures during the next
several years to comply with higher industry and regulatory safety
standards. Such expenditures cannot be accurately estimated at this time.
Hazard Communication Standard. The Occupational Safety and Health
Administration issued the Hazard Communication Standard ("HCS") that
employers to identify the chemical hazards at their facilities and to
educate employees about these hazards. HCS applies to all private-sector
employers including the oil and gas exploration and producing industry. HCS
requires that employers assess their chemical hazards, obtain and maintain
certain written descriptions of these hazards, develop a hazard
communication program and train employees to work safely with the chemicals
on site. Failure to comply with the requirements of the standard may result
in administrative, civil and criminal penalties.
Frost Laws. The operations of the Company's Eastern Division and
INDRILLERS Division are limited during April and May of each year due to
the "frost laws" of the states in which they operate. These frost laws
restrict the movement of equipment on public roads during these months.
LEGAL PROCEEDINGS
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's financial condition or results of
operations.
Certain litigation, styled TEPCO, Inc. v. Grey Wolf Drilling Company (Cause
No. 96-49194), is presently pending against Grey Wolf in the 164th Judicial
District Court of Harris County, Texas. In its petition filed on September 30,
1996, TEPCO, Inc. ("TEPCO") alleges that Grey Wolf breached contractual
obligations it owed to TEPCO by failing to drill an oil and gas well or wells
for it in the Treasure Isle Field, located in Galveston, Texas. TEPCO also
alleges that it lost rights under an oil and gas lease it had under an alleged
agreement with Mobil Producing Texas and New Mexico, Inc., causing plaintiff to
suffer money damages, which it values in its petition at "many tens of millions
of dollars." Grey Wolf intends to vigorously defend this action. Grey Wolf has
filed a counterclaim in the lawsuit for approximately $250,000 for recovery of
unpaid statements, and interest, for services rendered or materials provided by
Grey Wolf in connection with the drilling of two wells for TEPCO which were
completed before Grey Wolf ceased performing work for TEPCO. Following the
consummation of the Grey Wolf Acquisition, Messrs. James K. B. Nelson and
Sheldon B. Lubar, as representatives of the Grey Wolf shareholders, will control
and direct the handling of the lawsuit, and the Company will provide such
assistance and cooperation as is reasonably requested by the attorneys
representing the Company in the case. Mr. Nelson is a director nominee to be
elected following the Grey Wolf Acquisition and Mr. Lubar is a principal
shareholder of Grey Wolf. An escrow, consisting of $5.0 million of the cash
consideration for the Grey Wolf Acquisition, will be established to provide a
source of payment for the net costs to the Company, if any, for any eventual
settlement by, or the payment of a monetary court judgment against, the Company
arising out of this or any other lawsuit by TEPCO based on
15
<PAGE> 16
the same facts and circumstances. A judgment in favor of TEPCO in excess of $5.0
million could have a material adverse effect on the Company.
INSURANCE
The Company's operations are subject to the many hazards inherent in the
drilling business, including, for example, blowouts, cratering, fires,
explosions and adverse weather. These hazards could cause personal injury,
suspend drilling operations or seriously damage or destroy the equipment
involved and could cause substantial damage to producing formations and
surrounding areas. Damage to the environment could also result from the
Company's operations, particularly through oil spillage and extensive,
uncontrolled fires. As a protection against operating hazards, the Company
maintains insurance coverage, including comprehensive general liability or
commercial contract indemnity (including a separate policy for foreign
liability), commercial umbrella and workers' compensation insurance. The
Company's third party liability insurance coverage under each of the general and
foreign policies is $1.0 million per occurrence, with a deductible of $100,000
per occurrence and annual maximum coverage of $2.0 million. The commercial
umbrella limit is $30.0 million per occurrence. The Company believes that it is
adequately insured for public liability and property damage to others with
respect to its operations. However, such insurance may not be sufficient to
protect the Company against liability for all consequences of well disasters,
extensive fire damage or damage to the environment.
The Company also maintains insurance coverage on an annual basis to protect
against certain hazards inherent in its turnkey contract drilling operations.
This insurance covers "control of well" (including blowouts above and below the
surface), cratering, seepage and pollution and care, custody and control. The
Company does not have casualty insurance with respect to its rigs or drill
strings. The Company believes that it maintains insurance in accordance with
industry standards. The Company's current insurance program provides $500,000
coverage per occurrence for care, custody and control, and $10.0 million
coverage per occurrence for control of well, cratering and seepage and pollution
associated with drilling operations. Each form of coverage provides for a
deductible for the account of the Company, as well as a maximum limit of
liability. Each casualty is an occurrence, and there may be more than one such
occurrence on a well, each of which would be subject to a separate deductible.
FACILITIES
The following table summarizes the Company's significant owned and leased
properties:
<TABLE>
<CAPTION>
LOCATION INTEREST USES
-------- -------- ----
<S> <C> <C>
Houston, Texas...................... Leased Executive Offices
Houston, Texas...................... Owned Rig Yard
Alice, Texas........................ Owned Field Office, Rig Yard, Truck Yard
Duson, Louisiana.................... Owned Rig Yard
Eunice, Louisiana................... Owned Field Office
Fillmore, Louisiana................. Owned Field Office
Oklahoma City, Oklahoma............. Owned Rig Yard
Mt. Pleasant, Michigan.............. Owned Field Office, Rig Yard
Midvale, Ohio....................... Owned Field Office, Rig Yard
</TABLE>
The Company has leased approximately 17,200 square feet of office space for
its principal executive offices at a cost of approximately $22,000 per month.
The Company considers all of its facilities to be in good operating condition
and adequate for their present uses.
EMPLOYEES; SHORTAGES
At April 30, 1997, the Company had approximately 1,580 employees and Grey
Wolf had approximately 425 employees, substantially all of whom are expected to
join the Company. None of the Company's or Grey Wolf's employees are subject to
collective bargaining agreements, and management believes its employee relations
are satisfactory.
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The demand for, and wage rates of, qualified rig crews, have begun to rise
in the land drilling industry in response to the increasing number of active
rigs in service. Although the Company has not encountered material difficulty in
hiring and retaining qualified rig crews, such shortages have in the past
occurred in the industry in times of increasing demand for land drilling
services. If the number of active drilling rigs continues to increase, the
Company may experience shortages of qualified personnel to operate its rigs,
which could have a material adverse effect on the Company's financial condition
and results of operations.
DEBT FINANCING
BANK CREDIT FACILITY
On December 31, 1996, the Company and Drillers entered into a senior
secured reducing revolving credit facility as co-borrowers. This facility was
amended and restated on April 30, 1997, and is referred to herein as the "Bank
Credit Facility." DI International, Inc., a wholly-owned subsidiary of the
Company ("International"), guaranteed the obligations of the borrowers under the
Bank Credit Facility. The Bank Credit Facility, which replaced Drillers' 1994
credit facility, provides the Company and Drillers with the ability to borrow up
to $50.0 million from time to time prior to April 30, 2000, subject to the
reductions described below, with up to $5.0 million of such amount available for
letters of credit. Interest under the Bank Credit Facility accrues at a variable
rate, using (at the borrowers' election) either the agent's base rate plus a
margin ranging from 0.75% to 1.50%, depending upon the Company's trailing
12-month debt to EBITDA ratio, or a rate based on the interbank Eurodollar
market plus a margin ranging from 1.75% to 2.50%, depending upon the Company's
trailing 12-month debt to EBITDA ratio. Letters of credit accrue a letter of
credit fee equal to the margin described above for the interbank Eurodollar
market interest rate plus a facing fee of 0.25% per annum. The borrowers pay a
commitment fee of 0.5% per annum on the average unused portion of the lenders'
commitments. The borrowers' indebtedness under the Bank Credit Facility is
secured by a security interest in (i) all domestic drilling rigs and related
equipment owned by the Company or the Guarantors (as defined in the Bank Credit
Agreement), (ii) the stock of the Guarantors (as defined in the Bank Credit
Agreement), (iii) the member interest of Drillers in INDRILLERS and (iv)
substantially all other assets of the Company and the Guarantors, wherever
located (other than stock of other subsidiaries). Drillers is a co-borrower with
the Company under the Bank Credit Facility and International has guaranteed the
Company's obligations under the Bank Credit Facility.
The lenders' commitments will be reduced by the amount of net cash proceeds
received by the Company or its subsidiaries from sales of collateral in excess
of $1.0 million individually or $2.0 million in the aggregate in any 12-month
period. In addition, mandatory prepayments would be required upon (i) the
receipt of net proceeds received by the Company or its subsidiaries from the
incurrence of certain other debt or sales of debt or equity securities in a
public offering or private placement, or (ii) the receipt of net cash proceeds
received by the Company or its subsidiaries from asset sales (other than
proceeds from dispositions of inventory in the ordinary course of business,
certain licenses of intellectual property, certain inter-company transfers, and
sales of rigs identified in the credit agreement as equipment held for resale)
or the receipt of insurance proceeds on assets of the borrowers, in each case to
the extent that such proceeds are in excess of $500,000 individually or $1.0
million in the aggregate in any 12-month period. The final maturity date of the
Bank Credit Facility is April 30, 2000.
The initial borrowings under the Bank Credit Facility on December 31, 1996,
were used to complete the Diamond M Acquisition. Other borrowings may be used to
make land rig acquisitions and for general corporate purposes.
Among the various covenants that must be satisfied by the Company under the
Bank Credit Agreement are the following five financial covenants under which the
Company will not permit:
(i) working capital (as defined in the Bank Credit Agreement) to be
less than $5.0 million on the last day of any fiscal quarter;
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(ii) consolidated net worth to be less than the sum of $60.0 million
plus (a) 50% of the Company's consolidated net income, if positive, for the
period from January 1, 1997, to the final day of the most recent period for
which consolidated financial information of the Company is available and
(b) 50% of the increase to shareholders' equity of the Company attributable
to the issuance of Common Stock;
(iii) the ratio of (a) the appraised fair market value of rigs and
related equipment to (b) the lenders' commitments to be less than 2 to 1;
(iv) the ratio of consolidated debt to total capitalization to exceed
0.6 to 1; and
(v) the ratio of consolidated EBITDA to consolidated interest expense
for the most recent quarter to be less than 3 to 1.
The Bank Credit Agreement also contains provisions restricting the ability
of the Company and its subsidiaries to (i) engage in new lines of business
unrelated to their current activities, (ii) enter into mergers or consolidations
or asset sales or purchases (with specified exceptions), (iii) incur liens or
debts or make advances, investments or loans (in each case, with specified
exceptions), (iv) pay dividends or redeem stock (except for certain
inter-company transfers), (v) enter into transactions with affiliates other than
on an arm's-length basis in the ordinary course of business (with specified
exceptions), (vi) prepay or materially amend any other indebtedness, (vii)
modify any certificate of incorporation or by-laws in a manner adverse to the
lenders, (viii) issue any stock (other than common stock), (ix) agree to or
incur any restriction on the rights of the Company's subsidiaries to pay
dividends, make loans, transfer assets or take similar actions (with certain
exceptions) or (x) form new subsidiaries (with certain exceptions).
Events of default under the Bank Credit Facility include (i) non-payment of
amounts owing under the Bank Credit Facility, (ii) misrepresentation, (iii)
breach of covenants, (iv) default with respect to other indebtedness in excess
of $350,000, (v) bankruptcy, (vi) certain ERISA events, (vii) default under, or
noneffectiveness of, the security documents covering the collateral, (viii)
default under, or noneffectiveness of, the guaranty by International (or any
other future guaranty), (ix) judgments in excess of $350,000, and (x) a change
of control (meaning that (a) the Company ceases to own 100% of Drillers and
International, (b) some person or group has either acquired beneficial ownership
of 30% or more of the Company or obtained the power to elect a majority of the
Company's board of directors, (c) the Company's board of directors ceases to
consist of a majority of "continuing directors" (as defined in the Bank Credit
Agreement) or (d) Norex Drilling Ltd., SDA, and SCP cease to own or control at
least 30% of the Company).
SENIOR NOTES OFFERING
The Company intends to finance the cash portion of the Grey Wolf
Acquisition consideration from the proceeds of a proposed underwritten public
offering by the Company of "high-yield," unsecured debt securities ("Senior
Notes"). Accordingly, the Company filed a Registration Statement on Form S-3
(No. 333-26519) (the "Senior Notes Prospectus") with the Securities and Exchange
Commission covering the offering by the Company of $125.0 million of its Senior
Notes (the "Senior Notes Offering").
The net proceeds to the Company from the Senior Notes Offering are
estimated to be approximately $121.1 million, after deducting underwriting
discounts, commissions and fees and expenses of the Senior Notes Offering
payable by the Company. The Company intends to use the proceeds of the Senior
Notes Offering to pay the cash portion of the consideration for the Grey Wolf
Acquisition of up to $61.6 million and associated transaction costs estimated at
$300,000 and repay all indebtedness then outstanding under the Bank Credit
Facility. The balance of the net proceeds from the Senior Notes Offering will be
used for working capital and for general corporate purposes, including the
refurbishment of rigs. The amount of proceeds used for refurbishing rigs will
depend on a number of factors, including market conditions, management's
assessment of existing and anticipated demand and day rates for land drilling
rigs in the Company's domestic and Venezuelan markets and the Company's success
in bidding for drilling contracts.
The Company anticipates that the final terms of the Senior Notes (including
the principal amount of the Senior Notes, the interest rate and redemption
terms) will be set forth in an indenture to be finalized and executed by the
Company upon closing of the Senior Notes Offering (the "Indenture"). Although
the terms
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of the Senior Notes will not be finalized until the conclusion of the Senior
Notes Offering, the Company presently expects that the Senior Notes will feature
the following general terms:
The Senior Notes will mature ten years after the date of the Senior
Notes Offering. Interest on the Senior Notes is payable semi-annually. The
Senior Notes will not be redeemable prior to five years after date of the
Senior Notes Offering, after which time, the Senior Notes will be
redeemable, in whole or in part, at the option of the Company at decreasing
redemption prices plus accrued and unpaid interest, if any, to the date of
redemption. In addition, at any time during the first 36 months after the
date of the issuance of the Senior Notes, the Company may, at its option,
redeem a portion of the aggregate principal amount of the Senior Notes with
the net proceeds of one or more Qualified Equity Offerings (as defined in
the Indenture) at decreasing redemption prices calculated as a percentage
of the principal amount thereof, plus accrued and unpaid interest thereon,
provided that a minimum aggregate principal amount of Senior Notes remain
outstanding immediately after the occurrence of such redemption. Upon the
occurrence of a Change of Control (as defined in the Indenture), each
Holder (as defined in the Indenture) of the Senior Notes may require the
Company to repurchase such Senior Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest, to the date of repurchase.
The Senior Notes will be general unsecured senior obligations of the
Company ranking pari passu in right of payment with all indebtedness and
other liabilities of the Company that are not subordinated by their terms
to other indebtedness of the Company and senior in right of payment to all
indebtedness of the Company that by its terms is so unconditionally
guaranteed, on a joint and several basis (the "Guarantees"), by each of the
Company's wholly-owned, domestic subsidiaries and any other subsidiary that
guarantees indebtedness of the Company or a guarantor (the "Guarantors').
The Guarantors will be senior unsecured obligations of each respective
Guarantor and will rank pari passu in right of payment with all other
indebtedness and liabilities of such Guarantor that are not subordinated by
their terms to other indebtedness of such Guarantor. The Guarantees may be
released under certain circumstances. The Senior Notes and Guarantees will
be effectively subordinated to secured indebtedness of the Company and the
Guarantors, respectively, with respect to the assets securing such
indebtedness, including any indebtedness under the Bank Credit Facility,
which is secured by liens on substantially all of the assets of the Company
and the Guarantors. As of March 31, 1997, on a pro forma basis after giving
effect to the issuance of the Senior Notes and the completion of the other
transactions described above, the Company and its subsidiaries would have
had outstanding approximately $1.3 million of secured indebtedness. The
Indenture will permit the Company and its subsidiaries, including the
Guarantors, to incur additional indebtedness in the future, including
certain secured indebtedness, subject to limitations.
CERTAIN CONSEQUENCES OF DEBT FINANCING
Significant Leverage And Debt Service Requirements. After giving effect to
the issuance of the Senior Notes, the Company will have significant debt service
requirements due to the substantial indebtedness it has incurred primarily to
finance acquisitions (including the Grey Wolf Acquisition) and expand its
operations. Additionally, the Company and Drillers entered into the Bank Credit
Facility, which is a $50.0 million amended and restated senior secured revolving
credit facility with a syndicate of commercial banks. The Bank Credit Facility
is expected to be substantially undrawn immediately following the Senior Notes
Offering. The Company expects to continue to borrow under the Bank Credit
Facility and possible future credit arrangements in order to finance possible
future acquisitions and for general corporate purposes. As of March 31, 1997, on
a pro forma basis, after giving effect to the Grey Wolf Acquisition and the
repayment of all indebtedness then outstanding under the Bank Credit Facility
from the proceeds of the Senior Notes Offering, the Company would have had
$126.3 million in total indebtedness and $140.0 million in shareholders' equity.
The level of the Company's indebtedness could have several important
effects on the Company's future operations, including, among others, (i) its
ability to obtain additional financing for working capital, acquisitions,
capital expenditures, general corporate and other purposes may be limited, (ii)
a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing funds available for other purposes and (iii) the Company's significant
leverage could make it more vulnerable to economic downturns in the industry.
The Company's ability to meet its debt service obligations and reduce its total
indebtedness will be dependent upon the Company's future
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performance, which will be subject to the success of its business strategy,
general economic conditions, industry cycles, levels of interest rates, and
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. There can be no assurance that the
Company's business will generate sufficient cash flow from operations to meet
debt service requirements and payments of principal, and if the Company is
unable to do so, it may be required to sell assets, to refinance all or a
portion of its indebtedness, including the Senior Notes, or to obtain additional
financing. There can be no assurance that any such refinancing would be possible
or that any additional financing could be obtained.
Restrictions Imposed By Terms Of Indebtedness. The Company expects that the
Indenture will contain covenants restricting or limiting the ability of the
Company and certain of its subsidiaries to, among other things: (i) incur
additional indebtedness; (ii) pay dividends or make other restricted payments;
(iii) make asset dispositions; (iv) permit liens; (v) enter into sale and
leaseback transactions; (vi) enter into certain mergers, acquisitions and
consolidations; (vii) make certain investments; (viii) enter into transactions
with related persons; and (ix) engage in unrelated lines of business.
In addition, the loan agreement setting forth the terms of the Bank Credit
Facility (the "Bank Credit Agreement") contains certain other and more
restrictive covenants than those expected to be contained in the Indenture.
These covenants may adversely affect the Company's ability to pursue its
acquisition and rig refurbishment strategies and limit its flexibility in
responding to changing market conditions. The Bank Credit Agreement also
requires the Company to maintain specific financial ratios and satisfy certain
financial condition tests. The Company's ability to meet those financial ratios
and financial condition tests can be affected by events beyond its control, and
there can be no assurance that the Company will meet those tests. The Bank
Credit Agreement contains and it is expected that the Indenture will contain
covenants and default terms that effectively cross default the two credit
arrangements. Accordingly, the breach of any of the debt covenants applicable to
the Company could result in a default under both the Bank Credit Agreement and
the Indenture, and possibly other then outstanding debt obligations of the
Company, if any. If the indebtedness under the Bank Credit Facility, the Senior
Notes or other indebtedness were to be accelerated, there can be no assurance
that the Company's assets would be sufficient to repay in full all the Company's
indebtedness, including the Senior Notes.
Risk Of Inability To Repurchase Senior Notes Upon A Change Of Control. The
Company expects that the Indenture will provide that upon the occurrence of a
Change of Control, the Company must offer to purchase all Senior Notes then
outstanding at a purchase price equal to 101% of the principal amount thereof
plus accrued and unpaid interest to the date of purchase. The occurrence of a
Change of Control (as defined in the Bank Credit Facility) may result in lenders
under the Bank Credit Facility having the right to require the Company to repay
all indebtedness outstanding thereunder. There can be no assurance that the
Company will have available funds sufficient to repay all indebtedness owing
under the Bank Credit Facility or to fund the purchase of the Senior Notes upon
a Change of Control.
History Of Losses From Operations. The Company has a history of losses and
has not had a profitable year since 1991. The Company incurred net losses of
$11.7 million and $13.4 million for the years ended December 31, 1996 and 1995,
respectively, and $2.2 million for nine months ended December 31, 1994. The
calendar year 1996 loss includes nonrecurring charges of $6.1 million, while the
1995 loss includes a provision for asset impairment of $5.3 million. On a
historical basis, the Company would not have been able to service the level of
indebtedness expected to be incurred by the issuance of the Senior Notes.
Profitability in the future will depend largely upon utilization rates and day
rates for the Company's drilling rigs. There is no assurance that current
utilization rates and day rates will not decline or that the Company will not
continue to experience losses.
A registration statement on Form S-4 (No. 333-25811) relating to the
offering of the Company's Common Stock in the Grey Wolf Acquisition and a
registration statement on Form S-3 (No. 333-26519) relating to the Company's
offering of the Senior Note has been filed with the Securities and Exchange
Commission but have not yet become effective. The securities offered by each of
the registration statements may not be sold nor may offers to buy be accepted
prior to the time the time that each such registration statement becomes
effective. This Current Report shall not constitute an offer to sell or the
solicitation of an offer to buy any of such securities.
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EXHIBITS
The following exhibits are filed with this Current Report on Form 8-K:
<TABLE>
<S> <C>
2.1 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc., DI Merger Sub, Inc., Roy T. Oliver,
Jr., Mike L. Mullen, R.T. Oliver, Inc. and Land Rig
Acquisition Corp. (incorporated herein by reference to
Exhibit 2.1 to Registration Statement No. 333-6077).
2.2 -- Amendment to Agreement and Plan of Merger dated May 7,
1996, among DI Industries, Inc., DI Merger Sub, Inc., Roy
T. Oliver, Jr., Mike L. Mullen, R.T. Oliver, Inc. and
Land Rig Acquisition Corp. (incorporated herein by
reference to Exhibit 2.1.1 to Registration Statement No.
333-6077).
2.3 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc., DI Merger Sub,
Inc., Roy T. Oliver, Jr., Mike L. Mullen, R.T. Oliver,
Inc. and Land Rig Acquisition Corp. (incorporated herein
by reference to Exhibit 2.1.2 to Amendment No. 1 to
Registration Statement No. 333-6077).
2.4 -- Agreement and Plan of Merger dated May 7, 1996, among DI
Industries, Inc. and Somerset Investment Corp.
(incorporated herein by reference to Exhibit 2.2 to
Registration Statement No. 333-6077).
2.5 -- Amendment to Agreement and Plan of Merger dated May 7,
1996, among DI Industries, Inc. and Somerset Investment
Corp. (incorporated herein by reference to Exhibit 2.2.1
to Registration Statement No. 333-6077).
2.6 -- Second Amendment to Agreement and Plan of Merger dated
July 26, 1996, among DI Industries, Inc. and Somerset
Investment Corp. (incorporated herein by reference to
Exhibit 2.2.2 to Amendment No. 1 to Registration
Statement No. 333-6077).
2.7 -- Asset Purchase Agreement dated October 3, 1996, by and
between the Registrant and Meritus, Inc., a Texas
corporation, Mesa Rig 4 L.L.C., a Texas limited liability
company, Mesa Venture, a Texas general partnership, and
Mesa Drilling, Inc., a Texas corporation (incorporated
herein by reference to Exhibit 2.1 to Registration
Statement No. 333-14783).
2.8 -- Asset Purchase Agreement dated November 12, 1996, between
Diamond M Onshore, Inc. and Drillers, Inc. (incorporated
herein by reference to Exhibit 2.1 to Form 8-K dated
December 30, 1996).
2.9 -- Letter Agreement dated December 31, 1996, between Diamond
M Onshore and Drillers, Inc. amending the Asset Purchase
Agreement (incorporated herein by reference to Exhibit
2.2 to Form 8K dated December 30, 1996).
2.10 -- Asset Purchase Agreement dated December 31, 1996, by and
between Flournoy Drilling Company and Drillers, Inc.
(incorporated herein by reference to Exhibit 2.1 to Form
8-K dated January 31, 1996).
2.11 -- Form of Shareholder Agreement entered into January 31,
1997, by DI Industries, Inc., Drillers, Inc., and Lucien
Flournoy, Maxine E. Flournoy, Betty Louise Flournoy
Fields, Helen Ruth Flournoy Pope, Mary Anne Flournoy
Guthrie, F.C. West, Gregory M. Guthrie, Byron W. Fields,
John B. Pope, the Flournoy First, Second and Third Fields
Grandchild Trusts, the Flournoy First, Second and Third
Pope Grandchild Trusts, and the Flournoy First, Second,
Third, Fourth and Fifth Guthrie Grandchild Trusts
(incorporated herein by reference to Exhibit 10.22 to
Registration Statement No. 333-20423).
</TABLE>
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2.12 -- Agreement and Plan of Merger dated March 7, 1997, by and
among DI Industries, Inc., Drillers Inc., and Grey Wolf
Drilling Company including form of Escrow Agreement, form
of Trust Under Grey Wolf Drilling Company Deferred
Corporation Plan, and form of Grey Wolf Drilling Company
Deferred Compensation Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K dated March 10,
1997).
2.13 -- Agreement between Pool Company and Western Oil Well
Service Co. executed May 31, 1996 (incorporated by
reference to Exhibit 2.1 to Form 8-K dated June 24,
1996).
10.1 -- Amended and Restated Senior Secured Revolving Credit
Agreement dated as of April 30, 1997, among DI
Industries, Inc. and Drillers, Inc. (as borrowers), DI
International, Inc. (as guarantor), Bankers Trust
Company, as Agent, ING (US) Capital Corporation, as
Co-Agent, and various financial institutions, as Lenders
(incorporated by reference to Exhibit 10.1 to Form S-3
dated May 5, 1997).
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SIGNATURE
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.
Date: May 16, 1997
DI INDUSTRIES, INC.
By: /s/ T. SCOTT O'KEEFE
----------------------------------
T. Scott O'Keefe,
Senior Vice President and Chief
Financial Officer
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