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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission file number 1-8226
[GREY WOLF, INC. LOGO]
GREY WOLF, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2144774
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 713-435-6100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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COMMON STOCK, PAR VALUE $0.10 AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
At March 23, 1998, 164,797,591 shares of the Registrant's common stock
were outstanding. The aggregate market value of the Registrant's voting stock
held by non-affiliates (based upon the closing price on the American Stock
Exchange on March 23, 1998 of $4.625) was approximately $479.4 million.
The following documents have been incorporated by reference into the
Parts of this Report indicated: Certain sections of the Registrant's definitive
proxy statement for the Company's 1998 Annual Meeting of shareholders and is to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days of the Registrant's fiscal year ended December 31, 1997, are
incorporated by reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
Grey Wolf, Inc. is a leading provider of contract land drilling
services in the United States with a domestic fleet of 120 rigs at March 23,
1998. In addition to its domestic operations, the Company operates a fleet of
six rigs in Venezuela, giving the Company a total of 126 rigs, 111 of which are
actively marketed. The Company believes that it has the largest fleet of land
drilling rigs in its Gulf Coast and South Texas markets and the second largest
fleet in its Ark-La-Tex and Mississippi/Alabama markets. The Company has an
inventory of 15 non-marketed rigs that it intends to refurbish and reactivate
during 1998 and 1999 as demand warrants.
The Company is a Texas corporation formed in 1980. Over the two year
period ending December 31, 1997, the Company implemented a new strategy whereby
it elected a substantially new board of directors, installed new senior
management and completed several acquisitions, mergers and financing
transactions that significantly improved its liquidity, added drilling rigs to
its existing fleet, and substantially increased the number of its personnel. The
combined effect of the Company's change in operating strategy, larger fleet of
marketable rigs, higher rig utilization rates and increasing day rates
significantly improved the Company's financial performance during 1997. For the
year ended December 31, 1997, the Company reported net income of $10.2 million,
which was the Company's first profitable year since 1991.
As used herein, the term "Company" refers to Grey Wolf, Inc. and its
subsidiaries, unless the context otherwise indicates. Prior to September 19,
1997, the Company's corporate name was DI Industries, Inc. The Company's
principal office is located at 10370 Richmond Avenue, Suite 600, Houston, TX
77042, and its telephone number is (713) 435-6100.
BUSINESS STRATEGY
In April 1996, the Company initiated a reorganization of its operations
that consisted of replacing substantially all of the senior management and the
members of the Board of Directors of the Company and implementing a new business
strategy. This business strategy seeks to achieve increased cash flow and
earnings through:
(1) focusing on core markets and establishing leading positions in
these markets;
(2) refurbishing and reactivating inventoried rigs to satisfy
increases in demand;
(3) acquiring land drilling businesses and assets to capitalize on
anticipated improvements in the industry; and
(4) attracting, retaining and training qualified personnel to
support the Company's increased level of operations.
Focus on Core Markets. The Company focuses on its four core domestic
drilling markets as it believes these markets have historically maintained
higher utilization rates and day rates than other domestic markets. The Company
believes it currently has the leading market position in its Gulf Coast and
South Texas markets and the second leading market position in its Ark-La-Tex and
Mississippi/Alabama markets. By focusing on its core markets and establishing
leading positions in these markets, the Company is able to achieve economies of
scale and provide an infrastructure to acquire, refurbish and reactivate rigs in
these markets in a cost-effective manner. Internationally, the Company
concentrates its efforts in Venezuela, where the Company intends to increase its
market presence and is currently bidding on a number of potential drilling
projects.
Refurbishment and Reactivation of Inventoried Rigs. From the beginning
of the fourth quarter of 1996 through the first quarter of 1998, the Company has
refurbished and reactivated 26 rigs. The remaining 15 rigs in the Company's
inventory at March 23, 1998 are planned for refurbishment and reactivation
during 1998 and 1999 based on market demand.
Acquisitions. The Company has aggressively implemented its new
operating strategy by acquiring 100 land drilling rigs in 13 transactions from
August 1996 through Mid-March, 1998. Six of these acquisitions were of
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companies with long operating histories in the Company's Ark-La-Tex,
Mississippi/Alabama, Gulf Coast and South Texas markets. The other acquisitions
have provided the Company with additional inventory of drilling rigs suited for
refurbishment and reactivation in the Company's core domestic markets, Venezuela
or other foreign markets.
Attracting, Retaining and Training Qualified Personnel. The Company
believes that its executive management and operating personnel are among the
most experienced and highly skilled professionals in the contract drilling
industry. Thomas P. Richards, the Company's President and CEO, has 32 years of
contract drilling industry experience and the Company's four Senior Vice
Presidents have an average of 24 years of related experience. Many of the
Company's operating personnel joined the Company in connection with acquisitions
completed since August 1996, bringing to the Company additional customer
relationships and operating experience in their markets. The Company's ability
to retain these employees and to attract additional quality employees has
allowed the Company to expand its operations and customer base significantly
while ensuring quality service to its customers. The Company has a training
program in place to ensure that an adequate number of qualified supervisory
personnel are available for future expansion.
INDUSTRY OVERVIEW
The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that during the period from January 1, 1996
through January 31, 1998, there have been at least 39 completed or pending
transactions involving the acquisition of a combined total of approximately 509
rigs, the majority of which were acquired by six land rig companies including
the Company. The Company accounted for 13 of these transactions which involved
its acquisition of 100 rigs, of which 67 were actively marketed at the time of
acquisition and 33 were inventoried for later refurbishment.
Industry sources estimate that the supply of domestic land drilling
rigs available for work in the U.S. has declined from over 5,000 rigs in 1982 to
1,400 rigs currently. The Company believes the demand for land drilling rigs in
the Company's core markets increased during 1997 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 1997,
industry sources estimate that the average active domestic land rig count was
822 as compared to 652 for 1996.
RECENT ACQUISITIONS AND SALES
Murco Acquisition. On January 30, 1998, the Company closed the
acquisition of all of the outstanding common stock of Murco Drilling Corporation
("Murco") for $59.6 million in cash. At closing, Murco had net liabilities of
approximately $5.4 million. The Company funded this acquisition through the use
of working capital and its bank credit facility. Murco operated ten land
drilling rigs in the Ark-La-Tex and Mississippi/Alabama regions. The rigs
acquired consisted of two 1,500 horsepower Silicon Controlled Rectifier ("SCR")
rigs, one 1,000 horsepower SCR rig, one 800 horsepower SCR rig and six
mechanical rigs with horsepower ratings from 650 to 1,500.
Justiss Acquisition. On September 15, 1997, the Company entered into a
definitive agreement to acquire substantially all of the operating assets of
Justiss Drilling Company, a division of Justiss Oil Company, Inc. ("Justiss").
The assets included a fleet of 12 operating drilling rigs and related equipment
which are currently operating in the Company's Ark-La-Tex and Gulf Coast
markets. The total purchase price for the Justiss Acquisition is $ 36.1 million
in cash of which $28.6 million was paid on October 31, 1997 upon delivery of
nine of the 12 rigs to be acquired. The remaining three rigs were purchased and
the balance of the purchase price paid ($7.5 million) during November 1997 as
each rig completed a turnkey drilling contract for a well in progress.
Approximately 240 former rig-based employees of Justiss were hired by the
Company.
Kaiser-Francis Rig Purchase. On August 21, 1997, the Company acquired
six idle drilling rigs and related drilling equipment from Cactus Drilling
Company, a division of Kaiser-Francis Oil Company for a cash purchase price of
$25.4 million. The rigs consisted of four 2,000 horsepower Silicon Controlled
Rectifier ("SCR") rigs, one 1,000 horsepower SCR rig and one 1,000 horsepower
mechanical rig. The 2,000 horsepower rigs are rated for drilling to 25,000 feet
while the 1,000 horsepower rigs are rated for drilling to 15,000 feet. Three of
the six rigs are currently being refurbished and three were refurbished and
placed in service in late 1997 and early 1998. The purchase price for the
Kaiser-Francis Rig Purchase was paid from the net proceeds of the Senior Notes
offering.
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GWDC Acquisition. On June 27, 1997, the Company acquired Grey Wolf
Drilling Company ("GWDC") which owned a fleet of 18 operating drilling rigs and
related assets located in the Company's Gulf Coast market. Sixteen of the rigs
acquired in the GWDC Acquisition are rated to drill to depths of 20,000 feet or
greater. The consideration for the GWDC Acquisition consisted of $61.6 million
in cash and 14.0 million shares of common stock valued by the Company at $47.6
million under the purchase method of accounting. The GWDC Acquisition
established the Company's presence in its Gulf Coast market and provided the
Company with additional infrastructure to facilitate reactivation of its rigs
held in inventory.
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 assets acquired
included 13 operating 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 in
the Flournoy Acquisition at $31.1 million. The Company agreed to issue
additional shares of 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 less any shares sold, 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. No additional shares were required to be issued.
Diamond M Acquisition. On December 31, 1996, the Company acquired the
assets of Diamond M Onshore, Inc. ("Diamond M") for $26.0 million in cash. The
assets acquired consisted of ten operating 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 six diesel
electric SCR rigs, three of which were operating, from Mesa Drilling, Inc.
("Mesa") in exchange for 5.5 million shares of common stock. The Mesa
acquisition established the Company's presence in South Texas. Under the
purchase method of accounting, the Company valued the common stock issued in the
Mesa Acquisition at $7.5 million.
RTO/LRAC and Somerset Acquisitions. On August 29, 1996, the Company
completed the RTO/LRAC Acquisition in which approximately 39.4 million shares of
common stock were exchanged for 18 deep drilling land rigs which were added to
the Company's rigs held for refurbishment and reactivation. 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 a transaction in
which it issued approximately 39.4 million shares of common stock for $25.0
million in cash. 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 December
31, 1997, 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.
Additional Rig Purchases. In addition to the acquisitions described
above, the Company completed five additional acquisitions during the second and
third quarters of 1997 that added a total of seven drilling rigs to the
Company's fleet, one of which was operating and six of which were added to the
Company's rigs held for refurbishment.
Sale of INDRILLERS, L.L.C. On November 13, 1997, the Company closed the
sale of its 65% interest in INDRILLERS, LLC ("Indrillers") and certain related
drilling assets to Dart Energy Corporation ("Dart") in exchange for $1.65
million in cash and title to a 1,200 horsepower SCR rig previously held by
Indrillers. Indrillers, a limited liability company, operated drilling rigs in
Michigan and was formed in 1996 through the combination of certain drilling
assets of the Company and Dart with resulting ownership of 65% and 35%,
respectively. Indrillers' rig fleet consisted of nine smaller mechanical rigs
ranging from 300 to 900 horsepower and one 1,200 horsepower SCR rig.
Sale of Eastern Division Assets. On February 26, 1998, the Company
signed a definitive agreement to sell all of the rigs and drilling related
equipment of the Company's Eastern Division located in Ohio to Union Drilling,
Inc. ("Union") for $2.4 million. The sale closed in steps as each of the rigs
completed its current drilling contract with the
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last transaction being completed on March 4, 1998. The Eastern division's rig
fleet consisted of six 450 horsepower mechanical rigs.
DOMESTIC OPERATIONS
At December 31, 1997, the Company had a total domestic rig fleet of 116
rigs, 100 of which were being actively marketed, and 16 of which were held in
inventory for refurbishment and reactivation. After giving effect to the Murco
Acquisition and the disposition of the Eastern Division assets, the Company's
domestic total rig fleet at March 23, 1998 consists of 126 rigs, 111 of which
are actively marketed and 15 of which are held for refurbishment and
reactivation.
The Company conducts its domestic operations primarily in its four core
domestic drilling markets, the Ark-La-Tex, Mississippi/Alabama, South Texas and
Gulf Coast markets. The Ark-La-Tex and Mississippi/Alabama markets are served by
the Ark-La-Tex Division, while the South Texas and Gulf Coast market areas are
served by an operating division of the Company. The Company believes it
currently has the leading market position in its Gulf Coast and South Texas
markets and the second leading position in its Ark-La-Tex market. Two smaller,
non-strategic divisions operated by the Company were recently disposed of by the
Company. These were the Indrillers Division which operated primarily in Michigan
and the Eastern Division which operated primarily in Ohio. See "--Recent
Acquisitions and Sales" above.
Ark-La-Tex Division. The Ark-La-Tex Division provides drilling services
primarily in Northeast Texas, Northern Louisiana, Southern Arkansas, Mississippi
and Alabama and currently markets a fleet of 37 rigs. The majority of the
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, 450 to 1,000 horsepower
mechanical rigs are typically utilized in the Ark-La-Tex market. Twenty-three of
the divisions's rigs are suited for drilling to these depths, 18 of which are
mechanical, one of which is a diesel electric and four are SCR rigs. 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 14 marketable rigs suitable for these target
depths. Three of these deep drilling rigs are 1,500 horsepower mechanical rigs
capable of drilling to 20,000 feet, three are diesel electric 1,500 and 2,000
horsepower rigs capable of drilling to depths ranging from 20,000 to 25,000 feet
and eight are diesel electric SCR rigs ranging from 1,200 to 3,000 horsepower
and capable of drilling from 17,000 to 30,000 feet.
During 1997 approximately 76% of the division's revenues were generated
from daywork contracts, 4% from footage contracts and 20% from turnkey
contracts. The average revenues per rig day worked for the division during 1997
was $8,239 and its average rig utilization rate was 95%.
South Texas Division. The South Texas Division markets a fleet of 36
rigs consisting of 17 trailer mounted rigs with rated depth capacities ranging
from 9,500 to 14,000 feet, 12 diesel electric SCR rigs with rated depth
capacities from 12,000 to 25,000 feet and seven conventional mechanical rigs
with rated depth capacities ranging from 10,000 to 14,000 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 1997, approximately 61% of the division's revenues were
generated from daywork contracts, 15% from footage contracts and 24% from
turnkey contracts. The average revenues per rig day worked for the division
during 1997 was $9,395 and its average rig utilization rate was 97%.
Gulf Coast Division. The Gulf Coast Division's drilling services are
provided to operators in Southern Louisiana and along the Texas Gulf Coast. The
Gulf Coast Division's rig fleet consists of 32 drilling rigs, including nine
1,500 to 2,000 horsepower diesel electric rigs with rated depth capacities of
20,000 to 25,000 feet, thirteen 1,000 to 4,000 horsepower diesel electric SCR
rigs with rated depth capacities of 15,000 to 40,000 feet and ten mechanical
rigs with rated depth capacities of 10,000 to 20,000 feet.
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This division's rig fleet is comprised primarily of rigs acquired in
the GWDC Acquisition. Since the acquisition date, approximately 85% of its
revenues have been generated from daywork contracts, 1% from footage contracts
and 14% from turnkey contracts. Average revenue per day generated by the Gulf
Coast Division during 1997 was $10,219, and for the same period its average rig
utilization rates was 96%.
FOREIGN OPERATIONS
At the present time, the Company's foreign operations are in the
Venezuelan market having withdrawn from both the Argentine and Mexican markets
during 1996.
The Company began operating in Venezuela in 1994, and has upgraded the
performance capabilities of its rig fleet in Venezuela and is intensifying its
marketing efforts there in response to increased demand for land rig drilling
services. The Company currently has two rigs working in Venezuela and is
actively marketing its four remaining rigs. 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 August 1997, eight large undeveloped properties have been
awarded to multinational oil companies for development through production
sharing agreements. In June 1997, PDVSA awarded operating agreements to private
companies for the rehabilitation, reactivation and development of 18 additional
areas. The new operating agreements referred to by PDVSA as the "Third Operating
Round" cover 12 areas described by PDVSA as "onshore" locations covering a
combined area of approximately 2,600 square kilometers (approximately 1,000
square miles). The Company believes that the Third Operating Round operations
will require drilling and workover rigs with depth ratings from 4,000 to 18,000
feet.
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.
In 1996, the Company identified certain management and operating
deficiencies that contributed to reduced operations and profits, and the removal
of the Company from PDVSA's bid list due to the failure of the Company's
Venezuelan subsidiary to file statutorily required financial reports with the
Venezuelan government. To address these problems, the Company replaced its local
management with new management having substantial experience with competing
drilling contractors in Venezuela. The Company has since been restored to
PDVSA's bid list.
The Venezuela Division is currently marketing four land drilling rigs
with rated depths of 10,000 to 15,000 feet and two workover rigs, of which two
drilling rigs are under contract and the remainder are idle. To improve the
marketability of its existing Venezuelan rig fleet, the Company completed $3.6
million of capital improvements to its rigs in 1997. The Venezuela 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 Venezuela Division has contracted to provide crews to man rigs owned by
PDVSA and may do so in the future.
Further expansion of the Company's drilling fleet in Venezuela will
depend primarily on whether the Company is successful in obtaining long-term
drilling contracts in that market and on a variety of other factors including
market conditions, management's assessment of existing and future demand,
commodity prices and day rates. Should the Company be awarded long-term drilling
contracts requiring additional drilling rigs, management expects that inventory
rigs or active rigs from its domestic fleet will be refurbished and upgraded to
meet the premium quality rig specifications typically required by such long-term
international drilling contracts.
Foreign operations contributed approximately 3%, 36%, and 53% of the
Company's operating revenues for the years ended December 31, 1997, 1996 and
1995, reduced operating income by 9% in 1997 and accounted for 71% and 68%,
respectively, of the Company's total losses from operations for 1996 and 1995.
During 1997, the Company's
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foreign operations were conducted in Venezuela. In 1996 and 1995 the Company had
operations in Mexico and South America.
Consistent with the Company's decision to redeploy its rigs to more
productive markets, the Company withdrew from both the Argentine and Mexican
markets in 1996. 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 have been returned to the United States
where two of the three have been refurbished and returned to service in the
South Texas Division and one is being held for refurbishment and reactivation.
Although current operations are in Venezuela, the Company has and will
consider expansion into additional selected international markets as bidding
opportunities arise. In this regard, the Company intends to bid on long-term
contracts for drilling in Bolivia and Saudi Arabia.
RIG INVENTORY AND REFURBISHMENTS
As of March 23, 1998, the Company has an inventory of 15 rigs, or
approximately 12% of its rig fleet, which are suitable for refurbishment and
reactivation to meet future demand. The Company considers "inventory rigs" to be
rigs that are not working, are not actively marketed and that require additional
capital expenditures to return them to service. Management believes that the
anticipated demand for land drilling rigs in the Company's Ark-La-Tex, Gulf
Coast, South Texas and Venezuelan markets justifies a program to restore certain
of its inventory rigs to marketable condition.
Since the fourth quarter of 1996, the Company has completed the
refurbishment of 26 rigs at an aggregate cost of approximately $58.1 million. Of
these 26 recently refurbished rigs, 21 were diesel electric SCR inventory rigs
ranging from 1,000 to 4,000 horsepower with depth ratings of 15,000 to 40,000
feet. The other five refurbished rigs were previously marketed rigs that were
returned to the U.S. following the Company's withdrawal from the Argentine and
Mexican markets in late 1996. These rigs are mechanical rigs, ranging from 750
to 1,000 horsepower with rated depth capacities of 9,500 to 15,000 feet. All 26
recently refurbished rigs are now assigned to the Company's Ark-La-Tex, Gulf
Coast and South Texas Divisions.
As of March 23, 1998, the Company is refurbishing three rigs from its
inventory, of which two are diesel electric SCR rigs and one is a mechanical
rig. The mechanical rig is rated at 1,500 horsepower with a depth rating of
20,000 feet. The diesel electric SCR rigs undergoing refurbishment are 1,000 to
2,000 horsepower rigs with depth ratings of 15,000 to 25,000 feet. The Company
presently anticipates that the refurbished rigs will be deployed to the
Company's Ark-La-Tex, South Texas and Gulf Coast markets.
The Company plans to refurbish the remaining 12 inventory rigs during
late 1998 and 1999 as demand warrants. Upon refurbishment the rigs are expected
to be reactivated for service in the Company's four core domestic markets. If,
however, the Company is successful in obtaining long-term drilling contracts in
Venezuela or other foreign locations, certain of the Company's inventory rigs or
active rigs may be refurbished and mobilized for service in those foreign
markets. Refurbishment costs for rigs deployed by the Company in its core
domestic markets averaged approximately $2.2 million per rig for rigs
refurbished in 1996 and 1997 and are estimated to be $2.5 million per rig for
those to be refurbished in 1998 and 1999. Refurbishment costs for 2,000 and
3,000 horsepower rigs for the Venezuelan market are estimated to average
approximately $12.0 million per rig, in each case including the cost of a new
drill string. The actual number of rig refurbishments completed by the Company,
however, will depend on many factors, including management's assessment of
existing and anticipated demand and day rates, the Company's success in bidding
for foreign and domestic drilling contracts and possible future acquisitions of
rigs. See "Certain Risks --Dependence on Oil and Gas Industry; Industry
Conditions"
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
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are for multiple wells or a specified term. 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 may also require that the customer pay for the mobilization and
demobilization costs. The Company's drilling contracts generally provide for
compensation on either a daywork, turnkey or footage basis.
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 the risk of blowout, loss of hole,
stuck drill pipe, machinery breakdowns, abnormal drilling conditions and risks
associated with subcontractors' services, supplies, cost escalation and
personnel. 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 the risk of
blowout, loss of hole, stuck drill pipe, machinery breakdowns, abnormal drilling
conditions and risks associated with subcontractors' services, supplies, cost
escalation and personnel. As with turnkey contracts, the Company manages this
additional risk through the use of engineering expertise and bids 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. The Company
believes that approximately 85% of the wells it drilled in 1997 were principally
targeted by its customers for production of natural gas rather than crude oil.
One unaffiliated customer accounted for 10% of the Company's revenues for the
year ended December 31, 1997. There were no such significant customers for the
years ended December 31, 1996 and 1995.
The Company primarily markets its drilling rigs on a regional basis
through employee sales representatives. These sales representatives utilize
personal contracts 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.
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<PAGE> 9
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.
EMPLOYEES
At March 15, 1997, the Company had approximately 3,000 employees. None
of the Company's domestic employees are subject to collective bargaining
agreements, and management believes its employee relations are satisfactory.
REGULATION
Many aspects of the Company's operations are affected by domestic and
foreign political developments and are subject to numerous laws and regulations
that may relate directly or indirectly to the contract drilling industry. For
example, drilling operations are subject to extensive and evolving laws and
regulations governing environmental quality, pollution control, remediation of
contamination and preservation of natural resources. Such laws and regulations
pertain, among other things, to air emissions, waste management, spills and
other discharges, wetlands and endangered species protection and cleanup of
contamination. The Company's operations are often conducted in or near
ecologically sensitive areas such as wetlands which are subject to protective
measures. The handling of waste materials, some of which are classified as
hazardous substances, is a routine part of the Company's operations.
Consequently, the regulations applicable to the Company's operations include
those with respect to containment, disposal and control of the discharge of
hazardous oilfield waste and other nonhazardous waste material into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances impose strict liability, rendering a party liable for
environmental damage without regard to negligence or fault on the part of such
party. 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 Company may also be exposed to environmental or other liabilities
originating from businesses and assets subsequently acquired by the Company.
Compliance with such laws and regulations may require significant capital
expenditures. Although such compliance costs to date have not had a material
effect on the Company, application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company. In addition,
the modification or judicial interpretation of existing laws or regulations or
the adoption of new laws or regulations curtailing exploratory or development
drilling for oil and gas for economic, environmental or other reasons could have
a material adverse effect on the Company's operations by limiting future
contract drilling opportunities.
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. The primary environmental
statutory and regulatory programs that affect the Company's operations include
those summarized below.
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. 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. Under OPA, a person owning
or operating a facility or equipment from which there is a discharge or threat
of a discharge of oil into or upon navigable waters or adjoining shorelines is
liable as a "responsible party" for removal costs and damages. 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, and result in material liability.
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 as well as civil and criminal penalties
for violation of regulatory requirements.
The CWA also regulates the discharge of pollutants to surface water and
the discharge of dredged or fill material to wetlands areas.
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<PAGE> 10
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 current 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 who arranged for treatment or disposal at or
transport to such facility and (iv) transporters who selected the facility for
treatment or disposal of hazardous substances. 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 statues. The Environmental Protection Agency and various
state agencies have imposed strict requirements regulating the treatment,
storage, transport and disposal of hazardous wastes.
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 waste due to oil and gas
exploration and production activities is currently regulated in various states
including Louisiana and 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.
Occupational Safety and Health. The Occupational Safety and Health Act
of 1970, as amended, ("OSHA") establishes employer responsibilities including
maintenance of a workplace free of recognized hazards likely to cause death or
serious injury, compliance with standards promulgated by the Occupational Safety
and Health Administration, and various recordkeeping, disclosure and procedural
requirements. Such requirements include, for example, the Hazard Communication
Standard which applies to all private-sector employers including those in the
oil and gas exploration and production industry, and requires such employers to
assess chemical hazards, obtain and maintain certain written descriptions of
these hazards, develop a hazard communication program and train employees to
work safely with chemicals on site. Failure to comply with the requirements of
OSHA may result in administrative, civil and criminal penalties. The Company
believes it is in substantial compliance with OSHA requirements and does not
believe it will be required to expend material amounts by reason of such
requirements. However, the Company is unable to predict the ultimate cost of
compliance with these changing requirements.
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 property casualty insurance on its rigs
and drilling equipment, comprehensive general liability and commercial contract
indemnity (including a separate policy for foreign liability), commercial
umbrella and workers' compensation insurance and "control of well" insurance.
The Company's insurance coverage for property damage to its rigs and
drilling equipment is based on the Company's estimate, as of June 1997, of the
cost of comparable used equipment to replace the insured property. There is an
annual aggregate deductible on rigs of $500,000 to be comprised of losses
otherwise recoverable thereafter in excess of a $50,000 maintenance deductible.
There is a $10,000 deductible per occurrence on equipment.
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 $50,000 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 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),
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<PAGE> 11
cratering, seepage and pollution and care, custody and control. The Company's
current insurance provides $500,000 coverage per occurrence for care, custody
and control, and coverage per occurrence for control of well, cratering, seepage
and pollution associated with drilling operations of either $10.0 million or
$20.0 million, depending upon the area in which the well is drilled and its
target depth. 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.
CERTAIN RISKS
Dependence on Oil and Gas Industry; Industry Conditions. The Company's
business and operations are substantially dependent upon conditions in the oil
and gas industry and, specifically, the exploration and production expenditures
of oil and gas companies. The demand for contract land drilling and related
services is directly influenced by oil and gas prices, expectations about future
prices, the cost of producing and delivering oil and gas, government
regulations, local and international political and economic conditions,
including the ability of the Organization of Petroleum Exporting Countries
("OPEC") to set and maintain production levels and prices, the level of
production by non-OPEC countries and the policies of the various governments
regarding exploration and development of their oil and gas reserves. During
1997, conditions in the oil and gas industry were such that demand for land
drilling services was generally strong in each of the Company's four core
domestic markets. The Company's 1997 average rig utilization rate for these four
core markets was approximately 96%. In the first quarter of 1998, however, this
average rig utilization rate was approximately 80%. This lower average
utilization rate is believed by the Company to be due to an overall weakening of
demand it its core markets for land drilling services and, to a lesser extent,
delays caused by inclement weather. The generally reduced demand for land
drilling services in the first quarter of 1998 is believed by the Company to be
attributable to the decline of prices for oil production, and to widespread
uncertainty among potential customers as to the future level and trend of oil
and gas prices. If these industry conditions persist or worsen, they could have
a material adverse effect on the Company's financial condition and results of
operations.
History of Losses from Operations. Although the Company had net income
of $10.2 million for the year ended December 31, 1997, the Company has a history
of losses and had previously not had a profitable full 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. The 1996 loss included
non-recurring charges of $6.1 million while the 1995 loss included a provision
for asset impairment of $5.3 million. Profitability in the future will depend
upon many factors, but largely upon utilization rates and day rates for the
Company's drilling rigs. There can be no assurance that current utilization
rates and day rates will not decline or that the Company will not experience
losses.
Risks of International Operations. The Company derives revenue from
international operations. The Company's current international operations are
conducted only in Venezuela; however, the Company is pursuing opportunities in
other countries, including Bolivia and Saudi Arabia. Risks associated with
operating in international markets include foreign exchange restrictions and
currency fluctuations, foreign taxation, political instability, foreign and
domestic monetary and tax policies, expropriation, nationalization,
nullification, modification or renegotiation of contracts, war and civil
disturbances or other risks that may limit or disrupt markets. Additionally, the
ability of the Company to compete in the international drilling markets may be
adversely affected by foreign government regulations that favor or require the
awarding of such contracts to local contractors, or by regulations requiring
foreign contractors to employ citizens of, or purchase supplies from, a
particular jurisdiction. Furthermore, the Company's foreign subsidiaries may
face governmentally imposed restrictions from time to time on their ability to
transfer funds to the Company. No predictions can be made as to what foreign
governmental regulations may be applicable to the Company's operations in the
future. The Company is currently marketing six rigs in Venezuela, two of which
are under contract. In addition, during 1997 the Company completed approximately
$3.6 million in capital improvements to its rigs located in Venezuela. There can
be no assurance that these marketing efforts and capital improvements will
improve the Company's operating performance or generate contracts for the
Company's rigs in Venezuela.
Risks of Acquisition Strategy. As a key component of its new business
strategy, the Company has pursued and intends to continue to pursue acquisitions
of complementary assets and businesses. Certain risks are inherent in an
acquisition strategy, such as increasing leverage and debt service requirements
and combining disparate company cultures and facilities, which could adversely
affect the Company's operating results. The success of any completed acquisition
will depend in part on the Company's ability to integrate effectively the
acquired business into the Company. The process of integrating such acquired
business may involve unforeseen difficulties and may require a disproportionate
amount of management's attention and the Company's financial and other
resources. Possible future
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<PAGE> 12
acquisitions may be for purchase prices significantly higher than those paid for
recent and pending acquisitions. No assurance can be given that the Company will
be able to continue to identify additional suitable acquisition opportunities,
negotiate acceptable terms, obtain financing for acquisitions on satisfactory
terms or successfully acquire identified targets. The Company's failure to
achieve consolidation savings, to incorporate the acquired business and assets
into its existing operations successfully or to minimize any unforeseen
operational difficulties could have a material adverse effect on the Company's
financial condition and results of operations.
Dependence on Key Personnel; New Business Strategy. The Company
believes that its operations are dependent upon a small group of relatively new
management personnel, the loss of any one of whom could have a material adverse
effect on the Company's financial condition and results of operations. Material
changes in the Company's management and business strategy have only recently
occurred. The Company is therefore unable to predict the effect of these changes
on the Company's financial condition and results of operations. The Company's
ability to meet its substantially increased debt service and principal payments
will depend, in part, on the success of the Company's new business strategy.
There can be no assurance these material changes in the Company's management and
business strategy will result in the improvement of the Company's financial
condition and results of operations.
Competition. The land drilling industry is a highly competitive and
cyclical business characterized by high capital and maintenance costs. Drilling
contracts are usually awarded on a competitive basis and, while an operator may
consider factors such as quality of service and type and location of equipment
as well as the ability to provide ancillary services, price and rig availability
are the primary factors in determining which contractor is awarded a job. An
increasingly important competitive factor in the land drilling industry is the
ability to provide drilling equipment adaptable to, and personnel familiar with,
new technologies and drilling techniques as they become available. The land
drilling business is also highly fragmented. As a result, even though the
Company has the largest or second largest rig fleet in its four core domestic
markets, the Company estimates that its market share represents only 16% to 35%
of the overall market share in each of these four core markets. Certain of the
Company's competitors have greater financial and human resources than the
Company, which may enable them to better withstand periods of low rig
utilization, to compete more effectively on the basis of price and technology,
to build new rigs or acquire existing rigs and to provide rigs more quickly than
the Company in periods of high rig utilization. A number of the Company's
competitors have also announced plans to refurbish and reactivate rigs from
their inventory of stacked rigs. The deployment of these additional rigs to the
Company's core markets could further intensify competition based on pricing and
rig availability. There can be no assurance that the Company will be able to
compete successfully against all its competitors in the future or that the level
of competition will allow the Company to obtain adequate margins from its
drilling services.
Turnkey Drilling Risk. Contract drilling services performed under
turnkey drilling contracts have historically represented, and are expected to
continue to represent, a significant component of the Company's revenues. Under
a turnkey drilling contract, the Company contracts to drill a well to a contract
depth under specified conditions for a fixed price. In addition, 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. On a turnkey well, the Company often subcontracts for related
services and manages the drilling process. The risks to the Company on a turnkey
drilling 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 string, machinery breakdowns,
abnormal drilling conditions and risks associated with subcontractors' services,
supplies and personnel. Although the Company has obtained insurance coverage in
the past to reduce certain of the risks inherent in turnkey drilling operations,
there can be no assurance that such coverage will be obtained or available in
the future. The occurrence of an uninsured or under-insured loss could have a
material adverse effect on the Company's financial position and result of
operations.
Shortages of Equipment, Supplies and Personnel. There is a general
shortage of drilling equipment and supplies which the Company believes may
intensify. The cost and delivery times of equipment and supplies are
substantially greater than in prior periods and are currently escalating.
Accordingly, in 1996 the Company formed an alliance with a drill pipe
manufacturer that enables the Company to take delivery through 1998 of agreed
maximum
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<PAGE> 13
quantities of drill pipe in commonly used diameters at fixed prices, plus
possible escalations for increases in the manufacturer's cost of raw materials.
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 believes that the alliance may reduce, but not eliminate, its
exposure to price increases and supply shortages of drill pipe. The Company and
its supplier under the drill pipe alliance have entered into a formal
contractual arrangement for the purchase and supply of an average quarterly
quantity of 3,750 joints of drill pipe (a total of 15,000 joints) during 1999 at
prices based on the supplier's price list as of February 1997 less 5% (the
"Drill Pipe Agreement"). If the Company's source of supply through the alliance
and the Drill Pipe Agreement becomes unavailable or insufficient for any reason
(including by reason of additional rig acquisitions), the Company will likely
experience substantial delays in, and material price increases for, obtaining
substitute or additional supplies of drill pipe. Additionally, the Company may
be subject to shortages and price increases with respect to quantities in excess
of, and varieties of drill pipe not covered by, the alliance and the Drill Pipe
Agreement. Although the Company has formed similar informal supply alliances
with manufacturers and suppliers of other equipment and supplies, and is
attempting to establish arrangements to assure adequate availability of certain
other necessary equipment and supplies on satisfactory terms, there can be no
assurance that it will be able to do so. Shortages by the Company of drilling
equipment or supplies could delay and adversely affect its ability to refurbish
its inventory rigs and obtain contracts for its marketable rigs, which could
have a material adverse effect on its financial condition and results of
operations.
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 and are again arising as demand for land
drilling services increases. 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.
Governmental Regulations and Environmental. Many aspects of the
Company's operations are affected by domestic and foreign political developments
and are subject to numerous laws and regulations that may relate directly or
indirectly to the contract drilling industry. The Company's operations are often
conducted in or near ecologically sensitive areas, such as wetlands, which are
subject to protective measures. 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 Company may also be exposed to environmental or other
liabilities originating from businesses and assets subsequently acquired by the
Company. Compliance with such laws and regulations may require significant
capital expenditures. Although such compliance costs to date have not had a
material effect on the Company, application of these requirements or the
adoption of new requirements could have a material adverse effect on the
Company. In addition, the modification or judicial interpretations of existing
laws or regulations or the adoption of new laws or regulations curtailing
exploratory or development drilling for oil and gas for economic, environmental
or other reasons could have a material adverse effect on the Company's
operations by limiting future contract drilling opportunities.
Significant Leverage and Debt Service Requirements. On June 27, 1997,
the Company issued $175.0 million of 87/8 Senior Notes due 2007 in an
underwritten public offering (the "Senior Notes"). Additionally, the Company has
a $50.0 million amended and restated senior secured revolving credit facility
with a syndicate of commercial banks (the "Bank Credit Facility") under which no
indebtedness was outstanding at December 31, 1997, due to the repayment of all
amounts then outstanding from the net proceeds of a common stock offering. The
Company expects, however, 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. In January 1998, the Company
borrowed $28 million in order to complete the Murco Acquisition under the Bank
Credit Facility.
The level of the Company's indebtedness could have several important
effects on its 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 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
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<PAGE> 14
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 indenture under
which the Senior Notes were issued (the "Indenture") contains 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 contained in the Indenture. These covenants may
adversely affect the Company's ability to pursue its acquisition and rig
refurbishment strategies and limit is 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 default terms that effectively cross default with the Indenture.
Accordingly, the breach by the Company or its subsidiaries of the covenants
contained in the Indenture likely will result in a default under not only the
Indenture but also the Bank Credit Facility, and possibly certain other then
outstanding debt obligations of the Company or its subsidiaries. If the
indebtedness under the Bank Credit Facility or other indebtedness of the Company
or its subsidiaries is in excess of $10.0 million and is not paid when due or is
accelerated by the holders thereof, an event of default under the Indenture
would occur. In any such case, there can be no assurance that the Company's
assets would be sufficient to repay in full all of the Company's and its
subsidiaries' indebtedness, including the Senior Notes.
Qualification of the GWDC Acquisition as a Reorganization for U.S.
Federal Tax Purposes. The GWDC 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 GWDC shareholders. A principal condition for such qualification is
that the former shareholders of GWDC will satisfy the continuity of proprietary
interest standard with respect to common stock received in the GWDC Acquisition.
Thus, under present Internal Revenue Service ("IRS") guidelines, dispositions of
common stock by GWDC shareholders during the five years following the GWDC
Acquisition could cause the IRS to assert that the GWDC Acquisition does not
qualify as a tax free reorganization. The Company has no contractual agreements
with GWDC shareholders preventing the disposition of their shares. If the GWDC
Acquisition fails to qualify as a tax free reorganization for failure to meet
the continuity of interest standard or for any other reason, the receipt of
common stock will be taxable to the GWDC shareholders at the time of the GWDC
Acquisition, and GWDC will be deemed to have sold all of its assets in a taxable
exchange triggering a corporate tax liability to GWDC estimated to be in excess
of $30.0 million. The Company's wholly-owned subsidiary, Grey Wolf Drilling
Company (formerly Drillers, Inc.), as the surviving corporation of the GWDC
Acquisition, would be liable for any such corporate tax which, if imposed, would
have a material adverse effect on the financial condition of the Company
ITEM 2. PROPERTIES
DRILLING EQUIPMENT
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 drill string length and other equipment needed to drill a well.
Generally, land rigs operate domestically with crews of five to six persons and
in Venezuela with crews of ten to 12 persons.
The Company's rig fleet consists of several rig types to meet the
demands of its customers in each of the markets it serves. The Company's rig
fleet consists of two basic types of drilling rigs, the mechanical and the
diesel electric. Mechanical rigs transmit power generated by a diesel engine
directly to an operation (for example the
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<PAGE> 15
drawworks or mud pumps on a rig) through a compound consisting of chains, gears
and hydraulic clutches. Diesel electric rigs are further broken down into two
subcategories, direct current rigs and SCR rigs. Direct current rigs transmit
the power generated by a diesel engine to a direct current generator. This
direct current electrical system then distributes the electricity generated to
direct current motors on the drawworks and mud pumps. SCR rig's diesel engines
drive alternating current generators and this alternating current can be
transmitted to use for rig lighting and rig quarters or converted to direct
current to drive the direct current motors on the rig.
The following table summarizes the rigs owned by the Company at March
23, 1998, by maximum rated depth capacity:
<TABLE>
<CAPTION>
Maximum Rated Depth Capacity
----------------------------------------------
Under 10,000' 15,000' 20,000'
10,000' to 14,900' to 19,999' and Deeper Total
------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Ark-La-Tex
Diesel Electric -- 1 5 10 16
Mechanical -- 11 7 3 21
South Texas
Diesel Electric -- 2 5 5 12
Mechanical 4 20 -- -- 24
Gulf Coast
Diesel Electric -- -- 2 20 22
Mechanical -- 3 3 4 10
Venezuela
Diesel Electric -- -- -- -- --
Mechanical -- 5 1 -- 6
------- ---------- ---------- ---------- -------
Total Marketed 4 42 23 42 111
Inventory
Diesel Electric -- -- 2 10 12
Mechanical -- 1 1 1 3
------- ---------- ---------- ---------- -------
Total Rig Fleet 4 43 26 53 126
======= ========== ========== ========== =======
</TABLE>
FACILITIES
The Company's principal executive office is located in Houston, Texas.
The Company leases approximately 19,600 square feet at a cost of approximately
$25,000 per month. In addition, the Company owns field locations in: Duson,
Eunice and Fillmore, Louisiana; Midvale, Ohio; Oklahoma City, Oklahoma; Alice,
Houston and Midland, Texas.
ITEM 3. 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 consolidated financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET DATA
The common stock is listed and traded on the AMEX under the symbol
"GW." During the periods below prior to September 19, 1997, the Company's
corporate name was DI Industries, Inc. and the common stock was listed on the
AMEX under the Symbol "DRL" The following table sets forth the high and low
closing prices of the common stock on the AMEX for the periods indicated:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Period from January 1, 1998 to March 23, 1998 5.3750 3.5000
Year Ended December 31, 1997:
Quarter ended March 31, 1997 3.5000 2.4375
Quarter ended June 30, 1997 4.4375 2.4375
Quarter ended September 30, 1997 7.9375 4.3125
Quarter ended December 31, 1997 9.8750 7.8750
Year Ended December 31, 1996:
Quarter ended March 31, 1996 0.6875 0.4375
Quarter ended June 30, 1996 1.8750 0.6875
Quarter ended September 30, 1996 1.8750 1.1250
Quarter ended December 31, 1996 3.0000 1.5000
</TABLE>
The Company has never declared or paid cash dividends on its common
stock and does not expect to pay cash dividends in 1998 or for the foreseeable
future. The Company anticipates that all cash flow generated from operations in
the foreseeable future will be retained and used to develop or expand the
Company's business and reduce outstanding indebtedness. Any future payment of
cash dividends will depend upon the Company's results of operations, financial
condition, cash requirements and other factors deemed relevant by the Board of
Directors.
The terms of the Company's Bank Credit Facility prohibit the payment of
dividends without the prior written consent of the banks and the terms of the
Indenture under which the Senior Notes are issued also restrict the Company's
ability to pay dividends under certain conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Approximately 41% of the outstanding common stock is available for
resale by selling shareholders under an effective shelf registration statement
(the "Resale Shelf") under the Securities Act of 1933, as amended (the
"Securities Act"). Approximately 9% of the outstanding common stock is not
covered by the Resale Shelf, but is available for resale under Rules 144 and 145
under the Securities Act and is covered to a substantial extent by currently
unexercised registration rights. An additional 5,135,400 shares are issuable
upon exercise of options and 489,600 shares are issuable upon the exercise of
warrants. Future sales of substantial amounts of common stock in the public
market, or the perception that such sales may occur, could adversely affect
prevailing market prices of the common stock.
On March 23, 1997, the last reported sales price of the Company's
common stock on the American Stock Exchange was $4.625 per share.
RECENT SALES OF UNREGISTERED SECURITIES
The only recent sale of unregistered securities was the 12.4 million
shares issued to acquire the operating assets of Flournoy Drilling Company on
January 31, 1997, which was disclosed previously in the Company's Form 10-Q for
the quarterly period ended March 31, 1997. These shares were subsequently
registered for resale under a shelf registration on Form S-3 that became
effective November 6, 1997.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine
Years Ended December 31, Months Ended Year Ended
------------------------------------------ December 31, March 31,
1997 1996 1995 1994(1) 1994(1)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS:
Revenues $ 215,923 $ 81,767 $ 94,709 $ 50,987 $ 67,855
Income (loss)
from continuing operations 18,849 (10,877) (12,675) (2,260) (1,384)
DISCONTINUED OPERATIONS (2):
Income (loss) from oil and gas operations -- -- (4) 51 (1,274)
Loss from sale of oil and gas properties -- -- (768) -- --
NET INCOME (LOSS) 10,218 (11,722) (13,447) (2,209) (2,658)
INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
From continuing operations .07 (.18) (.33) (.06) (.04)
From discontinued operations -- -- (.02) -- (.03)
Net income (loss) .07 (.18) (.35) (.06) (.07)
TOTAL ASSETS (3) 533,752 117,819 57,783 62,860 40,325
LONG-TERM DEBT (3) 176,225 26,846 11,146 10,224 198
SERIES A PREFERRED STOCK - MANDATORY
REDEEMABLE 305 764 900 1,900 --
</TABLE>
- ----------
(1) During 1994 the Company changed its fiscal year end from March 31 to
December 31.
(2) To account for the discontinued operation of DI Energy, effective April
1, 1995.
(3) Total assets and long term debt have been restated to account for the
discontinued operations of DI Energy, effective April 1, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements of Grey Wolf, Inc. ("Grey Wolf" or the
"Company") included elsewhere herein. All significant intercompany transactions
have been eliminated.
GENERAL
The Company's operations have been and will continue to be
significantly affected by the new management team installed in 1996, the
implementation of a new business strategy in April 1996 and the major
transactions that have been consummated by the Company since August 1996. Since
the implementation of its new business strategy, the Company has acquired 100
drilling rigs and now has the largest or second largest active rig fleet in each
of its four core domestic markets, the Ark-La-Tex, Mississippi/Alabama, South
Texas and Gulf Coast markets. As of March 23, 1998 the Company's rig fleet
consists of 126 rigs, of which 111 are currently marketed by the Company.
Refurbishment and reactivation of the Company's inventory rigs is also a key
element of the Company's business strategy. From the fourth quarter of 1996
through February 1998, the Company has refurbished 26 rigs at an approximate
total cost of $58.1 million. Of the Company's inventory of 15 rigs, at March 23,
1998, three rigs are undergoing refurbishment and the Company intends to begin
refurbishment of the remaining 12 during 1998 and 1999. The Company estimates
total costs for pending and planned refurbishments will total approximately
$37.5 million, of which $1.6 million had been expended at December 31, 1997. By
increasing the size of its rig fleet through acquisitions and refurbishments,
the Company has increased its market share in its four core domestic markets
during a period of rapidly rising demand and
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<PAGE> 18
day rates for land drilling rigs in those key markets. The combined effect of
the Company's larger fleet of marketable rigs, higher rig utilization rates and
increasing day rates has significantly improved the Company's financial
performance since the third quarter of 1996 despite increased drilling operating
costs, including wages and benefits, and debt service over the same period.
Although the Company generated $10.2 million in net income during 1997, prior to
that the Company had not had a profitable full year since 1991.
FINANCIAL CONDITION AND LIQUIDITY
The significant changes in the Company's financial position from
December 31, 1996 to December 31, 1997 are primarily due to the Justiss and
Flournoy Acquisitions, the Kaiser-Francis Rig Purchase, the GWDC Acquisition,
the issuance of the Senior Notes and a common stock offering.
The following table summarizes the Company's financial position at
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Amount % Amount %
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Working capital $ 66,644 14 $ 6,195 7
Property and equipment, net 409,088 85 88,476 92
Other noncurrent assets 6,983 1 1,132 1
-------- ----- -------- -----
Total $482,715 100 $ 95,803 100
======== ===== ======== =====
Long-term debt $176,225 36 $ 26,846 28
Other long-term liabilities 57,274 12 4,311 4
Shareholders' equity 249,216 52 64,646 68
-------- ----- -------- -----
Total $482,715 100 $ 95,803 100
======== ===== ======== =====
</TABLE>
The $320.6 million increase in net property and equipment, is a direct
result of the Company's acquisition and refurbishment programs. During 1997, the
Company acquired 56 additional drilling rigs and refurbished 23 from inventory.
These increases in property and equipment due to acquisitions and refurbishments
were partially offset by the sale of Indrillers and additional depreciation. In
connection with certain of these transactions, the Company recorded
approximately $45 million in deferred taxes due to the difference between the
purchase price and the tax basis of the assets acquired.
These acquisitions also accounted for approximately $78.7 million of
the $184.6 million increase in shareholders' equity as 12.4 million shares were
issued in the Flournoy Acquisition and 14.0 million shares were issued in the
GWDC Acquisition. The remaining increase in shareholders' equity is due to net
income of $10.2 million and the closing in November of a common stock offering.
On November 3, 1997, the Company closed an offering of 25.0 million
shares of its common stock. The Company sold 12.5 million newly issued common
shares and certain shareholders sold 12.5 million shares at $8.00 per share. The
Company received proceeds, net of underwriting discount, of approximately $95
million.
Working capital also increased by $60.4 million from December 31, 1996
to December 31, 1997. This is primarily due to an increase in cash and cash
equivalents of $47.5 million. This increase was primarily a result of $239.0
million provided by financing activities and $21.8 million provided by operating
activities partially offset by $213.3 million used in investing activities.
OPERATING ACTIVITIES
During the year ended December 31, 1997, $21.8 million was provided by
operating activities. This was a result of $37.1 million in cash generated from
operations offset by changes in working capital items of $15.3 million. Cash
used for working capital items consisted primarily of an increase in accounts
receivable of $28.3 million partially offset by an increase in accounts payable.
The increased working capital requirements were a result of certain of
the acquisitions completed by the Company. Acquisitions of drilling rigs and
certain other related equipment require additional working capital to operate.
-18-
<PAGE> 19
INVESTING ACTIVITIES
During 1997, the Company invested $213.3 million in property and
equipment, net of asset sales. The cash portion of the purchase price for the
GWDC Acquisition, including transaction costs, accounted for $62.0 million and
the cash acquisition of Justiss, the Kaiser-Francis rigs and the other rig
purchase accounted for $79.7 million. In addition, during 1997 the Company spent
$52.1 million on rig refurbishments and $19.5 million on drill pipe and other
drilling related equipment. In addition, the acquisitions of Flournoy and GWDC
resulted in $40.5 million and $86.0 million, respectively, in non-cash additions
to property and equipment.
FINANCING ACTIVITIES
During 1997, the Company obtained a net $239.0 million from financing
activities, consisting principally of net proceeds of $169.1 million from the
issuance of Senior Notes, net proceeds from the issuance of common stock of
$94.3 million and borrowings and repayments under the Bank Credit Facility.
These borrowings were used to fund the cash portion of the GWDC acquisition and
the Justiss, Kaiser-Francis and other rig purchases, as well as to fund working
capital requirements and capital expenditures discussed above. The Company had
cash and cash equivalents of $53.6 million at December 31, 1997.
RECENT ACQUISITION
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $59.6 million in cash. The
Company funded this stock purchase out of working capital and $28.0 million in
borrowings under its bank credit facility.
FUTURE ACTIVITIES
The Company anticipates substantial funding requirements with its rig
refurbishment program during 1998. The Company currently has three rigs under
refurbishment and will begin refurbishment of the remaining 12 as demand
warrants. The Company estimates total costs for pending and planned
refurbishment will total approximately $37.5 million. These estimates are based
on deployment of all 15 rigs to the Company's four core domestic markets at an
estimated average refurbishment cost of $2.5 million per rig, including the cost
of a new drill string. If the Company instead chooses to refurbish rigs for
service in the Venezuelan or other international markets, it is estimated that
the average refurbishment cost of such rigs will be $12.0 million per rig,
including the cost of a new drill string. Overall estimated capital expenditures
for rig refurbishments would be correspondingly increased by the incremental
refurbishment cost of rigs destined for international markets.
The Company believes that the cash flow from operations, and to the
extent required, further borrowings under the Bank Credit Facility or other
external debt financing, will be sufficient to fund the Company's refurbishment
program and meet its other anticipated capital expenditures for 1998.
The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment other than the Murco Acquisition completed in 1998,
suitable opportunities may arise in the future. The timing or success of any
acquisition effort and the size of the associated potential capital commitments
cannot be predicted at this time. The ability of the Company to consummate any
such transaction will be dependent in large part on its ability to fund such
transactions. There can be no assurance that adequate funding will be available
on terms satisfactory to the Company.
CERTAIN CREDIT ARRANGEMENTS
The Company's principal credit arrangements (other than customary trade
credit and capital leases) consist of a bank credit facility and its recently
issued Senior Notes.
Bank Credit Facility. The Company has a senior secured revolving credit
facility from three commercial banks under which the Company and its principal
domestic subsidiary, Grey Wolf Drilling Company (formerly Drillers, Inc.) are
co-borrowers (the "Bank Credit Facility"). The Bank Credit Facility provides the
borrower 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
-19-
<PAGE> 20
variable rate, using (at the borrowers' election) either the agent bank's base
rate plus a margin ranging from 0.75% to 1.50%, depending upon the Company's
debt to EBITDA ratio for the trailing 12 month period, or a rate based on the
interbank Eurodollar market plus a margin ranging from 1.75% to 2.50%, depending
upon the Company's debt to EBITDA ratio for the trailing 12 month period.
Letters of credit accrue a 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. Indebtedness under the Bank Credit Facility is secured by a
security interest in substantially all of the Company's and its domestic
subsidiaries assets and by guarantees of certain of its wholly-owned
subsidiaries.
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
twelve 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
by the Company or its subsidiaries from asset sales (including proceeds from
sale of rigs identified in the credit agreement as equipment held for sales but
excluding proceeds from dispositions of inventory in the ordinary course of
business, certain licenses of intellectual property and certain inter-company
transfers) or the receipt of insurance proceeds on assets of the borrowers, in
each case in this clause (ii) to the extent that such proceeds are in excess of
$500,000 individually or $1.0 million in the aggregate in any twelve month
period. The final maturity date of the Bank Credit Facility is April 30, 2000.
Among the various covenants that must be satisfied by the Company under
the Bank Credit Facility are the following five financial covenants pursuant to
which the Company may not permit: (i) working capital (as defined in the Bank
Credit Facility) to be less than $5.0 million on the last day of any fiscal
quarter; (ii) consolidated net worth to be less than the sum of $60 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
domestic 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 2.5 to 1 through
December 31, 1997 and less than 3 to 1 thereafter.
The Bank Credit Facility also contains provisions restricting the
ability of the Company and its subsidiaries to, among other things, (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) prepay or materially amend any
other indebtedness and (vi) issue any stock (other than common stock).
Events of default under the Bank Credit Facility include, in addition
to non-payment of amounts due, misrepresentation and breach of loan covenants
and certain other events of default, (i) default with respect to other
indebtedness in excess of $350,000, (ii) judgments in excess of $350,000 and
(iii) a change of control (meaning that (a) the Company ceases to own 100% of
its two principal subsidiaries, (b) some person or group (other than persons
name in clause (d) below) 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 Facility) or
(d) Norex Drilling Ltd., Somerset Drilling Associates, L.L.C. ("SDA") and
Somerset Capital Partners ("SCP") cease to own or control at least 25% of the
Company.
Senior Notes. Concurrently with the closing of the GWDC Acquisition,
the Company concluded a public offering of $175 million in principal amount of
the Senior Notes. The net proceeds from the sale of the Senior Notes were used
(i) to pay the cash portion of the GWDC Acquisition price, (ii) to repay the
Company's then outstanding balance under its revolving line of credit from its
commercial banks, (iii) to pay the purchase price for the Kaiser-Francis Rig
Purchase and the Additional Rig Purchases and (iv) for capital expenditures to
refurbish certain of the Company's rigs and for other general corporate
purposes. The Senior Notes are general unsecured senior obligations of the
Company and are guaranteed, on a joint and several basis, by all domestic
wholly-owned subsidiaries of the Company.
The Senior Notes will be redeemable, at the Company's option, in whole
or in part from time to time on or after July 1, 2002, at redemption prices
decreasing from 104.4375% in 2002 to 100% in 2005 and thereafter, plus accrued
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<PAGE> 21
and unpaid interest to the redemption date. In the event the Company consummates
one or more Qualified Equity Offerings (as defined in the Indenture) on or prior
to July 1, 2000, the Company at its option may use all or a portion of the net
cash proceeds form such Qualified Equity Offerings to redeem up to 30% of the
aggregate principal amount of the Senior Notes at a redemption price equal to
108.875% of the aggregate principal amount thereof, together with accrued and
unpaid interest to the date of redemption, provided that at least $120 million
aggregate principal amount of Senior Notes remains outstanding immediately after
such redemption. Although the Company's recent equity offering qualified as a
Qualified Equity Offering, the Company did not use the proceeds of the offering
to repay any portion of the Senior Notes. Upon a Change of Control as defined in
the Indenture, each holder of Senior Notes will have the right to require the
Company to repurchase all or any part of such holder's Senior Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of purchase.
The Indenture permits the Company and its subsidiaries to incur
additional indebtedness, including senior indebtedness of up to $100.0 million
aggregate principal amount which may be secured by liens on all of the assets of
the Company and its subsidiaries, subject to certain limitations. The Indenture
contains other covenants limiting the ability of the Company and its
subsidiaries to, among other things, pay dividends or make certain other
restricted payments, make certain investments, incur additional indebtedness,
permit liens, incur dividend and other payment restrictions affecting
subsidiaries, enter into consolidation, merger, conveyance, lease or transfer
transactions, make asset sales, enter into transactions with affiliates or
engage in unrelated lines of business. These covenants are subject to certain
exceptions and qualifications.
OTHER
The Company has not paid any cash dividends on the Company's common
stock and does not anticipate paying dividends on the Company's common stock at
any time in the foreseeable future. Furthermore, the Bank Credit Facility
prohibits the payment of dividends without the consent of the participating
banks.
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<PAGE> 22
RESULTS OF OPERATIONS
The following tables highlight rig days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the years ended
December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
-------------------------------------
Domestic Foreign
Operations Operations Total
---------- ---------- ---------
($ in thousands, except
average revenue per day)
<S> <C> <C> <C>
Rig days worked 23,575 830 24,405
Drilling revenue $ 209,423 $ 6,500 $ 215,923
Operating expenses(1) 154,821 7,731 162,552
---------- ---------- ---------
Gross profit (loss) $ 54,602 $ (1,231) $ 53,371
========== ========== =========
Averages per rig day worked
Drilling revenue $ 8,883 $ 7,831 $ 8,847
Operating expenses 6,567 9,314 6,661
---------- ---------- ---------
Gross profit (loss) $ 2,316 $ (1,483) $ 2,186
========== ========== =========
<CAPTION>
For the Year Ended December 31, 1996
-------------------------------------
Domestic Foreign
Operations Operations Total
---------- ---------- ---------
($ in thousands, except
average revenue per day)
<S> <C> <C> <C>
Rig days worked 7,050 3,694 10,744
Drilling revenue $ 52,495 $ 29,272 $ 81,767
Operating expenses(1) 49,431 30,957 80,388
---------- ---------- ---------
Gross profit (loss) $ 3,064 $ (1,685) $ 1,379
========== ========== =========
Averages per rig day worked
Drilling revenue $ 7,446 $ 7,924 $ 7,610
Operating expenses 7,011 8,380 7,482
---------- ---------- ---------
Gross profit (loss) $ 435 $ (456) $ 128
========== ========== =========
<CAPTION>
For the Year Ended December 31, 1995
-------------------------------------
Domestic Foreign
Operations Operations Total
---------- ---------- ---------
($ in thousands, except
average revenue per day)
<S> <C> <C> <C>
Rig days worked 6,289 5,405 11,694
Drilling revenue $ 44,797 $ 45,698 $ 90,495
Export Sales -- 4,214 4,214
Operating expenses(1) 40,867 48,277 89,144
Export sales expenses -- 4,681 4,681
---------- ---------- ---------
Gross profit (loss) $ 3,930 $ (3,046) $ 884
========== ========== =========
Averages per rig day worked
Drilling revenue $ 7,123 $ 8,455 $ 7,739
Operating expenses 6,498 8,932 7,623
---------- ---------- ---------
Gross profit (loss) $ 625 $ (477) $ 116
========== ========== =========
</TABLE>
(1) Operating expenses exclude depreciation and amortization and general
and administrative expenses.
-22-
<PAGE> 23
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 AND 1996
Contract drilling revenues increased approximately $134.1 million, or
163.9%, to $215.9 million for the year ended December 31, 1997 compared to $81.8
million for the year ended December 31, 1996. This increase is primarily due to
an increase in revenue from domestic operations of $156.9 million due to an
increase in average revenue per day of $1,437 and an increase in utilization of
16,525 days. The increase in operating days is due to the acquisition of 57
operating rigs in late 1996 and 1997 as well as an overall increase in
utilization. The increase in revenue from domestic operations was partially
offset by a decrease in revenue from foreign operations of $22.8 million where
rig days worked decreased by 2,864 days. During 1996 the Company suspended its
operations in the Mexico and Argentina markets due to a decline in revenue per
day and rig utilization. Revenue generated in Mexico and Argentina markets
during 1997 was zero compared to $11.3 million for the year ended December 31,
1996. Revenue generated in Venezuela decreased by $11.5 million to $6.5 million
for the year ended December 31, 1997 compared to $18.0 million for the year
ended December 31, 1996. This decrease is due primarily to the expiration of a
contract to supply labor for four drilling rigs.
Drilling expenses increased by $82.2 million, or 102.2%, to $162.6
million for the year ended December 31, 1997 compared to $80.4 million for the
year ended December 31, 1996. The increase is due to an increase in drilling
expenses from domestic operations of $105.4 million partially offset by a
decrease in drilling expenses from foreign operations of $23.2 million. Drilling
expenses from domestic operations increased by $105.4 million, or 213.4%, to
$154.8 million for the year ended December 31, 1997 from $49.4 million for the
year ended December 31, 1996. This increase is primarily due to increased
utilization but is also partially due to increasing direct labor and other
costs. The decrease in drilling expenses from foreign operations of $23.2
million, or 74.8%, to $7.7 million for the year ended December 31, 1997 from $
31.0 million for the year ended December 31, 1996 is due to the withdrawal from
the Mexico and Argentina markets and the expiration of the labor contracts in
Venezuela discussed previously.
Depreciation expense increased by $16.3 million, or 346.8%, to $21.0
million for the year ended December 31, 1997 compared to $4.7 million for the
year ended December 31, 1996. However, depreciation as a percentage of revenue
increased by only 4% to approximately 10% for the year ended December 31, 1997
from 6% for the year ended December 31, 1996. The increase is due to the
incrementally higher cost basis of the rigs acquired in recent transactions.
During the year ended December 31, 1996 the company recorded
non-recurring charges of $6.1 million which included $1.1 million in employment
severance costs, $4.6 million dollars in cost to exit the Argentina and Mexico
markets and $400,000 of other non-recurring charges. The employment severance
cost included $602,000 in contractual severance pay to be paid over a two year
period to the Company's former President and Chief Executive Officer and the
transfer to him of certain drilling equipment with a net book value of $535,000
in settlement of a dispute over stock options to purchase Company common stock.
As a result of the Company's desire to redeploy assets to more productive
markets the Company has withdrawn from both the Argentina and Mexico markets. As
a result, in 1996, the Company recorded estimated exit cost of $1.3 million for
Mexico which primarily consisted of the forfeiture of a performance bond and
other costs incurred to close the office and exit cost of $800,0000 for
Argentina which primarily consist of costs incurred during the period necessary
to exit the market and close the office. In addition, during the first quarter
of 1997, the Company sold three of the six drilling rigs and certain other
assets located in Argentina for $1.5 million. In contemplation of the sale, in
1996 the Company recorded a write down of rig equipment and other assets of $2.5
million. The remaining Argentina drilling rigs have been mobilized out of
Argentina to the United States where they have been refurbished and returned to
service. Mobilization costs of approximately $900,000 were incurred during 1997
and are included in operating expense.
General and administrative expenses increased by $3.8 million, or
88.4%, to $8.1 million for the year ended December 31, 1997 compared to $4.3
million for the year ended December 31, 1996 due to increased payroll cost of
new management members and increased staff size. General and administrative
expenses as a percentage of revenue, however, have decreased to 3.7% for the
year ended December 31, 1997 from 5.2% for the year ended December 31, 1996.
Interest expense increased by $7.5 million, or 625%, to $8.7 million
for the year ended December 31, 1997 compared to $1.2 million for the year ended
December 31, 1996. This is primarily due to the issuance of $175 million in
Senior Notes during June 1997 to complete the Grey Wolf Acquisition and continue
the refurbishment of the rigs purchased in the stacked rig acquisitions.
-23-
<PAGE> 24
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1996 AND 1995
Revenues decreased approximately $12.9 million, or 13.6%, to $81.8
million for the year ended December 31, 1996 from $94.7 million for the year
ended December 31, 1995. This decrease was primarily due to a decrease in
revenues from foreign operations of $20.6 million where rig utilization
decreased by 1,711 days. Revenues generated in the Mexican and Argentine markets
decreased by $17.3 million to $11.3 million for the year ended December 31,
1996, compared to $28.6 million for the year ended December 31, 1995, due to a
decline in average revenues per day, lower rig utilization and the Company's
ultimate withdrawal from these markets. Revenues generated in Venezuela
increased slightly to $18.0 million for the year ended December 31, 1996 from
$17.1 million for the year ended December 31, 1995. The increase was due to
increases in day rates received because the number of rig days worked decreased
by 360 days caused by the non-renewal of several drilling contracts for which
the Company was unable to obtain replacement contracts from the same or other
customers. The remainder of the decrease in revenues from foreign operations was
due to $4.2 million in non-recurring export sales during the year ended December
31, 1995. The decrease in revenues from foreign operations was partially offset
by a $7.7 million increase in revenues from domestic operations to $52.5 million
for the year ended December 31, 1996, as compared to $44.8 million for the year
ended December 31, 1995. Domestic rig utilization improved by 7.0% in 1996, and
average revenues per day increased by 5.0%, due to an overall improvement in the
domestic contract drilling market.
Drilling operating expenses decreased by $13.4 million, or 14.3%, to
$80.4 million for the year ended December 31, 1996, from $93.8 million for the
year ended December 31, 1995. The decrease was due to a $22.0 million decrease
in foreign drilling expenses, which was partially offset by an $8.6 million
increase in drilling expenses from domestic operations. Drilling expenses
associated with the Company's Mexican and Argentine operations decreased by
$16.0 million to $15.3 million for the year ended December 31, 1996 from $31.3
million for the year ended December 31, 1995. This decrease was due to lower
utilization in, and the Company's ultimate withdrawal from, those markets.
Drilling operating expenses included $1.0 million in mobilization costs to
transport the Company's drilling rigs from Mexico to the United States. Drilling
expenses in Venezuela decreased by $1.3 million to $15.7 million for the year
ended December 31, 1996 from $17.0 million for the year ended December 31, 1995
primarily because of lower rig utilization in 1996. Also contributing to the
decrease in operating expenses from foreign operations was $4.7 million in costs
related to non-recurring export sales for the year ended December 31, 1995.
Drilling expenses from domestic operations increased $8.6 million to $49.4
million for the year ended December 31, 1996, from $40.9 million for the year
ended December 31, 1995. This increase was primarily due to increased
utilization and, to a lesser extent, increased direct labor costs.
Depreciation and amortization expenses decreased by $143,000, or 3%, to
$4.7 million for the year ended December 31, 1996 from $4.8 million for the year
ended December 31, 1995. The decrease in depreciation expense was primarily
attributable to the decrease in the depreciable asset base resulting from the
$5.3 million impairment provision recorded in the fourth quarter of 1995 as a
result of the Company's adoption of SFAS No. 121, as described below. While the
RTO/LRAC Acquisition, which occurred in August 1996, increased the Company's
asset base, no depreciation expense will be recorded until the acquired rigs are
placed in service. Only one of these rigs was placed in service in late 1996.
During the year ended December 31, 1996, the Company recorded
non-recurring charges of $6.1 million which included $1.1 million in employment
severance costs, $4.6 million in costs to exit the Argentine and Mexican markets
and approximately $400,000 of other non-recurring charges. The employment
severance costs includes $602,000 in contractual severance pay to be paid over a
two-year period to the Company's former President and Chief Executive Officer
and the transfer to him of certain drilling equipment with a net book value of
$535,000 in settlement of a dispute over options to purchase common stock. As a
result of the Company's desire to redeploy assets to more productive markets,
the Company decided in late 1996 to withdraw from both the Argentine and Mexican
markets and has recorded estimated exit costs of $1.3 million for Mexico, which
primarily consist of the forfeiture of a performance bond and other costs to be
incurred to close the office, and exit costs of $800,000 for Argentina, which
primarily consist of costs expected to be incurred during the period necessary
to exit the market and close the office. Additionally, in 1996, the Company
agreed to sell three of the six drilling rigs and certain other assets located
in Argentina for $1.5 million. As a result, the Company recorded a write down of
rig equipment and other assets of $2.5 million. The remaining Argentine drilling
rigs have been returned to the United States where they have been or will be
refurbished and returned to service.
-24-
<PAGE> 25
General and administrative expenses increased by $719,000 to $4.3
million for the year ended December 31, 1996, from $3.6 million for the year
ended December 31, 1995, due to increased payroll cost associated with the new
management members and the increased corporate staff, legal fees associated with
unsuccessful litigation to recover amounts the Company believed it was owed and
other professional fees.
Interest expense decreased by $252,000 for the year ended December 31,
1996, primarily as a result of lower average outstanding debt levels during 1996
in the United States and lower outstanding levels on an overdraft facility in
Argentina. The consolidated average debt balances during 1996 and 1995 were
$13.7 million and $15.0 million, respectively. Interest rates during these
periods remained relatively unchanged.
Other income, net increased $2.5 million to $4.1 million in 1996 from
$1.6 million in 1995 primarily as a result of a $2.8 million gain recorded in
connection with the sale of its Western Division in the second quarter of 1996.
INFLATION AND CHANGING PRICES
Contract drilling revenues do not necessarily track the changes in
general inflation as they tend to respond to the level of activity on the part
of the oil and gas industry in combination with the supply of equipment and the
number of competing companies. Capital and operating costs are influenced to a
larger extent by specific price changes in the oil and gas industry and to a
lesser extent by changes in general inflation.
FOREIGN EXCHANGE
Venezuelan operations are often performed by the Company pursuant to
drilling contracts under which payments to the Company are denominated in United
States Dollars but are payable in Venezuelan currency at a floating exchange
rate. Although the Company's Venezuelan contracts usually allow the Company to
exchange up to 35% of payments made to it in Venezuelan currency for United
States Dollars for a limited period of time following the payment and at the
official Venezuelan exchange rate in effect at the time the payment was made to
the Company (thus offering limited protection against adverse fluctuation), the
Company is typically subject to the risk of adverse currency fluctuations with
respect to the balance of such payments. Additionally, a significant portion of
costs and expenses relating to the Company's international operations are
comprised of goods and services procured in the respective foreign countries and
paid for in the respective countries' currencies. Accordingly, management
expects that the Company's subsidiaries operating in Venezuela will be required
to maintain significant cash balances in Venezuelan currency. The Company is not
a party to any currency hedging arrangements and has not during the three-year
period ending December 31, 1997 entered into any currency hedges to protect it
from foreign currency losses. Instead, the Company attempts to manage assets in
foreign countries to minimize its exposure to currency fluctuations. Despite
those efforts, however, the Company remains subject to the risk of foreign
currency losses. During the year ended December 31, 1995, the Company realized
currency gains of $888,000 and, in 1997 and 1996, $50,000 and $404,000,
respectively, were recorded as decreases in shareholders' equity due to a
devaluation of the Venezuelan Bolivar.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report including,
without limitation, statements regarding the Company's business strategy, plans,
intentions, objectives and beliefs of management for future operations are
forward looking statements, including the Company's intentions with respect to
rig refurbishments and rig deployment. Although the Company believes the
expectations and beliefs reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
discussed in Item 1 "Business" and Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEAR 2000 COMPLIANCE
The Company expects that the cost of converting its computer systems to
year 2000 compliance will be between $100,000 and $200,000, which is not
material to its financial condition. The Company believes that it will be able
to achieve year 2000 compliance by the end of 1999, and it does not currently
anticipate any disruption in its operations
-25-
<PAGE> 26
as a result of any failure by the Company to be in compliance. The Company does
not currently have any information concerning the year 2000 compliance status of
its customers or vendors.
ACCOUNTING MATTERS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components. The components of comprehensive income refer to revenues, expenses,
gains and losses that are excluded from net income under current accounting
standards, including foreign currency translation items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. SFAS 130 requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement displayed in equal prominence with other financial
statements; the total of other comprehensive income for a period is required to
be transferred to a component of equity that is separately displayed in a
statement of financial position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after December 15, 1997.
The Company will adopt SFAS 130 in the quarter ending March 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for periods
beginning after December 15, 1997. The Company will adopt SFAS 131 in the
quarter ending March 31, 1998.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This Item 7A is not applicable to the Company.
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<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report..................................................28
Independent Auditors' Report..................................................29
Consolidated Balance Sheets as of December 31, 1997 and 1996..................30
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996, and 1995..............................31
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.........................32
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995..............................33
Notes to Consolidated Financial Statements....................................35
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................49
Schedules other than those listed above are omitted because they are either not
applicable or not required or the information required is included in the
consolidated financial statements or notes thereto.
-27-
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Grey Wolf, Inc.:
We have audited the accompanying consolidated balance sheets of Grey
Wolf, Inc. (formerly DI Industries, Inc.) and Subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1997. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for the years ended December 31, 1997 and 1996. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Grey Wolf,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects the information set forth
therein.
KPMG Peat Marwick LLP
Houston, Texas
March 3, 1998
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<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Grey Wolf, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Grey Wolf, Inc. and its Subsidiaries (the
"Company") for the year ended December 31, 1995. Our audit also included the
financial statement schedule for the year ended December 31, 1995 listed in the
Index. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the results of operations and cash flows of the
Company for the year ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic 1995 consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Houston, Texas
March 28, 1996
-29-
<PAGE> 30
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 53,626 $ 6,162
Restricted cash - insurance deposits 450 1,000
Accounts receivable, net of allowance
of $1,053 and $1,333, respectively 56,499 15,866
Inventory and supplies 555 936
Assets held for sale 80 557
Prepaids and other current assets 6,471 3,690
---------- ----------
Total current assets 117,681 28,211
---------- ----------
Property and equipment:
Land, buildings and improvements 5,293 4,312
Drilling equipment 430,524 95,059
Furniture and fixtures 1,573 1,088
Less: accumulated depreciation and amortization (28,302) (11,983)
---------- ----------
Net property and equipment 409,088 88,476
---------- ----------
Other noncurrent assets 6,983 1,132
---------- ----------
$ 533,752 $ 117,819
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,148 $ 613
Accounts payable - trade 29,434 11,826
Accrued workers' compensation 2,678 1,502
Payroll and related employee costs 8,103 3,340
Accrued interest payable 7,938 --
Customer advances 523 2,466
Income taxes payable -- 845
Other accrued liabilities 1,213 1,424
---------- ----------
Total current liabilities 51,037 22,016
---------- ----------
Senior Notes 174,182 --
Long-term debt net of current maturities 2,043 26,846
Other long-term liabilities and minority interest 3,863 3,299
Deferred income taxes 53,106 248
Series A preferred stock - mandatory redeemable 305 764
Commitments and contingent liabilities -- --
Shareholders' equity:
Series B Preferred stock, $1 par value; 10,000 shares
authorized, none outstanding -- --
Common stock, $.10 par value; 300,000,000 and 75,000,000
shares authorized; 164,746,291 and 125,043,234 issued and
outstanding, respectively 16,474 12,504
Additional paid-in capital 269,733 99,301
Cumulative translation adjustments (454) (404)
Accumulated deficit (36,537) (46,755)
---------- ----------
Total shareholders' equity 249,216 64,646
---------- ----------
$ 533,752 $ 117,819
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE> 31
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Contract drilling $ 215,923 $ 81,767 $ 94,709
Costs and expenses:
Drilling operations 162,552 80,388 93,825
Depreciation and amortization 20,957 4,689 4,832
General and administrative 8,081 4,274 3,555
Provision for asset impairment -- -- 5,290
Non-recurring charges -- 6,131 --
---------- ---------- ----------
Total costs and expenses 191,590 95,482 107,502
---------- ---------- ----------
Operating income (loss) 24,333 (13,715) (12,793)
Other income (expense):
Interest income 1,248 505 292
Gain on sale of assets 1,692 3,078 466
Interest expense (8,748) (1,220) (1,472)
Minority interest 324 475 (56)
Foreign currency gains -- -- 888
---------- ---------- ----------
Other income (expense), net (5,484) 2,838 118
---------- ---------- ----------
Income (loss) from continuing operations 18,849 (10,877) (12,675)
Discontinued operations:
Loss from oil and gas operations -- -- (4)
Loss from sale of oil and gas properties -- -- (768)
---------- ---------- ----------
Loss from discontinued operations -- -- (772)
---------- ---------- ----------
Income (loss) before income taxes 18,849 (10,877) (13,447)
Income taxes 8,631 845 --
---------- ---------- ----------
Net Income (loss) 10,218 (11,722) (13,447)
Series A preferred stock redemption premium (240) (13) --
Series B preferred stock subscription
dividend requirement -- (402) --
---------- ---------- ----------
Net income (loss) applicable to common stock $ 9,978 $ (12,137) $ (13,447)
========== ========== ==========
Basic net income (loss) per common share from
continuing operations $ .07 $ (.18) $ (.33)
Basic net loss per common share from discontinued operations -- -- (.02)
---------- ---------- ----------
Basic net income (loss) per common share $ .07 $ (.18) $ (.35)
========== ========== ==========
Basic weighted average shares outstanding 145,854 67,495 38,669
========== ========== ==========
Diluted net income (loss) per common share from
continuing operations $ .07 $ (.18) $ (.33)
Diluted net loss per common share from discontinued operations -- -- (.02)
---------- ---------- ----------
Diluted net income (loss) per common share $ .07 $ (.18) $ (.35)
========== ========== ==========
Diluted weighted average shares outstanding 149,724 67,495 38,669
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 32
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Series B
Preferred Common
Stock Stock Additional Cumulative
$1 par Common $.10 par Paid-in Translation
Value Shares Value Capital Deficit Adjustments Total
--------- -------- -------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ -- 38,669 $ 3,867 $ 46,458 $ (21,184) $ -- $ 29,141
Series B Preferred Stock Subscribed 4,000 -- -- -- -- -- 4,000
Net Loss -- -- -- -- (13,447) -- (13,447)
--------- -------- -------- ---------- --------- ----------- ---------
Balance, December 31, 1995 4,000 38,669 3,867 46,458 (34,631) -- 19,694
Issuance of shares in Merger
transactions -- 78,848 7,885 41,673 -- -- 49,558
Issuance of shares in Mesa
transaction -- 5,500 550 6,985 -- -- 7,535
Issuance of shares in
Wexford transaction -- 1,750 175 3,945 -- -- 4,120
Exercise of stock options -- 276 27 253 -- -- 280
Redemption of Series A
Preferred Stock -- -- -- (13) -- -- (13)
Series B Preferred Stock dividend
requirement 402 -- -- -- (402) -- --
Recision of Series B Preferred
Stock Subscription (4,402) -- -- -- -- -- (4,402)
Unrealized translation loss -- -- -- -- -- (404) (404)
Net loss -- -- -- -- (11,722) -- (11,722)
--------- -------- -------- ---------- --------- ----------- ---------
Balance, December 31, 1996 -- 125,043 12,504 99,301 (46,755) (404) 64,646
Issuance of shares in
Flournoy acquisition -- 12,426 1,243 29,823 -- -- 31,066
Exercise of stock options -- 777 78 1,624 -- -- 1,702
Redemption of Series A
preferred stock -- -- -- (240) -- -- (240)
Issuance of shares in
Grey Wolf merger -- 14,000 1,400 46,200 -- -- 47,600
Sale of common stock -- 12,500 1,249 93,025 -- -- 94,274
Unrealized translation loss -- -- -- -- -- (50) (50)
Net Income -- -- -- -- 10,218 -- 10,218
--------- -------- -------- ---------- --------- ----------- ---------
Balance, December 31, 1997 $ -- 164,746 $ 16,474 $ 269,733 $ (36,537) $ (454) $ 249,216
========= ======== ======== ========== ========= =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 33
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,218 $ (11,722) $ (13,447)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 20,957 4,689 4,832
Provision for asset impairment -- -- 5,290
Non-recurring charges -- 2,497 --
Gain on sale of assets (1,692) (3,078) (466)
Discontinued operations - loss from
sale of oil and gas properties -- -- 768
Deferred income taxes 7,864 -- --
Provision for doubtful accounts (200) 302 291
(Increase) decrease in restricted cash 550 612 (1,612)
(Increase) decrease in accounts and notes receivable (28,336) 3,255 (3,558)
(Increase) decrease in inventory 381 1,190 1,152
(Increase) decrease in assets held for sale 477 1,841 118
(Increase) decrease in other current assets (1,922) 116 274
Increase (decrease) in accounts payable 8,783 (703) 5,289
Increase (decrease) in accrued workers' compensation 201 (1,855) 394
Increase (decrease) in customer advances (2,841) 2,350 (1,233)
Increase (decrease) in other current liabilities 7,208 (1,167) 4,288
Increase (decrease) in minority interest (1,197) 1,047 (131)
Increase (decrease) in other 1,332 (813) (179)
(Increase) decrease in discontinued operations -- -- 419
---------- ---------- ----------
Cash provided by (used in) operating activities 21,783 (1,439) 2,489
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (218,723) (38,436) (5,657)
Proceeds from sales of equipment 5,382 4,917 737
Proceeds from sale of discontinued operations -- -- 4,200
---------- ---------- ----------
Cash used in investing activities (213,341) (33,519) (720)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes 174,161 -- --
Proceeds from long-term debt 52,811 31,542 2,066
Repayments of long-term debt (78,141) (16,544) (5,490)
Repayments of long-term debt-discontinued operations -- -- (2,114)
Proceeds from sale of common stock 94,274 28,678 --
Senior notes financing costs (5,086) -- --
Proceeds from exercise of stock options 1,702 280 --
Redemption of Series A Preferred Stock (699) (149) --
Sale (recession) of preferred stock subscriptions -- (4,402) 4,000
---------- ---------- ----------
Cash provided by (used in) financing activities 239,022 39,405 (1,538)
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (144) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 47,464 4,303 231
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,162 1,859 1,628
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53,626 $ 6,162 $ 1,859
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 34
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 2,572 $ 1,220 $ 1,472
========== ========== ==========
CASH PAID FOR TAXES: 1,999 -- --
========== ========== ==========
NON CASH TRANSACTIONS:
Issuance of common stock for Oliver/Mullen rigs
Change in property and equipment additions -- 25,000 --
Change in issuance of common stock -- 25,000 --
Issuance of common stock for Mesa rigs
Change in property and equipment additions -- 7,783 --
Change in issuance of common stock -- 7,535 --
Change in deferred tax liability -- 248 --
Issuance of common stock for Flournoy acquisition:
Change in property and equipment additions 40,503 -- --
Change in issuance of common stock 31,066 -- --
Change in deferred tax liability 9,437 -- --
Issuance of common stock for Grey Wolf acquisition:
Change in property and equipment additions 86,038 -- --
Change in issuance of common stock 47,600 -- --
Change in deferred tax liability 35,557 -- --
Change in accounts receivable 12,097 -- --
Change in prepaids and other current assets 859 -- --
Change in other assets 180 -- --
Change in accounts payable 8,825 -- --
Change in accrued workers' compensation costs 975 -- --
Change in payroll and related employee costs 1,305 -- --
Change in customer advances 898 -- --
Change in income tax payable 1,099 -- --
Change in other accrued liabilities 1,832 -- --
Change in long term debt 1,083 -- --
Change in other long term liabilities -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
-34-
<PAGE> 35
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Nature of Operations. Grey Wolf, Inc., (formerly DI Industries, Inc.)
is a Texas corporation formed in 1980. On July 14, 1997, by written consent, the
Board of Directors and certain shareholders of DI Industries, Inc. approved an
amendment to the corporate charter to change the name of the company from DI
Industries, Inc. to Grey Wolf, Inc. The Articles of Amendment effecting the
amendment were filed with the Texas Secretary of State on September 18, 1998.
Principles of Consolidation and Basis of Presentation. Grey Wolf, Inc.
is engaged in the business of providing onshore contract drilling services to
the oil and gas industry. Grey Wolf, Inc. and its subsidiaries conduct
operations in Texas, Arkansas, Louisiana, Mississippi and other states and
currently have international operations in Venezuela. The consolidated financial
statements include the accounts of Grey Wolf, Inc. and its majority-owned
subsidiaries ("the Company" or "Grey Wolf"). All significant intercompany
accounts and transactions are eliminated in consolidation.
Inventory. Inventory consists primarily of drilling and support
equipment and is stated at the lower of specifically identified cost or market.
Assets Held for Sale. Assets held for sale are primarily comprised of
drilling rigs and equipment and is stated at the Company's net book value.
Management believes the carrying value is less than net realizable value on the
basis of purchase offers received in 1997 and 1996 and recent appraisals.
Property and Equipment. Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets between three and twelve years. The Company's
producing oil and gas properties were sold on August 9, 1995. Such properties
were recorded using the full-cost method of accounting. Under this method, all
costs incurred in connection with the exploration for and development of oil and
gas were capitalized. Depreciation, depletion and amortization of oil and gas
properties was computed on the basis of physical units, with oil and gas
converted to a common unit of measure based on the approximate relative energy
content. Unamortized costs were compared to the present value of estimated
future net revenues and any excess was charged to expense during the period in
which the excess occurred.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
effective for years beginning after December 15, 1995. As the FASB encouraged
earlier application, the Company adopted the provisions of SFAS No. 121 during
the fourth quarter of 1995. This accounting standard requires certain assets be
reviewed for impairment whenever events or circumstances indicate the carrying
amount may not be recoverable. During 1995, the Company provided a provision of
$5.3 million for certain drilling rigs and equipment due to market indications
that the carrying amounts were not fully recoverable. Net realizable value was
determined based upon appraisal, comparable sale data and management estimates.
Revenue Recognition. Revenue from turnkey drilling contracts is
recognized using the percentage-of-completion method based upon costs incurred
to date and estimated total contract costs. Revenue from daywork, footage and
hourly drilling contracts is recognized based upon the provisions of the
contract. Provision is made currently for anticipated losses, if any, on
uncompleted contracts.
Foreign Currency Translation. Assets and liabilities of foreign
subsidiaries have been translated into United States dollars at the applicable
rate of exchange in effect at the end of the period reported. Revenues and
expenses have been translated at the applicable weighted average rates of
exchange in effect during the period reported. Translation adjustments are
reflected as a separate component of shareholders' equity. Any transaction gains
and losses are included in net income. During 1997 and 1996 respectively, the
Company recorded unrealized translation losses of $50,000 and $404,000 as a
reduction of shareholders' equity. During the year ended December 31, 1995, the
Company realized currency gains of $888,000.
Income (Loss) per Share. In February 1997 the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
128 ("SFAS 128"), Earnings per Share. SFAS No. 128 specifies new
-35-
<PAGE> 36
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
measurement, presentation and disclosure requirements for earnings per share and
is required to be applied retroactively upon initial adoption. The Company has
adopted SFAS No. 128 effective with the release of December 31, 1997 earnings
data, and accordingly, has restated herein all previously reported earnings per
share data. Basic earnings per share is based on weighted average shares
outstanding without any dilutive effects considered. Diluted earnings per share
reflects dilution from all contingently issuable shares, including options,
warrants and convertible preferred stock. A reconciliation of the weighted
average common shares outstanding on a basic and diluted basis is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Weighed average common shares
outstanding - Basic 145,854 67,495 38,669
Effect of dilutive securities:
Options 2,883 -- --
Redeemable preferred stock 329 -- --
Warrants 658 -- --
-------- -------- --------
3,870 -- --
Weighted average common shares
outstanding - Diluted 149,724 67,495 38,669
======== ======== ========
</TABLE>
Income Taxes. The Company utilizes the asset and liability method in
accounting for income taxes that requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns. Under
this method, deferred income tax liabilities and assets are determined based on
the temporary differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities and available tax credit
carryforwards. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Interest Capitalization. Interest is capitalized on rig refurbishments
during the refurbishment period. Interest is capitalized to the rigs using an
allocation method based on the Company's actual interest cost. Total interest
capitalized for the year ended December 31, 1997 was $1.8 million. No interest
was capitalized for the years ended December 31, 1996 or 1995.
Fair Value of Financial Instruments. The carrying amount of the
Company's cash and short-term investments approximates fair value because of the
short maturity of those instruments. The carrying amount of the Company's
reducing revolving line of credit approximates fair value as the interest is
indexed to the prime rate or LIBOR. The carrying amount of the Company's Senior
Notes approximates fair value as interest rates have not changed significantly
since the notes were issued on June 27, 1997.
Cash Flow Information. Cash flow statements are prepared using the
indirect method. The Company considers all unrestricted highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.
Restricted Cash. Restricted cash consists of investments in interest
bearing certificates of deposit totaling $450,000 and $1.0 million at December
31, 1997 and 1996, respectively as collateral for a letter of credit securing
insurance deposits. The carrying value of the investments approximates the
current market value.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of certain
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities. Actual results could
differ from those estimates.
Concentrations of Credit Risk. Substantially all of the Company's
contract drilling activities are conducted with independent oil and gas
companies in the United States or with national petroleum companies in South
America. Historically, the Company has not required collateral or other security
for the related receivables from such customers. However, the Company has
required certain customers to deposit funds in escrow prior to the commencement
of drilling. Actions typically taken by the Company in the event of nonpayment
include filing a lien on the customer's producing properties and filing suit
against the customer.
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<PAGE> 37
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other recent accounting pronouncements. In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components. The components of comprehensive income
refer to revenues, expenses, gains and losses that are excluded from net income
under current accounting standards, including foreign currency translation
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS 130 requires that all
items that are recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed in equal
prominence with other financial statements; the total of other comprehensive
income for a period is required to be transferred to a component of equity that
is separately displayed in a statement of financial position at the end of an
accounting period. SFAS 130 is effective for both interim and annual periods
beginning after December 15, 1997. The Company will adopt SFAS 130 in the
quarter ending March 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131"). SFAS 131 establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for periods
beginning after December 15, 1997. The Company will adopt SFAS 131 in the
quarter ending March 31, 1998.
(2) SIGNIFICANT PROPERTY TRANSACTIONS
On May 7, 1996 the Company entered into two separate definitive merger
agreements (the "Mergers") to effect a $25 million equity infusion and the
acquisition of deep drilling equipment. These Mergers were closed on August 29,
1996.
Under the first agreement, R.T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") merged with a new subsidiary of the Company
with the capital stock of RTO and LRAC being exchanged for 39,423,978 shares of
the Company's common stock. In addition, warrants were issued to acquire up to
1,720,000 additional shares of Grey Wolf common stock, the exercise of which is
contingent upon the occurrence of certain events. As a result of certain events
which occurred prior to year end, at December 31, 1997, 244,800 warrants
remained outstanding and the remainder were canceled. These Mergers resulted in
the acquisition of 18 inactive, deep capacity land drilling rigs which included
five 3,000 horsepower and nine 2,000 horsepower land rigs which are rated for
depths of 25,000 feet or greater. The Company placed nine of these rigs in
operation during 1997 and one of these rigs in operation during 1996.
Under the second agreement, a subsidiary of Somerset Drilling
Associates, L.L.C. ("Somerset"), a privately-held investment limited liability
company, was merged into the Company. The stock of the subsidiary was exchanged
for 39,423,978 shares of Grey Wolf common stock and warrants to acquire up to
1,720,000 shares of Grey Wolf common stock, the exercise of which is contingent
upon the occurrence of certain events. As a result of certain events which
occurred prior to year end, at December 31, 1997, 244,800 warrants remained
outstanding and the remainder were canceled. This merger transaction resulted in
a $25 million equity infusion into the Company.
A definitive proxy statement was mailed to shareholders of record as of
July 15, 1996, and the Mergers were approved by the shareholders at a meeting on
August 27, 1996. These Mergers resulted in an ownership change in the Company as
defined by Section 382 of the Internal Revenue Code which limits the ultimate
utilization of the Company's net operating loss carryforward (see footnote 3).
As part of the Merger agreements, the 1995 subscription by Norex
Drilling for 4,000 shares of Series B Preferred Stock and related Series B
Warrants was rescinded. The $4.0 million subscription plus accrued dividends
were repaid to Norex Drilling by the Company with the proceeds from a term loan
that was paid in full on December 30, 1996 from the proceeds of a private
placement of the Company's common stock (see below). Interest was at 12% and was
payable on the last business day of each calendar quarter.
-37-
<PAGE> 38
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 24, 1996, the Company closed a transaction whereby it sold all
of the operational assets of Western Oil Well Service Co. ("Western"), a
wholly-owned subsidiary of the Company, for $3.95 million in cash. Western
provided oil and gas well workover services principally in Montana, Utah and
North Dakota. Pursuant to the sale, the buyer assumed all of Western's existing
leases, primarily for vehicles, which totaled $251,000 at closing. The Company
recorded a gain of $2.8 million in the second quarter of 1996 as a result of
this sale.
On October 3, 1996 the Company acquired all of the South Texas
operating assets of Mesa Drilling, Inc. ("Mesa") in exchange for 5,500,000
shares of the Company's common stock. The assets acquired consisted of six
diesel electric SCR drilling rigs, three of which were operating in South Texas
and the other rigs were stacked. One of the stacked rigs was refurbished and
placed in service during 1997.
On December 31, 1996, the Company completed the acquisition of all the
South Texas operating assets of Diamond M Onshore, Inc., a wholly owned
subsidiary of Diamond Offshore Drilling, Inc. The assets were acquired for
approximately $26 million in cash and consist of ten land drilling rigs, all of
which are currently operating, 19 hauling trucks, a yard facility in Alice,
Texas and various other equipment and drill pipe. Grey Wolf hired the majority
of the personnel operating the assets.
On January 31, 1997, the Company acquired the operating assets of
Flournoy Drilling Company ("Flournoy") for 12.4 million shares of the Company's
common stock and $800,000 in cash. The assets acquired included 13 drilling
rigs, 17 rig hauling trucks, a yard and office facility in Alice, Texas, and
various other equipment and drill pipe. The Company agreed to issue additional
shares of 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 less any shares sold, 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.
No additional shares were required to be issued.
In May 1997, the Company increased its inventory of rigs held for
refurbishment by purchasing three rigs in three separate transactions for an
aggregate purchase price of $6.9 million in cash. One of the rigs was purchased
from an affiliate of one of the Company's directors. The Company refurbished two
of the three rigs and placed them in service during 1997.
In June 1997, the Company purchased three additional rigs to add to its
inventory of rigs to be refurbished for $8.9 million. These rigs were also
purchased from an affiliate of one of the Company's directors.
On June 27, 1997, the Company acquired all of the outstanding capital
stock of Grey Wolf Drilling Company ("GWDC") by merger in exchange for $61.6
million cash and 14.0 million shares of the Company's common stock. Transaction
costs of approximately $0.6 million were incurred in connection with the merger.
GWDC operated 18 large premium drilling rigs in South Louisiana and along the
upper Texas Gulf Coast. The merger was accounted for using purchase accounting
and as such, all revenues and expenses were recorded by the Company beginning
from the date of acquisition.
In July 1997, the Company purchased one operating rig for $2.4 million
in cash. In August 1997, the Company purchased six idle drilling rigs and
related equipment from Cactus Drilling Company, a division of Kaiser-Francis Oil
Company, for $25.4 million (the "Kaiser-Francis Rig Purchase"). Two of these
rigs have been refurbished and placed in service during 1997. The remaining rigs
will be refurbished and placed in service in the future as warranted by demand.
On September 15, 1997, the Company entered into a definitive agreement
to acquire substantially all of the operating assets of Justiss Drilling Company
(the "Justiss Acquisition"), a division of Justiss Oil Company, Inc. The assets
included a fleet of 12 operating drilling rigs and related equipment which are
currently operating in the Company's Ark-La-Tex and Gulf Coast markets. The
total purchase price for the Justiss acquisition was $36.1 million in cash of
which $28.6 million was paid on October 21, 1997, upon delivery of nine of the
12 rigs. The remaining three rigs were purchased and the balance of the purchase
price ($7.5 million) was paid in November 1997, as each rig
-38-
<PAGE> 39
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
completed a turnkey drilling contract. The Company borrowed $28.0 million under
its bank credit facility for the first nine rigs and the November purchases were
funded from the Company's stock offering (discussed below).
On November 3, 1997, the Company closed an offering of 25.0 million
shares of the Company's common stock (the "Offering"). The Company sold 12.5
million newly issued common shares and certain selling shareholders sold 12.5
million additional shares at $8.00 per share. The Company received proceeds net
of underwriting discounts, of approximately $95.0 million. The expenses of the
offering were approximately $0.7 million. The proceeds of the Offering were used
to pay down the bank credit facility and to complete the Murco acquisition
discussed below.
On November 13, 1997, the Company closed the sale of its 65% interest
in INDRILLERS, L.L.C. ("Indrillers") and certain related drilling assets to Dart
Energy Corporation ("Dart") in exchange for $1.65 million in cash and title to a
1,200 horsepower SCR rig previously held by Indrillers. Indrillers, a limited
liability company, operated ten drilling rigs in Michigan and was formed in 1996
though the combination of certain drilling assets of the Company and Dart with
resulting ownership of 65% and 35%, respectively. Indrillers' rig fleet
consisted of nine smaller mechanical rigs ranging from 300 to 900 horsepower and
one 1,200 horsepower SCR rig. The Company recorded a gain of approximately
$700,000 on the sale.
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $59.6 million in cash. At
closing, Murco had net liabilities of approximately $5.4 million. The
consideration is subject to a final accounting adjustment for the actual net
liabilities of Murco. The Company funded this stock purchase out of working
capital and borrowing under its bank credit facility.
On February 26, 1998, the Company signed a definitive agreement to sell
all of the rigs and drilling related equipment of the Company's Eastern division
located in Ohio to Union Drilling, Inc. ("Union"), an affiliate of two of the
Company's directors, for $2.4 million. The sale closed in steps as each of the
rigs completed its current drilling contract with the last transaction being
completed on March 4, 1998. The Eastern division rig fleet consisted of six 450
horsepower mechanical rigs. The Company will recognize a gain on the sale during
the first quarter of 1998.
The December 31, 1997 consolidated balance sheet includes the effect of
the Flournoy acquisition, the GWDC Acquisition, the issuance of the Notes
(defined herein), the May, June, July and Kaiser-Francis stacked rig purchases
and the Company's common stock offering. The following unaudited pro forma
balance sheet assumes the Murco Acquisition occurred on December 31, 1997. The
following unaudited pro forma consolidated financial data for the year ended
December 31, 1997, includes the historical results of the Company for the year
ended December 31, 1997, and gives effect to the Murco Acquisition, the Flournoy
Acquisition, the GWDC merger, the Justiss Acquisition and issuance of the Notes
as if they occurred on January 1, 1996. The following unaudited pro forma
consolidated financial data for the year ended December 31, 1996, includes the
historical results of the Company for the year ended December 31, 1996, and
gives effect to each of the above transactions as well as the previously
disclosed merger, acquisition and sale transactions which occurred before
December 31, 1996, as if they occurred on January 1, 1996. The May, June, July
and Kaiser-Francis rig purchases have no historical operations as the rigs have
been stacked and the impact on the unaudited pro forma consolidated financial
data is not material and has not been presented.
-39-
<PAGE> 40
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
As of
December 31, 1997
----------------------
(Amounts in thousands)
<S> <C>
Working capital $ 31,638
Total assets 591,508
Shareholders' equity 249,216
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1997 1996
---------- ----------
(Amounts in thousands, except per share amounts)
<S> <C> <C>
Total revenues $ 249,426 $ 240,614
Net income (loss) applicable
to common stock 6,872 (33,226)
Net income (loss) per basic
and diluted share .04 (.20)
</TABLE>
Each of the Company's acquisitions have been accounted for using
purchase accounting. As such all revenues and expenses have been recorded by the
Company beginning at the date of acquisition.
(3) INCOME TAXES
The Company and its domestic subsidiaries file a consolidated U.S.
Federal income tax return. The Company's foreign owned subsidiaries file tax
returns in the country where they are domiciled. The Company records current
income taxes based upon its estimated tax liability in the United States and
foreign countries for the year. During 1997, the Company recorded $1,057,000 in
current U.S. income taxes and a reduction of $290,000 in current tax based on
its estimate of taxes payable in Venezuela. In 1996, the Company recorded
$845,000 of current tax expense based on its estimate of taxes payable in
Venezuela.
The Company follows Statement of Financial Accounting Standard No. 109
("SFAS No. 109") which requires the balance sheet approach of income tax
accounting whereby deferred income taxes are provided at the balance sheet date
for the (a) differences existing in the tax basis of assets and liabilities and
their financial statement carrying amounts plus (b) operating loss and tax
credit carryforwards.
At December 31, 1997 and 1996, the Company had U.S. net operating loss
("NOL") carryforwards of approximately $32.0 and $23.0 million, respectively and
investment tax credit ("ITC") carryforwards of approximately $2.4 million which
expire at various times through 2010 and 2000, respectively. The NOL and ITC
carryforwards are subject to annual limitations as a result of the changes in
ownership of the Company in 1989, 1994 and 1996.
For financial accounting purposes, approximately $21.0 million of the
NOL carryforwards was utilized to offset the book versus tax basis differential
in the recording of the assets acquired in the Mergers and the Mesa acquisition
in 1996.
Deferred tax liabilities of approximately $15.5 million exist at
December 31, 1997 and are comprised of temporary differences between federal
income tax and financial accounting practices for the Company's property and
equipment. Deferred tax benefits of $6.1 million exist at December 31, 1997,
attributable to costs that were expended for financial reporting purposes that
will be deducted in future years for income tax purposes. These items are
comprised of workmans compensation and bad debt reserves as well as net
operating loss carryforwards. These items are augmented by the $2.4 million of
investment tax credit carryforwards and $900,000 alternative minimum tax
carryforward. A valuation allowance of $2.4 million has been provided as the
Company believes it is more likely than not that the investment tax credits will
expire before they can be fully utilized by the Company.
-40-
<PAGE> 41
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996, deferred tax liabilities and deferred tax assets
were $5.5 million and $3.7 million, respectively and investment tax
carryforwards were $2.4 million. A net deferred tax benefit of $600,000 was not
recognized in 1996 as a valuation allowance was provided against it, as the
recognition criteria set forth in SFAS No. 109 for a deferred tax asset, had not
been met.
In the Company's Venezuelan subsidiary, no temporary differences
existed as of December 31, 1997 or 1996. In the Company's other foreign
subsidiaries, the Company's net operating loss carryforwards and other timing
differences will not be recoverable since the Company has exited these markets.
The following summarizes the differences between the statutory tax
rates (35%, 34%, 34%, respectively) and the Company's effective tax rate
(amounts in thousands):
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory rate $ 6,597 $ (3,986) $ (4,572)
Increase in taxes resulting from:
Permanent differences 838 -- --
Change in valuation allowance -- 1,169 4,572
Loss of foreign deductions 292 3,662 --
State taxes (net) 857 -- --
Other 47 -- --
---------- ---------- ----------
Provision for income taxes $ 8,631 $ 845 $ --
========== ========== ==========
</TABLE>
(4) LONG-TERM DEBT
Long-Term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
$175,000 senior notes due 2007, general unsecured senior obligations
guaranteed by the company's domestic subsidiaries, bearing interest
at 8-7/8% per annum payable semiannually $174,182 $ --
$50,000 reducing revolving line of credit between the Company and a
syndicate of commercial banks, secured by substantially all of the
Company's assets; bearing interest on a sliding variable rate based on
certain financial ratios of either LIBOR plus 1.75%
to 2.5% or prime plus .75% to 1.5%, due quarterly -- 25,000
Note to McRae Energy Corporation, payable from available cash
flow, as defined, matures September 1998 -- 1,300
Capital leases, secured by transportation and other equipment,
bearing interest at 10% to 14% 3,191 858
Insurance premium financed over 12 months with certain insurance
agencies due in equal monthly installments -- 264
Promissory note payable secured by trust deed to certain land and
building, bearing interest at 9.75%, due in equal monthly
installments through September 1, 1997 -- 37
-------- --------
177,373 27,459
Less current maturities 1,148 613
-------- --------
Long-term debt $176,225 $ 26,846
======== ========
</TABLE>
-41-
<PAGE> 42
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 27, 1997, the Company issued $175.0 million of Senior Notes
(the "Notes") receiving gross proceeds of $174.1 million. The Notes bear
interest at 87/8% per annum payable semiannually and mature on July 1, 2007. The
Notes are general unsecured senior obligations of the Company and are guaranteed
by the Company's domestic subsidiaries. Proceeds from the Notes were used to
fund the cash portion of the GWDC Acquisition to repay the then outstanding
Facility balance of $47.0 million and to fund certain inventory rig purchases.
In connection with the issuance of the Notes, the Company paid approximately
$5.1 million in underwriting and financing costs which will be amortized over
the life of the Notes.
Except as discussed below, the Notes are not redeemable at the option
of the Company prior to July 1, 2002. On or after such date, the Company shall
have the option to redeem the Notes in whole or in part during the twelve months
beginning July 1, 2002 at 104.4375%, beginning July 1, 2003 at 102.9580%,
beginning July 1, 2004 at 101.479% and beginning July 1, 2005 and thereafter at
100.0000% together with any interest accrued and unpaid to the redemption date.
At any time during the first 36 months after the issue date, the
Company may at its option, redeem up to a maximum of 30% of the aggregate
principal amount with the net cash proceeds of one or more equity offerings at a
redemption price equal to 108.875% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date provided that at least $120.0
million aggregate principal amount shall remain outstanding immediately after
the occurrence of any such redemption.
On December 31, 1996, the Company closed a $35 million reducing
revolving line of credit ("the Facility") with a syndicate of commercial banks.
The Facility reduces by $5.0 million each year until the December 31, 1999
maturity date. On April 30, 1997, the Facility was amended and restated to
increase the line of credit to $50 million and to revise certain other terms and
covenants, including the elimination of mandatory $5.0 million reductions in the
line in January 1998 and 1999 and a conversion of the interest rate to a sliding
variable rate based on certain financial ratios of either LIBOR plus 1.75% to
2.5% or prime plus .75% to 1.5%. The Company pays commitment fees of .5% on the
unused portion of the Facility. The Facility is secured by substantially all the
Company's assets and calls for quarterly interest payments on the outstanding
balance. The Facility also contains customary affirmative and negative covenants
with which the Company was in compliance.
On August 28, 1996, the Company entered into a $4 million term loan
with Norex Drilling. The term loan was due on August 29, 1997, and bore interest
at 12%. The loan was paid in full from the proceeds of a private placement of
the Company's common stock on December 31, 1996.
During 1995, the Company issued 190,000 shares, out of 200,000
authorized, of Series A Preferred stock valued at $1,900,000. The Series A
Preferred is redeemable in cash at a redemption price payable from available
cumulative Venezuelan positive net cash flows, as defined, commencing the first
fiscal quarter following the original issuance date. The Company may redeem, at
any time, the Series A Preferred stock upon consent of the holders or upon
written notice commencing five years from the original issuance date. At the
election of the Company, dividends may be declared and payable in common stock
equivalent to the value of the dividends. Each Series A Preferred holder of
record has no voting right on any matters voted on by stockholders of the
Company. During March 1996, 100,000 shares of Series A Preferred, totaling
$1,000,000, were returned to the Company in settlement of asserted claims
against An-Son Drilling Company of Columbia, S.A. At December 31, 1995, the
balance of the Series A Preferred had been adjusted to reflect this settlement.
During 1997 and 1996, the Company voluntarily redeemed 45,900 and 13,500 shares,
respectively of Series A Preferred leaving 30,600 shares outstanding at December
31, 1997.
Annual maturities of the debt outstanding at December 31, 1997 for the
next five years are as follows: 1998 - $1,148,000; 1999 - $976,000; 2000 -
$708,000; 2001 - $359,000; and 2002 - $0.
-42-
<PAGE> 43
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) CAPITAL STOCK AND STOCK OPTION PLANS
During the fourth quarter of 1995, Norex Drilling subscribed to and
paid $4,000,000 for a new Company issue of Series B Preferred Stock (the "Series
B Preferred"), to be issued subsequent to December 31, 1995. This subscription
was in the form of 4,000 shares (10,000 authorized) of Series B 15% Senior
Cumulative Redeemable Preferred, par value $1. This stock had annual dividends
of 15% per annum, payable through the issuance of additional preferred shares
for the first three years. On August 28, 1996, the $4,000,000 subscription plus
accrued dividends was repaid to Norex Drilling by the Company with the proceeds
from a term loan.
In connection with closing the Facility, the Company completed a
private placement of 1,750,000 shares of Grey Wolf common stock for
approximately $4,120,000 to four funds managed by Wexford Management LLC. The
proceeds generated from this private placement were utilized to repay the above
mentioned $4,000,000 term note. Grey Wolf also agreed to issue more shares to
the extent the Wexford funds hold value less than $4,120,000 on the one-year
anniversary date of the issuance. Immediate shelf registration rights were also
granted by Grey Wolf in connection with the share issuance. These shares were
subsequently registered. No additional shares were required to be issued.
On November 3, 1997, the Company closed an offering of 25.0 million
shares of its common stock. The Company sold 12.5 newly issued common shares and
certain shareholders sold 12.5 million additional shares at $8.00 per share. The
Company received proceeds, net of underwriting discount, of approximately $95
million. Other costs incurred to complete the offering were approximately
$722,000 and were recorded as a reduction of additional paid-in capital.
The Company's 1982 Stock Option and Long-Term Incentive Plan for Key
Employees (the "1982 Plan") reserves 2,500,000 shares of the Company's common
stock for issuance upon the exercise of options. At December 31, 1997 options to
purchase 1,895,800 shares of common stock were available for grant under the
1982 Plan. The Company's 1987 Stock Option Plan for Non-Employee Directors (the
"1987 Director Plan") reserves 250,000 shares of common stock for issuance upon
the exercise of options and provides for the automatic grant of options to
purchase shares of common stock to any non-employee who becomes a director of
the Company. Options under the 1987 Director Plan to purchase 212,800 shares of
common stock were available for grant until June 30, 1997 when the plan was
canceled. The Company's 1996 Employee Stock Option Plan (the "1996 Plan")
reserves 7,000,000 shares of the Company's common stock for issuance upon the
exercise of options. At December 31, 1997 options under the 1996 Plan to
purchase 4,285,000 shares of common stock were available for grant until July
29, 2006. The exercise price of stock options under the 1982 Plan, the 1987
Director Plan and the 1996 Plan approximates the fair market value of the stock
at the time the option is granted. The Company has 2,360,000 shares reserved for
other Incentive Stock Option Agreements between the Company and its' executive
officers and directors. One million five hundred thousand of the shares are
reserved for the Company's President, and 500,000 are reserved for the Chairman
of the Board of Directors. The options become exercisable in varying increments
over four- to five-year periods and the majority of the options expire on the
tenth anniversary of the inception of the plans. The remaining shares are
reserved for non-employee directors and are immediately exercisable upon
issuance. Stock option activity for all plans was as follows (number of shares
in thousands):
-43-
<PAGE> 44
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Number Option
of Shares Price Range
--------- -------------
<S> <C> <C>
Outstanding December 31, 1994: 1,988 $0.88 - $2.38
--------- -------------
Granted 253 $0.69 - $0.88
Canceled (267) $0.94 - $2.38
Outstanding December 31, 1995: 1,974 $0.69 - $1.63
Granted 50 $0.69 - $1.00
3,700 $1.13 - $1.75
475 $2.56 - $2.88
Exercised (232) $0.69 - $1.00
(44) $1.25 - $1.75
Canceled (1,282) $0.69 - $1.00
(132) $1.25 - $1.75
Outstanding December 31, 1996: 276 $0.69 - $1.00
3,758 $1.13 - $1.63
475 $2.56 - $2.88
Granted 800 $2.50 - $2.88
630 $3.13 - $4.06
10 $8.25
Exercised (107) $ .69 - $1.00
(670) $1.13 - $1.75
Canceled (13) $2.50 - $2.88
(4) $ .69 - $1.75
(20) $2.50 - $2.88
Outstanding December 31, 1997 156 $ .69 - $1.00
3,084 $1.13 - $1.75
1,255 $2.50 - $2.88
630 $3.13 - $4.06
10 $8.25
</TABLE>
At December 31, 1997, the Company has three stock-based compensation
plans, which are described above. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized. Had compensation cost for the Company's three stock-based
compensation plans been determined on the fair value at the grant dates for
awards under those plans consistent with the method of Statement of Financial
Accounting Standards ("SFAS") No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (amounts
in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported $ 10,218 $ (12,124) $ (13,447)
Pro forma $ 9,531 $ (13,723) $ (13,447)
Earnings (loss) per share - basic and diluted
As reported $ .07 $ (.18) $ (.35)
Pro forma $ .06 $ (.20) $ (.35)
</TABLE>
For purposes of determining compensation costs using the provisions of
SFAS No. 123, the fair value of option grants was determined using the
Black-Scholes option-valuation model. The key input variables used in valuing
the options were: risk-free interest rate based on the five-year Treasury strips
of 7.8%; dividend yield of zero; stock price volatility of 60%; and expected
option lives of five years.
(6) GEOGRAPHIC AREA INFORMATION
The following table sets forth the Company's operations based on the
geographic areas in which it operates (amounts in thousands).
-44-
<PAGE> 45
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Domestic $ 209,423 $ 52,495 $ 44,797
Mexico -- 3,504 12,617
South America 6,500 25,768 37,295
---------- ---------- ----------
$ 215,923 $ 81,767 $ 94,709
========== ========== ==========
Operating income (loss)
Domestic $ 26,822 $ (4,002) $ (4,093)
Mexico -- (3,818) 238
South America (2,489) (5,895) (8,938)
---------- ---------- ----------
$ 24,333 $ (13,715) $ (12,793)
========== ========== ==========
Identifiable assets:
Domestic $ 515,683 $ 103,608 $ 39,069
Mexico 3 1,500 4,008
South America 18,066 12,711 14,706
---------- ---------- ----------
$ 533,752 $ 117,819 $ 57,783
========== ========== ==========
</TABLE>
During the year ended December 31, 1997, one customer accounted for 10%
of the Company's consolidated revenues. During the years ended December 31, 1996
and 1995; no customer accounted for 10% or more of the Company's consolidated
revenues.
(7) RELATED-PARTY TRANSACTIONS
Prior to June 2, 1994, certain of the Company's insurance coverage,
including workers' compensation and excess liability coverage, was arranged by
American Premier as part of a program which American Premier provided to its
subsidiaries. Subsequent to the sale of the Company's common shares by American
Premier, the Company obtained workers' compensation, excess liability coverage
and certain other insurance from other sources. The Company and American Premier
entered into an agreement pursuant to which the Company agreed to reimburse
American Premier for all amounts advanced by American Premier from time to time
on behalf of the Company in connection with American Premier's administration of
the Company's workers' compensation and certain other insurance programs for the
periods between July 20, 1989 and the closing of the common stock transaction.
The amount reimbursable to American Premier at December 31, 1995 relating to
this program was $1,900,000. All amounts outstanding under the program were paid
in full during 1996.
As part of the Merger agreements, the 1995 subscription by Norex
Drilling for 4,000 shares of Series B Preferred Stock and related Series B
Warrants was rescinded. The $4,000,000 subscription plus accrued dividends was
repaid to Norex Drilling by the Company with the proceeds from a term loan that
was made by Norex Drilling to the Company. Interest was at 12% and was payable
on the last business day of each calendar quarter. The note payable was paid in
full December 31, 1996 using the proceeds from a private placement of the
Company's common stock.
On June 10, 1996, Norex Drilling advanced $1,000,000 to the Company
pursuant to a Promissory Note (the "Note") and Commercial Security Agreement.
The Note provided for interest at 12% per annum and matured on the Closing Date
of the Merger transactions. The Company's domestic accounts receivable were
pledged under the security agreement. The Company repaid this loan, plus accrued
interest, in early July 1996 with the proceeds from the sale of the assets
discussed in footnote 2.
During 1996 a consulting fee of $10,000 per month was paid by the
Company under a consulting arrangement with the Company's Chairman of the Board.
-45-
<PAGE> 46
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One of the Company's directors is a partner in a law firm that
performed legal services for the Company. During 1997 and 1996 the Company paid
the firm $41,000 and $200,000, respectively.
As previously disclosed, during 1997 the Company purchased four
drilling rigs from an affiliate of one of the Company's directors.
As previously disclosed, the Company sold its Eastern Division assets
to Union, an affiliate of two of the Company's directors.
From time to time, in the normal course of business the Company
purchases equipment from an affiliate of one of the Company's directors.
(8) LEASE COMMITMENTS
Aggregate minimum lease payments required under noncancellable
operating leases having terms greater than one year are as follows as of
December 31, 1997: 1998 - $345,000; 1999 - $345,000; 2000 - $316,000; 2001 -
$265,000; and 2002 - $44,000.
Rent expense under operating leases for 1997, 1996 and 1995 was
approximately $268,000, $109,000 and $101,000, respectively.
Capital leases for the Company's field trucks and automobiles are
included in long-term debt.
(9) CONTINGENCIES
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 consolidated financial condition or results
of operations.
In connection with the GWDC Acquisition, a $5.0 million escrow fund was
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
judgement against the Company arising out of a case pending against GWDC at the
time of the GWDC Acquisition. The source of the escrow fund was the cash
consideration that would have otherwise been payable by the Company to GWDC's
shareholders. The litigation was styled TEPCO, Inc. ("TEPCO") v. Grey Wolf
Drilling (Cause no. 96-49194) and was filed in the 164th Judicial District Court
of Harris County, Texas. TEPCO alleged 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
alleged 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. Grey Wolf had filed a counterclaim in the lawsuit for
approximately $154,000 for recovery of unpaid invoices, 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. This case was settled in August 1997 for $2.5 million
which was paid from the escrow fund in October 1997, and the remaining $2.5
million less applicable expenses was distributed to the former GWDC
shareholders.
The GWDC 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 GWDC shareholders. A principal condition for such qualification is
that the former shareholders of GWDC will satisfy the continuity of proprietary
interest standard with respect to common stock received in the GWDC Acquisition.
Thus, under present Internal Revenue Service ("IRS") guidelines, dispositions of
common stock by GWDC shareholders during the five years following the GWDC
Acquisition could cause the IRS to assert that the GWDC Acquisition does not
qualify as a tax free reorganization. The Company has no contractual agreements
with GWDC shareholders preventing the disposition of their shares. If the GWDC
Acquisition fails to qualify as a tax free reorganization for failure to meet
the continuity of interest standard or for any reason, the receipt of common
stock will be taxable to the GWDC shareholders at the time of the GWDC
Acquisition, and GWDC will be deemed to have sold all of its assets in
-46-
<PAGE> 47
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a taxable exchange triggering a corporate tax liability to GWDC estimated to be
in excess of $30.0 million. The Company's wholly-owned subsidiary, Grey Wolf
Drilling Company (formerly Drillers, Inc.), as the surviving corporation of the
GWDC Acquisition, would be liable for any such corporate tax which, if imposed,
would have a material adverse effect on the financial condition of the Company.
(10) EMPLOYEE BENEFIT PLAN
The Company has a defined contribution employee benefit plan covering
substantially all of its employees. Prior to 1997, the Company matched
individual employee contributions up to 2% of the employee's compensation.
Effective January 1, 1997, the Company increased the matching provisions to
include matching 100% of the first 3% of individual employee contributions and
50% of the next 3% of individual employee contributions. Other provisions of the
plan were also amended. Employer matching contributions under the plan totaled
$852,000, $104,000 and $144,000 for the years ended December 31, 1997, 1996 and
1995. Employer matching contributions vest over a five year period.
(11) NON-RECURRING CHARGES
During the year ended December 31, 1996, the Company recorded
non-recurring charges of $6.1 million which included $1.1 million in employment
severance costs, $4.6 million in cost to exit the Argentina and Mexico markets
and $400,000 of other non-recurring charges. The employment severance cost
included $602,000 in contractual severance pay to be paid over a two year period
to the Company's former President and Chief Executive Officer and the transfer
to him of certain drilling equipment with a net book value of $535,000 in
settlement of a dispute over stock options to purchase the Company's common
stock. As a result of the Company's desire to redeploy assets to more profitable
markets, the Company withdrew from both the Argentina and Mexico markets. As a
result, during 1996, the Company recorded estimated exit costs of $1.3 million
for Mexico which primarily consisted of the forfeiture of a performance bond and
other costs incurred to close the office and exit the market and exit costs of
$800,000 for Argentina which primarily consisted of costs incurred during the
period necessary to close the office and exit the market. In addition, the
Company sold three of the six drilling rigs and certain other assets located in
Argentina for $1.5 million. As a result, during 1996 the Company recorded a
write down of rig equipment and other assets of $2.5 million. The remaining
Argentina rigs were mobilized to the United States, where they were refurbished
and returned to work. Mobilization costs were approximately $900,000 and were
expensed as they were incurred during 1997.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for years ended December 31, 1997,
1996 and 1995 are set forth below (amounts in thousands, except per share
amounts).
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
March June September December
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 35,975 $ 40,071 $ 63,750 $ 76,127
Gross profit (1) 7,183 6,731 18,463 20,994
Operating income 3,322 2,043 9,132 9,836
Income continuing operations 2,976 1,734 5,952 8,187
Net income 2,314 1,040 2,722 4,142
Net income per common share - basic .02 .01 .02 .03
and diluted
</TABLE>
-47-
<PAGE> 48
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
March June September December
1996 1996 1996 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 20,102 $ 19,183 $ 22,031 $ 20,451
Gross profit (loss) (1) 1,166 (199) 3,144 (2,732)
Operating income (loss) (1,253) (2,398) 1,108 (11,172)
Income (loss) continuing operations (1,491) 524 808 (10,718)
Net income (loss) (1,491) 524 808 (11,563)
Net income (loss) per common share - basic (.04) .01 .01 (.09)
and diluted
<CAPTION>
Quarter Ended
----------------------------------------------------
March June September December
1995 1995 1995 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 22,344 $ 23,151 $ 27,106 $ 22,108
Gross profit (loss) (1) (180) 1,075 448 (459)
Operating loss (1,946) (814) (1,565) (8,468)
Loss-continuing operations (2,219) (1,122) (1,234) (8,100)
Discontinued operations (11) (543) (116) (102)
Net loss (2,230) (1,665) (1,350) (8,202)
Net loss per common share - basic (.06) (.04) (.03) (.22)
and diluted
</TABLE>
(1) Gross profit (loss) is computed as consolidated revenues less
operating expenses (which excludes expenses for depreciation and
amortization, general and administrative and non-recurring
charges).
-48-
<PAGE> 49
SCHEDULE II
GREY WOLF, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions Collections Balance at
Beginning Charged to and End
of Period Allowance Write-Offs of Period
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995:
Allowance for doubtful accounts receivable $ 2,066 $ 291 $ (406) $ 1,951
========== ========== =========== ==========
Year Ended December 31, 1996:
Allowance for doubtful accounts receivable $ 1,951 $ 302 $ (920) $ 1,333
========== ========== =========== ==========
Year Ended December 31, 1997:
Allowance for doubtful accounts receivable $ 1,333 $ (200) $ (80) $ 1,053
========== ========== =========== ==========
</TABLE>
-49-
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Deloitte & Touche LLP was previously the principal accountants for Grey
Wolf, Inc. On October 2, 1996, that firm's appointment as principal accountants
was terminated and KPMG Peat Marwick LLP was engaged as principal accountants.
The decision to change accountants was approved by the Board of Directors upon
recommendation of the Audit Committee of the Board of Directors.
In connection with the audits of the two fiscal years ended December 31,
1995, and the subsequent interim period through June 30, 1996, there were no
disagreements with Deloitte & Touche LLP on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of Deloitte & Touche LLP on the consolidated financial
statements of Grey Wolf, Inc. and subsidiaries as of and for the years ended
December 31, 1995 and 1994, did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference to such information
appearing under the captions "Election of Directors" and "Executive Officers" in
the Company's definitive proxy statement for the Company's 1998 Annual Meeting
of shareholders and is to be filed with the Securities and Exchange Commission
("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days
of the end of the Company's fiscal year on December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item as to the management of the Company
is hereby incorporated by reference to such information appearing under the
caption "Executive Compensation" in the Company's definitive proxy statement for
the Company's 1998 Annual Meeting of shareholders and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference to such
information appearing under the caption "Nominees for Director" and "Certain
Shareholders" in the Company's definitive proxy statement for the Company's 1998
Annual Meeting of shareholders and is to be filed with the Commission pursuant
to the Securities Exchange Act of 1934 within 120 days of the end of the
Company's fiscal year on December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item as to certain business relationships
and transactions with management and other related parties of the Company is
hereby incorporated by reference to such information appearing under the caption
"Certain Transactions" in the Company's definitive proxy statement for the
Company's 1998 Annual Meeting of shareholders and is to be filed with the
Commission pursuant to the Securities Exchange Act of 1934 within 120 days of
the end of the Company's fiscal year on December 31, 1997.
-50-
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. AND 2. FINANCIAL STATEMENTS AND SCHEDULE.
The consolidated financial statements and supplemental schedule of Grey
Wolf, Inc. and Subsidiaries are included in Part II, Item 8 and are
listed in the Index to Consolidated Financial Statements and Financial
Statement Schedule therein.
3. EXHIBITS
Exhibit No. Documents
----------- ---------
2.1 -- Agreement and Plan of Merger dated May 7,
1996, among DI Industries, Inc., DI Merger
Sub, Inc., Roy T. Oliver, Inc. and Land Rig
Acquisition Corp. (incorporated herein by
reference to Exhibit 2.1 to Registration
Statement No. 333- 6077).
2.1.1 -- 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).
2.1.2 -- Second Amendment 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).
2.2 -- 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).
2.2.1 -- 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).
2.2.2 -- Second Amendment to Agreement an 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).
2.3 -- Asset Purchase Agreement dated October 3,
1996, by and between the DI Industries, Inc.
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 by reference to
Exhibit 2.1 to Registration no. 333-14783).
2.4.1 -- Asset Purchase Agreement dated November 12,
1996, between Diamond M Onshore, Inc. and
Drillers, Inc. (the Asset Purchase
Agreement") (incorporated herein by
reference to Exhibit 2.1 to Form 8-K dated
December 30, 1996).
2.4.2 -- 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 8-K dated December 30, 1996).
2.5 -- Asset Purchase Agreement dated December 31,
1996, between Flournoy Drilling Company and
Drillers, Inc. (incorporated herein by
reference to Exhibit 2.1 to Form 8-K filed
January 31, 1997).
2.6 -- 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
-51-
<PAGE> 52
Compensation Plan (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed
March 10, 1997).
2.7 -- Voting and Support Agreement dated March 7,
1997, of Sheldon B. Lubar (incorporated
herein by reference to Exhibit 10.2 to Form
8-K dated March 10, 1997).
2.8 -- Voting and Support Agreement dated March 7,
1997, of Felicity Ventures, Ltd.
(incorporated herein by reference to Exhibit
10.3 to Form 8-K dated March 10, 1997).
2.9 -- Voting and Support Agreement dated March 7,
1997, of James K.B. Nelson (incorporated
herein by reference to Exhibit 10.4 to Form
8-K dated March 10, 1997).
2.10 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and James K.B. Nelson (incorporated
herein by reference to Exhibit 10.5 to Form
8-K dated March 10, 1997).
2.11 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Billy G. Emanis (incorporated
herein by reference to Exhibit 10.6 to Form
8-K dated March 10, 1997).
2.12 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Bill Brannon (incorporated
herein by reference to Exhibit 10.7 to Form
8-K dated March 10, 1997).
2.13 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Tom L. Ferguson (incorporated
herein by reference to Exhibit 10.8 to Form
8-K dated March 10, 1997).
2.14 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and John D. Peterson (incorporated
herein by reference to Exhibit 10.9 to Form
8-K dated March 10, 1997).
2.15 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Janet V. Campbell (incorporated
herein by reference to Exhibit 10.10 to Form
8-K dated March 10, 1997).
2.16 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Sheldon B. Lubar (incorporated
herein by reference to Exhibit 10.11 to Form
8-K dated March 10, 1997).
2.17 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Robert P. Probst (incorporated
herein by reference to Exhibit 10.12 to Form
8-K dated March 10, 1997).
2.18 -- Indemnification Agreement dated as of March
6, 1997, by and between Grey Wolf Drilling
Company and Uriel E. Dutton (incorporated
herein by reference to Exhibit 10.13 to Form
8-K dated March 10, 1997).
3.1 -- Articles of Incorporation of Grey Wolf,
Inc., as amended.
3.2 -- By-Laws of Grey Wolf, Inc., as amended.
3.3 -- Statement of Resolutions Establishing the
Series A Convertible Redeemable Preferred
Stock.
10.1 -- Shareholders' Agreement dated May 7, 1996,
among Somerset Drilling Associates, L.L.C.,
Roy T. Oliver, Jr., U.S. Rig and Equipment,
Inc., Mike Mullen Energy Equipment Resource,
Inc., GCT Investments, Inc., Mike L. Mullen,
Norex Drilling Ltd., and Pronor Holdings,
Ltd. (incorporated herein by reference to
Exhibit 10.9 to Registration Statement No.
333-6077).
10.1.1 -- Amendment to Shareholders' Agreement dated
May 7, 1996, among Somerset Drilling
Associates, L.L.C., Somerset Capital
Partners, Roy T. Oliver, Jr., U.S. Rig and
Equipment, Inc., Mike Mullen Energy
Equipment Resource, Inc., GCT Investments,
Inc., Mike L. Mullen, Norex Drilling Ltd.,
and Pronor Holdings, Ltd. (incorporated
herein by reference to Exhibit 10.9.1 to
Registration Statement No. 333-6077).
10.2 -- Form of Shadow Warrant to be issued to the
shareholders of Somerset Investment
Corporation. (incorporated herein by
reference to Exhibit 10.10 to Registration
Statement No. 333-6077).
-52-
<PAGE> 53
10.3 -- Form of Shadow Warrant to be issued to the
shareholders of R.T. Oliver, Inc. And Land
Rig Acquisition Corporation (incorporated
herein by reference to Exhibit 10.11 to
Registration Statement No. 333-6077).
10.4 -- Registration Rights Agreement dated May 7,
1996, among Somerset Drilling Associates,
L.L.C., Roy T. Oliver, Jr., U.S. Rig and
Equipment, Inc., Mike Mullen Energy
Equipment Resource, Inc., GCT Investments,
Inc., Norex Drilling Ltd., and Pronor
Holdings, Ltd. (incorporated herein by
reference to Exhibit 10.12 to Registration
Statement No. 333-6077)
10.4.1 -- Amendment to Registration Rights Agreement
dated May 7, 1996, among Somerset Drilling
Associates, L.L.C., Somerset Capital
Partners, Roy T. Oliver, Jr., U.S. Rig and
Equipment, Inc., Mike Mullen Energy
Equipment Resource, Inc., GCT Investments,
Inc., Norex Drilling Ltd., and Pronor
Holdings, Ltd. (incorporated herein by
reference to Exhibit 10.12.1 to Registration
Statement No. 333-6077).
10.4.2 -- Second Amendment to Registration Rights
Agreement dated July 26, 1996, among
Somerset Drilling Associates, L.L.C.,
Somerset Capital partners, Roy T. Oliver,
Jr., U.S. Rig and Equipment, Inc., Mike
Mullen Energy Equipment Resource, Inc., GCT
Investments, Inc., Norex Drilling Ltd., and
Pronor Holdings, Ltd. (incorporated herein
by reference to Exhibit 10.4.2 to Amendment
No. 1 to Registration Statement No.
333-6077).
10.5 -- Investment Monitoring Agreement dated May 7,
1996, among Grey Wolf, Inc., Somerset
Capital Partners and Somerset Drilling
Associates, L.L.C. (incorporated herein by
reference to Exhibit 10.13 to Registration
Statement No. 333-6077).
10.6 -- Form of Non-Competition Agreement to be
executed among Grey Wolf, Inc., Roy T.
Oliver, Jr., U.S. Rig and Equipment, Inc.,
Mike L. Mullen and mike Mullen Energy
Equipment Resource, Inc. (incorporated
herein by reference to Exhibit 10.14 to
Registration Statement No. 333-6077).
10.7 -- Employment Agreement dated September 3,
1996, by and between the Company and Thomas
P. Richards (incorporated herein by
reference to Exhibit 10.1 to Registration
Statement No. 333-14783).
10.8 -- Form of Non-Qualified Stock Option Agreement
dated September 3, 1996, by and between the
Company and Thomas P. Richards (incorporated
herein by reference to Exhibit 10.2 to
Registration Statement No. 333-14783).
10.11 -- Employment Agreement dated September 17,
1996, by and between the Company and Forrest
M. Conley, Jr. (incorporated herein by
reference to Exhibit 10.11 to Post Effective
Amendment No. 1 to Registration Statement
No. 333-14783).
10.12 -- Form of Incentive Stock Option Agreement
dated September 17, 1996, by and between the
Company and Forrest M. Conley, Jr.
(incorporated herein by reference to Exhibit
10.12 to Post Effective Amendment No. 1 to
Registration Statement No. 333-14783).
10.13 -- Employment Agreement dated September 3,
1996, by and between the Company and Ronnie
E. McBride (incorporated herein by reference
to Exhibit 10.13 to Post Effective Amendment
No. 1 to Registration Statement No.
333-14783).
10.14 -- Form of Incentive Stock Option Agreement
dated September 3, 1996, by and between the
Company and Ronnie E. McBride (incorporated
herein by reference to Exhibit 10.14 to Post
Effective Amendment No. 1 to Registration
Statement No. 333-14783).
10.15 -- Form of Non-Qualified Stock Option Agreement
dated September 3, 1996, by and between the
Company and Ronnie E. McBride. (incorporated
herein by reference to Exhibit 10.15 to Post
Effective Amendment No. 1 to Registration
Statement No. 333-14783).
10.16 -- Employment Agreement dated October 1, 1996,
by and between the Company and Terrell L.
Sadler. (incorporated herein by reference to
Exhibit 10.16 to Post Effective Amendment
No. 1 to Registration Statement No.
333-14783).
10.17 -- Form of Non-Qualified Stock Option Agreement
dated October 1, 1996, by and between the
Company and Terrell L. Sadler (incorporated
herein by reference to Exhibit 10.17 to Post
Effective Amendment No. 1 to Registration
Statement No. 333-14783).
-53-
<PAGE> 54
10.18 -- Form of Incentive Stock Option Agreement
dated October 1, 1996, by and between the
Company and Terrell L. Sadler (incorporated
herein by reference to Exhibit 10.17 to Post
Effective Amendment No. 1 to Registration
Statement No. 333- 14783).
10.19 -- Grey Wolf, Inc. 1996 Employee Stock Option
Plan (incorporated herein by reference to
Grey Wolf, Inc. 1996 Annual Meeting of
Shareholders definitive proxy materials).
10.20 -- Stock Purchase Agreement dated as of
December 28, 1996, between Grey Wolf, and
Wexford Special Situations 1996, L.P.,
Wexford-Euris Special Situations 1996, L.P.,
Wexford Special Situations 1996
Institutional, L.P. and Wexford Special
Situations 1996 Limited (incorporated herein
by reference to Exhibit 10.1 to Form 8-K
dated December 30, 1996).
10.21 -- 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 herein by reference to Exhibit
10.1 to Registration Statement No.
333-26519).
10.22 -- Amendment to the Credit Facility dated June
6, 1997 (incorporated herein by reference to
Exhibit 10.2 to Amendment No. 1 to
Registration Statement No. 333- 26519.
*10.23 -- Amendment to Credit Facility dated June 23,
1997.
10.24 -- 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).
10.25 -- Form of Shareholder Agreement entered into
January 31, 1997, by Grey Wolf, 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
Amendment No. 2 to Registration Statement
No. 333-20423).
10.27 -- Drillers Inc. 1982 Stock Option and
Long-Term Incentive Plan for Key Employees
(incorporated by reference to Drillers Inc.
1982 Annual Meeting definitive proxy
solicitation materials.)
10.28 -- Drillers Inc. Stock Option Plan for
Non-Employee Directors (incorporated by
reference to Drillers Inc. 1982 Annual
Meeting definitive proxy solicitation
materials.)
10.29 -- Grey Wolf, Inc. 1987 Stock Option Plan for
Non-Employee Directors. (incorporated by
reference to Grey Wolf, Inc. 1987 Annual
Meeting definitive proxy solicitation
materials.)
10.30 -- Form of Non-Qualified Stock Option Agreement
dated December 16, 1996, by and between the
Company and Forrest M. Conley, Jr.
(incorporated by reference to DI Industries,
Inc. Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.31 -- Employment Agreement dated March 17, 1997,
by and between the Company and Gary D. Lee.
(incorporated by reference to DI Industries,
Inc. Annual Report of Form 10-K for the year
ended December 31, 1996.)
10.32 -- Form of Incentive Stock Option Agreement
dated March 17, 1997, by and between the
Company and Gary D. Lee (incorporated by
reference to DI Industries, inc. Annual
Report of Form 10-K for the year ended
December 31, 1996.)
10.33 -- Stock Purchase Agreement by and among Grey
Wolf Drilling Company, Grey Wolf, Inc.,
Murco Drilling Corporation, et al., dated
December 30, 1997. (incorporated by
reference to Exhibit 10.1 to Form 8-K dated
February 5, 1998)
*10.34 -- Employment Agreement dated Jan. 1, 1998, by
and between the Company and David W. Wehlmann.
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<PAGE> 55
*10.35 -- Form of Incentive Stock Option Agreement
dated February 10, 1998, by and between the
Company and David W. Wehlmann.
16.1 -- Change in Certifying Accountant.
(incorporated by reference to Exhibit 16.1
to 8-K filed on October 2, 1996)
*21.1 -- List of Subsidiaries of Grey Wolf, Inc.
*23.1 -- Consent of KPMG Peat Marwick LLP
*23.2 -- Consent of Deloitte & Touche LLP
*27. -- Financial Data Schedule
- ----------
* Filed herewith
(b) Reports on Form 8-K
A current report on form 8-K was filed with the Securities and Exchange
Commission on December 16, 1997 announcing the signing of a letter of intent
with Murco Drilling Corporation ("Murco") and its share holders to acquire all
the outstanding shares of common stock in Murco (Item 5). A current report on
form 8-K (Item 5) was filed on January 30, 1998, the Company's acquisition of
all the outstanding stock of Murco.
-55-
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 24th day of
March, 1998.
Grey Wolf, Inc.
By: /s/ Thomas P. Richards
-------------------------------------
Thomas P. Richards, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures and Capacities Date
- ------------------------- --------------
<S> <C>
By: /s/ Thomas P. Richards March 24, 1998
----------------------------------------------------------------------------
Thomas P. Richards, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David W. Wehlmann. March 24, 1998
----------------------------------------------------------------------------
David W. Wehlmann, Senior Vice President and Chief Financial Officer
By: /s/ Merrie S. Costley March 24, 1998
----------------------------------------------------------------------------
Merrie S. Costley, Vice President and Controller
By: /s/ Ivar Siem March 24, 1998
----------------------------------------------------------------------------
Ivar Siem, Chairman of the Board and Director
By: /s/ William R. Ziegler March 24, 1998
----------------------------------------------------------------------------
William R. Ziegler, Director
By: /s/ William T. Donovan March 24, 1998
----------------------------------------------------------------------------
William T. Donovan, Director
By: /s/ Peter M. Holt March 24, 1998
----------------------------------------------------------------------------
Peter M. Holt, Director
By: /s/ K. B. Nelson March 24, 1998
----------------------------------------------------------------------------
K. B. Nelson, Director
By: /s/ Roy T. Oliver March 24, 1998
----------------------------------------------------------------------------
Roy T. Oliver, Director
</TABLE>
-56-
<PAGE> 1
EXHIBIT 10.23
-1-
AMENDMENT NO. 3 AND WAIVER
This AMENDMENT NO. 3 AND WAIVER ("Amendment") is made as of June 23,
1997 by and among DI INDUSTRIES, INC., a Texas corporation (the "Company"),
DRILLERS, INC., a Texas corporation ("DI" and, with the Company the
"Borrowers"), each of the Subsidiary Guarantors party thereto (the "Subsidiary
Guarantors"), the lending institutions from time to time party thereto (each a
"Lender" and collectively the "Lenders") and Bankers Trust Company, as Agent and
Administrative Agent, and ING (US) Capital Corporation, as Co-Agent and
Documentation Agent. This Amendment is made with reference to that certain
Amended and Restated Senior Secured Revolving Credit Agreement dated as of
December 31, 1996 by and among the Borrowers, the Subsidiary Guarantor, the
Agent and the Co-Agent and Nordlandsbanken ASA, as a Lender (as amended to
date, the "Credit Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit
Agreement.
Whereas, the Borrowers, Subsidiary Guarantor, Agent, Co-Agent and the
Lender entered into the Senior Secured Reducing Revolving Credit Agreement on
December 31, 1996 (the "Initial Agreement"); and
Whereas, the Borrowers, Subsidiary Guarantor, Agent, Co-Agent and the
Lender have amended and restated the Initial Agreement by entering into an
Amended and Restated Senior Secured Revolving Credit Agreement on April 30,
1997 (the "Amended and Restated Agreement"); and
Whereas, the Borrowers, Subsidiary Guarantor, Agent and Co-Agent have
further amended the Amended and Restated Agreement by entering into Amendment
No. 2 and Waiver on June 6, 1997; and
Whereas, the Borrowers, Subsidiary Guarantor, Agent, Co-Agent and the
Lender desire to further amend and waive certain terms of the Credit Agreement
as set forth below in order to accommodate the transactions described in the
Company's Registration
<PAGE> 2
-2-
Statement under the Securities Act of 1933 on Form S-3, as amended, as filed
with the Securities and Exchange Commission on June 6, 1997.
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS AND WAIVERS
1.1. Section 8 of the Credit Agreement is hereby amended by adding
a new Section 8.04(j) as follows:
"and (j) Indebtedness evidenced by the Company's Senior Notes due 2007
in an aggregate principal amount up to $175,000,000."
SECTION 2. RATIFICATION OF AGREEMENT
2.1. To induce the Required Lenders to enter into this Amendment,
each Borrower represents and warrants that after giving effect to this
Amendment no violation of the terms of the Credit Agreement exist and all
representations and warranties contained in the Credit Agreement are true,
correct and complete in all material respects on and as of the date hereof
except to the extent such representations and warranties specifically relate to
an earlier date in which case they were true, correct and complete in all
material respects on and as of such earlier date.
2.2. Except as expressly set forth in this Amendment, the terms,
provisions and conditions of the Credit Agreement and other Credit Documents
are unchanged, and said agreements, as amended, shall remain in full force and
effect and are hereby confirmed and ratified.
<PAGE> 3
-3-
SECTION 3. COUNTERPARTS; EFFECTIVENESS
This Amendment may be executed in any number of counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument. Signature pages may be detached from counterpart documents and
reassembled to form duplicate executed originals. This Amendment shall become
effective as of the date hereof upon the execution of the counterparts hereof by
each of the Borrowers, the Subsidiary Guarantor and the Required Lenders.
SECTION 4. GOVERNING LAW
THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO PRINCIPLES OF CONFLICT OF LAWS.
SECTION 5. ACKNOWLEDGMENT AND CONSENT BY SUBSIDIARY GUARANTOR
The Subsidiary Guarantor hereby acknowledges that it has read this
Amendment and consents to the terms hereof and further confirms and agrees that,
notwithstanding the effectiveness of this Amendment, its obligations under the
Guarantee shall not be impaired or affected and the Guarantee is, and shall
continue to be, in full force and effect and is hereby confirmed and ratified in
all respects.
<PAGE> 4
-4-
Witness the execution hereof by the respective duly authorized officers
of the undersigned as of the date first above written.
BANKERS TRUST COMPANY, DI INDUSTRIES, INC.,
Individually and as Agent as Borrower
By: /s/ Calli S. Nayes By: /s/ Donald J. Guedry, Jr.
------------------------------ ------------------------------
Title: Managing Director Title: Treasurer
--------------------------- ---------------------------
ING (US) CAPITAL CORPORATION, DRILLERS, INC.,
Individually and as Co-Agent as Borrower
By: /s/ Frank Ferrera By: /s/ Donald J. Guedry, Jr.
------------------------------ ------------------------------
Title: Senior Associate Title: Treasurer
--------------------------- ---------------------------
DI INTERNATIONAL, INC.,
as Guarantor
By: /s/ Donald J. Guedry, Jr.
------------------------------
Title: Treasurer
---------------------------
<PAGE> 1
EXHIBIT 10.34
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of January 1, 1998 between GREY WOLF,
INC., Inc. a Texas corporation (the "Company"), and David Wehlmann (the
"Executive").
The Company desires to employ the Executive and the Executive desires
to accept employment with the Company, on the terms and conditions of this
Agreement.
Accordingly, the parties agree as follows:
1. EMPLOYMENT, DUTIES AND ACCEPTANCE.
1.1 Employment by the Company; Duties. The Company hereby
agrees to employ the Executive for a term commencing
on January 1, 1998, and expiring at the end of the
day on January 1, 1999 (such date, or later date to
which this Agreement is extended in accordance with
the terms hereof, the "Termination Date"), unless
earlier terminated as provided in Article 4 or unless
extended as provided herein (the "Term"). The Term
shall automatically be extended on the Termination
Date and each anniversary thereof for successive
one-year periods unless either party notifies the
other on or before the date 90 days prior to the
Termination Date that he or it desires to terminate
the Agreement. During the Term, the Executive shall
initially serve in the capacity of Senior Vice
President/Chief Financial Officer of the Company and
shall also serve in those offices and directorships
of subsidiary corporations or entities of the Company
to which he may from time to time be appointed or
elected. During the Term, the Executive shall devote
all reasonable efforts and all of his business time
and services to the Company, subject to the direction
of the Board. The Executive shall not engage in any
other business activities except for passive
investments in corporations or partnerships not
engaged in the oil or gas drilling or well servicing
business.
1.2 Acceptance of Employment by the Executive. The
Executive hereby accepts such employment and shall
render the services and perform the duties described
above.
2. COMPENSATION AND OTHER BENEFITS.
2.1 Annual Salary. The Company shall pay to the Executive
an annual salary at a rate of not less than
$165,000.00 per year (the "Annual Salary"), subject
to increase at the sole discretion of the Board of
Directors of the Company (the "Board"). The Annual
Salary shall
<PAGE> 2
be payable in accordance with the payroll policies of
the Company as from time to time in effect, but in no
event less frequently than once each month, less such
deductions as shall be required to be withheld by
applicable law and regulations.
2.2 Bonuses. The Executive may receive, at the sole
discretion of the Board, an incentive bonus with
respect to the fiscal years ending during the term
hereof (the "Incentive Bonus"), provided that an
Incentive Bonus, payable in respect of a fiscal year,
shall not exceed one-half of the Annual Salary for
such fiscal year.
2.3 Grant of Option. The Company agrees to grant the
Executive, pursuant to the terms of its existing
stock option plan or new or amended stock option
plans, options to acquire 65,000 shares of the
Company's common stock, at an exercise price equal to
the fair market value of such stock on the date of
grant. Any such stock options shall vest in five
equal increments over a four-year period commencing
on the date of grant, and shall expire ten years
after the date of grant. One fifth of the options
shall vest on February 10, 1999 and on each
subsequent anniversary of the date of grant until the
fifth anniversary at which time the options shall be
fully vested.
2.4 Vacation Policy. The Executive shall be entitled to a
paid vacation of three weeks during each year of the
Term.
2.5 Participation in Employee Benefit Plans. The Company
agrees to permit the Executive during the Term, if
and to the extent eligible, to participate in any
group life, hospitalization or disability insurance
plan, health program, pension plan, similar benefit
plan or other so-called "fringe benefits" of the
Company (collectively, "Benefits") which may be
available to other senior executives of the Company
on terms no less favorable to the Executive than the
terms offered to such other executives. The Company
agrees to use its best efforts to obtain immediate
coverage for the Executive upon the commencement of
the Term under its existing or newly adopted medical
expense and hospitalization plan for employees
without premium surcharge and without exclusions for
disclosed preexisting conditions. The Executive shall
cooperate with the Company in applying for such
coverage, including submitting to a physical exam and
providing all relevant health and personal data.
2.6 General Business Expenses. The Company shall pay or
reimburse the Executive for all expenses reasonably
and necessarily incurred by the Executive during the
Term in the performance of the Executive's
-2-
<PAGE> 3
services under this Agreement. Such payment shall be
made upon presentation of such documentation as the
Company customarily requires of its senior executive
employees prior to making such payments or
reimbursements.
2.7 Company Car, Cellular Telephone. The Company shall
provide an automobile, of the Executive's choice, to
be used by the Executive during the Term hereof or
until his employment hereunder is terminated. The
purchase price of the automobile shall not exceed
$35,000 unless increased by the Board. If requested
by the Executive, the Company will replace the
automobile with a new automobile no less frequently
than every three years during the Term hereof. The
Company shall, at its expense, pay any and all
expenses associated with the operation of such
company car, including but not limited to, collision
and liability insurance, maintenance and repair
costs, replacement parts, tires, fuel and oil. The
Executive may use the automobile for personal
purposes and, to the extent of the value of such
personal usage, the value thereof shall be deemed to
be additional compensation.
The Company shall also furnish the Executive with a cellular telephone
of his choice and the Company shall pay all charges in connection with the use
thereof, other than charges for calls not related to Executive's duties
hereunder.
3. NON-COMPETITION.
3.1 Covenants Against Competition. The Executive
acknowledges that (i) the Company is currently
engaged in the business of owning, managing and
operating onshore drilling and workover rigs for its
own account or for others which are contracted or
hired for the purpose of drilling and/or workover of
oil or natural gas wells and from time to time
acquiring working or carried interests in oil and gas
wells in connection with, or incident to, such
drilling or workover activities (the "Company
Business"); (ii) his work for the Company will give
him access to trade secrets of and confidential
information concerning the Company; and (iii) the
agreements and covenants contained in this Agreement
are essential to protect the business and goodwill of
the Company. Accordingly, the Executive covenants and
agrees as follows:
3.1.1 Non-Compete. The Executive shall not during the
Restricted Period (as defined below) in the United
States or any other place where the Company and its
affiliates conduct operations related to the Company
Business, directly or indirectly (except in the
Executive's capacity as an officer of the Company),
(i) engage or participate in the Company Business;
(ii) enter the employ of, or render any other
services to, any person engaged in the Company
Business except as
-3-
<PAGE> 4
permitted hereunder; or (iii) become interested in
any such person in any capacity, including, without
limitation, as an individual, partner, shareholder,
lender, officer, director, principal, agent or
trustee except as permitted hereunder; provided,
however, that the Executive may own, directly or
indirectly, solely as an investment, securities of
any person traded on any national securities exchange
or listed on the National Association of Securities
Dealers Automated Quotation System if the Executive
is not a controlling person of, or a member of a
group which controls, such person and the Executive
does not, directly or indirectly, own 1% or more of
any class of equity securities, or securities
convertible into or exercisable or exchangeable for
1% or more of any class of equity securities, of such
person. As used herein, the "Restricted Period" shall
mean a period commencing on the date hereof and
terminating upon the first to occur of (a) the date
on which the Company terminates or is deemed to
terminate the Executive's employment without Cause,
(b) the date the Executive terminates or is deemed to
terminate his employment pursuant to Section 4.6
hereof, or (c) the date of termination of this
Agreement; provided, however, that if the Company
shall have terminated the Executive's employment for
Cause and such Cause in fact exists or if the
Executive shall have terminated his employment with
the Company in breach of the terms of this Agreement,
the Restricted Period shall end twelve months
following the termination of the Executive's
employment hereunder.
3.1.2 Confidential Information; Personal
Relationships. The Executive acknowledges that the
Company has a legitimate and continuing proprietary
interest in the protection of its confidential
information and that it has invested substantial sums
and will continue to invest substantial sums to
develop, maintain and protect confidential
information. The Executive agrees that, during and
after the Restricted Period, the Executive shall keep
secret and retain in strictest confidence, and shall
not use for the benefit of himself or others all
confidential matters directly relating to the Company
Business including, without limitation, financial
information, trade secrets, customer lists, details
of client or consultant contracts, pricing policies,
operational methods, marketing plans or strategies,
product development techniques or plans, business
acquisition plans, new personnel acquisition plans,
technical processes, designs and design projects,
inventions and research projects of the Company, its
affiliates, or any other entity which may hereafter
become an affiliate thereof, learned by the Executive
heretofore or hereafter unless otherwise in the
public domain other than as a result of disclosure by
the Executive or unless independently obtained from
third parties not under disclosure restrictions in
favor of the Company.
-4-
<PAGE> 5
3.1.3 Property of the Company. All memoranda, notes,
lists, records, engineering drawings, technical
specifications and related documents and other
documents or papers (and all copies thereof) relating
to the Company, including such items stored in
computer memories, microfiche or by any other means,
made or compiled by or on behalf of the Executive
after the date hereof, or made available to the
Executive after the date hereof relating to the
Company, its affiliates or any entity which may
hereafter become an affiliate thereof, shall be the
property of the Company, and shall be delivered to
the Company promptly upon the termination of the
Executive's employment with the Company or at any
other time upon request; provided, however, that
Executive's address books, diaries, chronological
correspondence files and rolodex files shall be
deemed to be property of the Executive.
3.1.4 Original Material. The Executive agrees that
any inventions, discoveries, improvements, ideas,
concepts or original works of authorship relating
directly to the Company Business, including without
limitation computer systems, programs and
manufacturing techniques, whether or not protectable
by patent or copyright, that have been originated,
developed or reduced to practice by the Executive
alone or jointly with others during the Executive's
employment with the Company shall be the property of
and belong exclusively to the Company. The Executive
shall promptly and fully disclose to the Company the
origination or development by the Executive of any
such material and shall provide the Company with any
information that it may reasonably request about such
material.
3.1.5 Employees of the Company and its Affiliates.
During the Restricted Period, the Executive shall
not, directly or indirectly, hire or solicit, or
cause others to hire or solicit, for employment by
any person other than the Company or any affiliate or
successor thereof, any employee of the Company and
its affiliates or successors or encourage any such
employee to leave his employment.
3.1.6 Customers of the Company. During the Restricted
Period, the Executive shall not, except by reason of
and in his capacity as an officer of the Company,
directly or indirectly, request or advise a customer
of the Company or its subsidiaries to curtail or
cancel such customer's business relationship with the
Company.
-5-
<PAGE> 6
3.2 Rights and Remedies Upon Breach. If the Executive
breaches, or threatens to commit a breach of, any of
the provisions contained in Section 3.1 of this
Agreement (the "Restrictive Covenants"), the Company
shall have the following rights and remedies, each of
which rights and remedies shall be independent of the
others and severally enforceable, and each of which
is in addition to, and not in lieu of, any other
rights and remedies available to the Company under
law or in equity:
3.2.1 Specific Performance. The right and remedy to
have the Restrictive Covenants specifically enforced
by any court of competent jurisdiction, it being
agreed that any breach or threatened breach of the
Restrictive Covenants would cause irreparable injury
to the Company and that money damages would not
provide an adequate remedy to the Company.
3.2.2 Accounting. The right and remedy to require the
Executive to account for and pay over to the Company
all compensation, profits, monies, accruals,
increments or other benefits derived or received by
the Executive as the result of any action
constituting a breach of the Restrictive Covenants.
3.3 Severability of Covenants. The Executive acknowledges
and agrees that the Restrictive Covenants are
reasonable and valid in duration and geographical
scope and in all other respects. If any court
determines that any of the Restrictive Covenants, or
any part thereof, is invalid or unenforceable, the
remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect
without regard to the invalid portions.
3.4 Blue-Pencilling. If any court determines that any of
the Restrictive Covenants, or any part thereof, is
unenforceable because of the duration or geographical
scope of such provision, such court shall have the
power to reduce the duration or scope of such
provision, as the case may be, and, in its reduced
form, such provision shall then be enforceable.
3.5 Enforceability in Jurisdictions. The Company and the
Executive intend to and hereby confer jurisdiction to
enforce the Restrictive Covenants upon the courts of
any jurisdiction within the geographical scope of
such Restrictive Covenants. If the courts of any one
or more of such jurisdictions hold the Restrictive
Covenants unenforceable by reason of the breadth of
such scope or otherwise, it is the intention of the
Company that such determination not bar or in any way
affect the right
-6-
<PAGE> 7
of the Company to the relief provided above in the
courts of any other jurisdiction within the
geographical scope of such Restrictive Covenants, as
to breaches of such Restrictive Covenants in such
other respective jurisdictions, such Restrictive
Covenants as they relate to each jurisdiction being,
for this purpose, severable into diverse and
independent covenants.
4. TERMINATION.
4.1 Termination Upon Death. If the Executive dies during
the Term, this Employment Agreement shall terminate,
provided, however, that in any such event, the
Company shall pay to the Executive, or to his estate,
any portion of the Annual Salary that shall have been
earned by the Executive prior to the termination but
not yet paid, any Benefits that have vested in the
Executive at the time of such termination as a result
of his participation in any of the Company's benefit
plans shall be paid to the Executive, or to his
estate or designated beneficiary, in accordance with
the provisions of such plan; and the Company shall
reimburse the Executive, or his estate, for any
expenses with respect to which the Executive is
entitled to reimbursement pursuant to Section 2.6 of
this Agreement, and the Executive's right to
indemnification, payment or reimbursement pursuant to
Section 6 of this Agreement shall not be affected by
such termination and shall continue in full force and
effect, both with respect to proceedings that are
threatened, pending or completed at the date of such
termination and with respect to proceedings that are
threatened, pending or completed after that date.
4.2 Termination With Cause. The Company has the right, at
any time during the Term, subject to all of the
provisions hereof, exercisable by serving notice,
effective on or after the date of service of such
notice as specified therein, to terminate the
Executive's employment under this Agreement and
discharge the Executive with Cause. If such right is
exercised, the Company's obligation to the Executive
shall be limited solely to the payment of unpaid
Annual Salary accrued, together with unpaid Incentive
Bonus, if any, and Benefits vested up to the
effective date specified in the Company's notice of
termination. As used in this Agreement, the term
"Cause" shall mean and include (i) chronic alcoholism
or controlled substance abuse as determined by a
doctor mutually acceptable to the Company and the
Executive, (ii) an act of proven fraud or dishonesty
on the part of the Executive with respect to the
Company or its subsidiaries; (iii) knowing and
material failure by the Executive to comply with
material applicable laws and regulations
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<PAGE> 8
relating to the business of the Company or its
subsidiaries; (iv) the Executive's material and
continuing failure to perform (as opposed to
unsatisfactory performance) his duties hereunder or a
material breach by the Executive of this Agreement
except, in each case, where such failure or breach is
caused by the illness or other similar incapacity or
disability of the Executive; or (v) conviction of a
misdemeanor involving moral turpitude or a felony.
Prior to the effectiveness of termination for Cause
under subclause (i), (ii), (iii) or (iv) above, the
Executive shall be given 30 days' prior notice from
the Board specifically identifying the reasons which
are alleged to constitute cause for any termination
hereunder and an opportunity to be heard by the Board
in the event Executive disputes such allegations.
4.3 Termination Without Cause. The Company has the right,
at any time during the Term, subject to all of the
provisions hereof, exercisable by serving notice,
effective on or after the date of service of such
notice as specified therein, to terminate the
Executive's employment under this Agreement and
discharge the Executive without Cause. If the
Executive is terminated during the Term without Cause
(including any termination which is deemed to be a
constructive termination without Cause under Section
4.6 hereof), the Company's obligation to the
Executive shall be limited solely to the payment, at
the times and upon the terms provided for herein, of
the greater of (i) the Executive's Annual Salary and
Incentive Bonus for the number of full months
remaining in the Term of this Agreement (assuming no
automatic extension of the Term) had the Executive
not been so terminated and (ii) the Executive's
Annual Salary for a period of twelve months, in each
case based on the Annual Salary of the Executive in
effect on the date of termination (or, if the Company
has reduced the Executive's Annual Salary in breach
of this Agreement, the Executive's Annual Salary
before such reduction) and, in the case of clause
(i), the average Incentive Bonus received by the
Executive for the immediately preceding two fiscal
years, together with all unpaid Incentive Bonus and
Benefits awarded or accrued up to the date of
termination. If the Executive is terminated after he
has received one Incentive Bonus but before he has
received two, the Incentive Bonus in clause (i) shall
be based on the amount of that one Incentive Bonus;
if he has not yet received an Incentive Bonus, it
shall be based on the maximum Incentive Bonus (i.e.,
one half of the Annual Salary). In the event of a
termination by the Company without Cause within 180
days after a Change of Control (as hereinafter
defined), including a constructive termination
without Cause pursuant to Section 4.6, the amounts
due to
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<PAGE> 9
the Executive pursuant to this Section 4.3 shall be
due and payable in one lump-sum payment within 60
days after such termination. In all other cases, any
amounts due to the Executive pursuant to this Section
4.3 shall be due and payable as and when they would
have become due and payable absent such termination.
4.4 Termination by the Executive. Any termination of this
Agreement by the Executive during the Term, except
such termination as is deemed to be a constructive
termination without Cause by the Company under
Section 4.6 of this Agreement, shall be deemed to be
a breach of the terms of this Agreement for the
purposes of Section 3.1.1 hereof and shall entitle
the Company to discontinue payment of all Annual
Salary, Incentive Bonuses and Benefits accruing from
and after the date of such termination.
4.5 Termination upon Disability. If during the Term the
Executive becomes physically or mentally disabled,
whether totally or partially, as evidenced by the
written statement of a competent physician licensed
to practice medicine in the United States who is
mutually acceptable to the Company and the Executive
or his closest relative if he is not then able to
make such a choice, so that the Executive is unable
substantially to perform his services hereunder for
(i) a period of four consecutive months, or (ii) for
shorter periods aggregating six months during any
twelve-month period, the Company may at any time
after the last day of the four consecutive months of
disability or the day on which the shorter periods of
disability equal an aggregate of six months, by
written notice to the Executive, terminate the
Executive's employment hereunder and discontinue
payments of the Annual Salary, Incentive Bonuses and
Benefits accruing from and after the date of such
termination. The Executive shall be entitled to the
full compensation payable to him hereunder for
periods of disability shorter than the periods
specified in clauses (i) and (ii) of the previous
sentence.
4.5 Constructive Termination Without Cause.
Notwithstanding any other provision of this
Agreement, the Executive's employment under this
Agreement may be terminated during the Term by the
Executive, which shall be deemed to be constructive
termination by the Company without Cause, if one of
the following events shall occur without the consent
of the Executive: (i) a failure to elect or reelect
or to appoint or reappoint the Executive to the
office of Senior Vice President/Chief Financial
Officer of the Company or other material change by
the Company of the Executive's functions, duties or
responsibilities which change would reduce the
ranking or level, dignity, responsibility, importance
or scope of the Executive's position with the Company
from the position and attributes thereof described in
Section 1 above; (ii) the assignment or reassignment
by the Company of the Executive to
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<PAGE> 10
another place of employment more than 50 miles from
the Executive's principal place of residence in the
Houston, Texas, metropolitan area; (iii) the
liquidation, dissolution, consolidation or merger of
the Company, or transfer of all or substantially all
of its assets, other than a transaction in which a
successor corporation with a net worth at least equal
to that of the Company assumes this Agreement and all
obligations and undertakings of the Company
hereunder; (iv) a reduction in the Executive's fixed
salary; (v) a Change of Control as hereinafter
defined; (vi) the failure of the Company to continue
to provide the Executive with office space, related
facilities and secretarial assistance that are
commensurate with the Executive's responsibilities to
and position with the Company; (vii) the notification
by the Company of the Company's intention not to
observe or perform one or more of the obligations of
the Company under this Agreement; (viii) the failure
by the Company to indemnify, pay or reimburse the
Executive at the time and under the circumstances
required by Section 6 of this Agreement; (ix) the
occurrence of any other material breach of this
Agreement by the Company or any of its subsidiaries;
or (x) the delivery of notice by the Company in
accordance with Section 1.1 hereof that it desires to
terminate the Agreement, but only if such notice is
given before the Term has been automatically extended
three times. Any such termination shall be made by
written notice to the Company, specifying the event
relied upon for such termination and given within 60
days after such event. Any constructive termination
shall be effective 60 days after the date the Company
has been given such written notice setting forth the
grounds for such termination with specificity;
provided, however, that Executive shall not be
entitled to terminate this Agreement in respect of
any of the grounds set forth above if within 60 days
after such notice the action constituting such ground
for termination is no longer continuing. A
constructive termination by the Company without Cause
shall terminate the Restrictive Period hereunder.
4.7 For the purposes hereof, a "Change of Control of the
Company" shall be deemed to have occurred if after
the effective date (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Act) is or
becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934 (the
"Act")), directly or indirectly, of securities of the
Company representing 50% or more of the combined
voting power of the Company's then outstanding
securities without the prior approval of at least a
majority of the members of the Board in office
immediately prior to such person attaining such
percentage interest; (ii) there occurs a proxy
contest or a consent solicitation, or the Company is
a party to a merger, consolidation, sale of assets,
plan
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<PAGE> 11
of liquidation or other reorganization not approved
by at least a majority of the members of the Board in
office, as a consequence of which members of the
Board in office immediately prior to such transaction
or event constitute less than a majority of the Board
thereafter; or (iii) during any period of two
consecutive years, other than as a result of an event
described in clause (ii) of this Section 4.7,
individuals who at the beginning of such period
constituted the Board (including for this purpose any
new director whose election or nomination for
election by the Company's stockholders was approved
by a vote of at least a majority of the directors
then still in office who were directors at the
beginning of such period) cease for any reason to
constitute at least a majority of the Board.
5. INSURANCE.
The Company may, from time to time, apply for and take out, in its own
name and at its own expense, naming itself or one or more of its
affiliates as the designated beneficiary (which it may change from time
to time), policies for life, health, accident, disability or other
insurance upon the Executive in any amount or amounts that it may deem
necessary or appropriate to protect its interest. The Executive agrees
to aid the Company in procuring such insurance by submitting to medical
examinations and by filling out, executing and delivering such
applications and other instruments in writing as may reasonably be
required by an insurance company or companies to which any application
or applications for insurance may be made by or for the Company.
6. INDEMNIFICATION.
6.1 The Company shall, to the extent not prohibited by law,
indemnify the Executive if he is made, or threatened to be
made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the
Company to procure a judgment in its favor (hereinafter a
"Proceeding"), by reason of the fact that the Executive is or
was a director or officer of the Company, or is or was serving
in any capacity at the request of the Company for any other
corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against judgments, fines,
penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees and
disbursements) paid or incurred in connection with any such
Proceeding.
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<PAGE> 12
6.2 The Company shall, from time to time, reimburse or advance to
the executive the funds necessary for payment of expenses,
including attorneys' fees and disbursements, incurred in
connection with any Proceeding in advance of the final
disposition of such Proceeding; provided, however, that, if
required by the Texas Business Corporation Act, such expenses
incurred by or on behalf of the Executive may be paid in
advance of the final disposition of a Proceeding only upon
receipt by the Company of an undertaking, by or on behalf of
the Executive, to repay any such amount so advanced if it
shall ultimately be determined by final judicial decision from
which there is no further right of appeal that the Executive
is not entitled to be indemnified for such expenses.
6.3 The right to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article
6 shall not be deemed exclusive of any other rights which the
Executive may now or hereafter have under any law, by-law,
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office.
6.4 The right to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article
6 shall continue as to the Executive after he has ceased to be
a director or officer and shall inure to the benefit of the
heirs, executors and administrators of the Executive.
6.5 The Company shall purchase and maintain director and officer
liability insurance on such terms and providing such coverage
as the Board determines is appropriate, and the Executive
shall be covered by such insurance on the same basis as the
other directors and executive officers of the Company.
6.6 The right to indemnification and reimbursement or advancement
of expenses provided by, or granted pursuant to, this Article
6 shall be enforceable by the Executive in any court of
competent jurisdiction. The burden of proving that such
indemnification or reimbursement or advancement of expenses is
not appropriate shall be on the Company. Neither the failure
of the Company (including its board of directors, independent
legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that
such indemnification or reimbursement or advancement of
expenses is proper in the circumstances nor an actual
determination by the Company (including its board of
directors, independent legal counsel, or its stockholders)
that the Executive is not entitled to such
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<PAGE> 13
indemnification or reimbursement or advancement of expenses
shall constitute a defense to the action or create a
presumption that the Executive is not so entitled. The
Executive shall also be indemnified for any expenses incurred
in connection with successfully establishing his right to such
indemnification or reimbursement or advancement of expenses,
in whole or in part, in any such proceeding.
6.7 If the Executive serves (1) another corporation of which a
majority of the shares entitled to vote in the election of its
directors is held by the Company, or (2) any employee benefit
plan of the Company or any corporation referred to in clause
(1), in any capacity, then he shall be deemed to be doing so
at the request of the Company.
6.8 The right to indemnification or reimbursement or advancement
of expenses shall be interpreted on the basis of the
applicable law in effect at the time of the occurrence of the
event or events giving rise to the applicable Proceeding.
7. OTHER PROVISIONS.
7.1 Certain Definitions. As used in this Agreement, the following
terms have the following meanings unless the context otherwise
requires:
(i) "affiliate" with respect to the Company means any
other person controlled by or under common control
with the Company but shall not include any
stockholder or director of the Company, as such.
(ii) "person" means any individual, corporation,
partnership, firm, joint Company, association,
joint-stock company, trust, unincorporated
organization, governmental or regulatory body or
other entity.
(iii) "subsidiary" means any corporation 50% or more of the
voting securities of which are owned directly or
indirectly by the Company.
7.2 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered
personally, telegraphed, telexed, sent by facsimile
transmission or sent by certified, registered or express mail,
postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by
facsimile transmission or, if mailed, on the date of actual
receipt thereof, as follows:
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<PAGE> 14
(i) IF TO THE COMPANY, TO:
Grey Wolf, Inc.
10370 Richmond Avenue, Suite 600
Houston, Texas 77042
WITH A COPY TO:
Garderer Wynn Sewell & Riggs L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002-4086
Attention: Frank Putman, Esq.
(ii) IF TO THE EXECUTIVE, TO:
David Wehlmann
22402 Wildwood Grove
Katy, Texas 77450
Any party may change its address for notice hereunder by notice to the other
party hereto.
7.3 Entire Agreement. This Agreement contains the entire
agreement between the parties with respect to the
subject matter hereof and supersedes all prior
agreements, written or oral, with respect thereto.
7.4 Waivers and Amendments. This Agreement may be
amended, superseded, canceled, renewed or extended,
and the terms and conditions hereof may be waived,
only by a written instrument signed by the parties
or, in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in
exercising any right, power or privilege hereunder
shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any such right,
power or privilege hereunder, nor any single or
partial exercise of any right, power or privilege
hereunder, preclude any other or further exercise
thereof or the exercise of any other right, power or
privilege hereunder.
7.5 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the
State of Texas (without giving effect to the choice
of law provisions thereof) where the employment of
the Executive shall be deemed, in part, to be
performed and enforcement of this Agreement or any
action taken or held with respect to this Agreement
shall be taken in the courts of appropriate
jurisdiction in Houston, Texas.
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<PAGE> 15
7.6 Assignment. This Agreement, and any rights and
obligations hereunder, may not be assigned by the
Executive and may be assigned by the Company (subject
to Section 4.6 (iii) hereof) only to a successor by
merger or purchasers of substantially all of the
assets of the Company.
7.7 Counterparts. This Agreement may be executed in
separate counterparts, each of which when so executed
and delivered shall be deemed an original, but all of
which together shall constitute one and the same
instrument.
7.8 Headings. The headings in this Agreement are for
reference purposes only and shall not in any way
affect the meaning or interpretation of this
Agreement.
7.9 No Presumption Against Interest. This Agreement has
been negotiated. drafted, edited and reviewed by the
respective parties, and therefore, no provision
arising directly or indirectly herefrom shall be
construed against any party as being drafted by said
party.
7.10 Validity Contest. The Company shall promptly pay any
and all legal fees and expenses incurred by the
Executive from time to time as a direct result of the
Company's contesting the due execution,
authorization, validity or enforceability of this
Agreement.
7.11 Binding Agreement. This Agreement shall inure to the
benefit of and be binding upon the Company and its
respective successors and assigns and the Executive
and his legal representatives.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
GREY WOLF, INC.
By /s/ T. P. RICHARDS
--------------------------------------
Name: T. P. Richards
Title: President and CEO
EXECUTIVE
/s/ DAVID WEHLMANN
-----------------------------------------
Name: David Wehlmann
Title: Senior Vice President/Chief
Financial Officer
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<PAGE> 1
EXHIBIT 10.35
GREY WOLF, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS NON-QUALIFIED STOCK OPTION AGREEMENT (this "Agreement") made as of
February 10, 1998, by and between GREY WOLF, INC., a corporation organized under
the laws of the State of Texas (the "Corporation"), and David W. Wehlmann, an
individual (the "Optionee");
W I T N E S S E T H:
WHEREAS, the Corporation is desirous of providing incentive to the
Optionee to further the business of the Corporation and the Corporation has
agreed to grant the Optionee options to purchase shares of common stock, $0.10
par value ("Common Stock"), of the Corporation; and
WHEREAS, by granting the Optionee options to purchase shares of Common
Stock pursuant to the terms of this Agreement, the Corporation intends to carry
out the purposes set forth in the 1996 Employee Stock Option Plan of the
Corporation (the "Plan") adopted by the Board of Directors of the Corporation
(the "Board of Directors") effective July 29, 1996 and the shareholders of the
Corporation effective as of August 27, 1996; and
WHEREAS, the Corporation and the Optionee desire to set forth the terms
and conditions of such options to purchase Common Stock;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and other good and valuable consideration, the receipt, adequacy and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. Grant of Option. Subject to the terms and conditions hereinafter set
forth, the Corporation hereby grants to the Optionee a non-qualified option (the
"Option") to purchase all or any part of an aggregate number of 65,000 shares of
Common Stock (such shares, as increased or decreased in accordance with Section
9 hereof, being referred to hereinafter as the "Option Shares") at an exercise
price of $4.375 per share (hereinafter the "Exercise Price").
2. Exercise Period. The Option shall be exercisable by Optionee as to
twenty percent (20%) of the Option Shares one (1) year after the date of this
Agreement, as to an additional twenty percent (20%) of the Option Shares two (2)
years after the date of this Agreement, as to an additional twenty percent (20%)
of the Option Shares three (3) years after the date of this Agreement, as to an
additional twenty percent (20%) of the Option Shares four (4) years after the
date of this Agreement, until the fifth anniversary of the date of this
Agreement, after which time the Option shall be exercisable in full. The Option
shall expire and terminate as to any Option Shares not purchased by the Optionee
on or before the tenth anniversary of the date of this Agreement (the
"Expiration Date"), subject to earlier termination as set forth herein.
<PAGE> 2
3. Method of Exercising the Option. The Option shall be exercised by
the Optionee delivering to the Corporation (i) written notice from the Optionee
stating that the Optionee is exercising the Option and specifying the number of
Option Shares that the Optionee is entitled to purchase (the "Notice"), which
shall be in form and content identical to Annex I hereto and (ii) the aggregate
Exercise Price (the "Payment") for the number of Option Shares that the Optionee
is entitled to purchase, which Exercise Price must be in the form of (a) cash or
a cashier's or certified check payable to the order of the Corporation, or (b)
the tender to the Corporation of such number of shares of Common Stock owned by
the Optionee having an aggregate fair market value as of the date of exercise
that is not greater than the total Exercise Price for the shares of Common Stock
with respect to which the Option is being exercised and by paying in cash or
cashiers check payable to the Corporation the remaining amount of the Exercise
Price.
4. Transferability of Option. The Option shall not be transferable or
assignable, in whole or in part, and except as otherwise provided in Section 11
of this Agreement or by will or the laws of descent or distribution. The Option
shall be exercisable (i) only by the Optionee during his lifetime, or (ii) in
the event of his death, by his heirs, representatives, distributees, or legatees
in accordance with his will or the laws of descent and distribution (but only to
the extent that the Option would be exercisable by the Optionee under this
Agreement).
5. Payment of Taxes Upon Exercise. The Optionee understands and
acknowledges that under currently applicable law, the Optionee may be required
to include in the Optionee's taxable income, at the time of exercise of the
Option, the amount by which the value of the Option Shares purchased (the
"Exercise Shares") exceeds the Exercise Price paid. The Optionee hereby
authorizes the Corporation to withhold Exercise Shares of a value equivalent to
the amount of tax required to be withheld by the Corporation out of any taxable
income derived by the Optionee upon exercise of the Option; provided, however,
that the Optionee may, in the alternative, in order to satisfy such withholding
requirement, deliver to the Corporation cash or other shares of Common Stock
owned by the Optionee.
6. Investment Representation. The Optionee represents that the Option
Shares available for purchase by the Optionee under this Agreement will be
acquired only for investment and not with a view toward resale or distribution.
7. Securities Law Requirements; Legends. The Optionee agrees and
understands that the Option Shares may be restricted securities as defined in
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and may not be sold, assigned or transferred, unless the
sale, assignment or transfer of such shares is registered under the Securities
Act and applicable blue sky laws, as now in effect or hereafter amended, or
there is furnished an opinion of counsel in form and substance satisfactory to
the Corporation from counsel acceptable to the Corporation that such
registrations are not required. The Optionee further understands and agrees
that, unless issued pursuant to an effective registration statement under the
Securities Act, the following legend shall be set forth on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
2
<PAGE> 3
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE BLUE SKY LAWS
OF ANY STATE, AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED EXCEPT UPON
SUCH REGISTRATION OR UPON RECEIPT BY THE CORPORATION OF AN OPINION OF
COUNSEL FOR THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED FOR
SUCH SALE, ASSIGNMENT OR TRANSFER."
In addition, the following legend shall be placed on each certificate
representing Option Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE GOVERNED BY THE TERMS
OF THE 1996 EMPLOYEE STOCK OPTION PLAN OF THE CORPORATION, DATED JULY
29, 1996, WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION
AND A COPY OF WHICH WILL BE PROVIDED FOR INSPECTION UPON WRITTEN
REQUEST."
8. No Rights as Shareholder. The Optionee shall not have any rights as
a shareholder with respect to any of the Option Shares until the date of
issuance by the Corporation to the Optionee of a stock certificate representing
such Option Shares. Except as otherwise provided in Section 9 hereof, the
Optionee shall not be entitled to any dividends, cash or otherwise, or any
adjustment of the Option Shares for such dividends, if the record date therefor
is prior to the date of issuance of such stock certificate. Upon valid exercise
of the Option by the Optionee, the Corporation agrees to cause a valid stock
certificate for the number of Option Shares then purchased to be issued and
delivered to the Optionee within seven (7) business days thereafter.
9. Corporate Proceedings of the Corporation.
(a) The existence of the Option shall not affect in any way
the right or power of the Corporation or its officers, directors and
shareholders, as the case may be, to (i) make or authorize any
adjustments, recapitalizations, reorganizations or other changes in the
capital structure or business of the Corporation, (ii) participate in
any merger or consolidation of the Corporation, (iii) issue any Common
Stock, bonds, debentures, preferred or prior preference stock or any
other securities affecting the Common Stock or the rights of holders
thereof, (iv) dissolve or liquidate the Corporation, (v) sell or
transfer all or any part of the assets or business of the Corporation,
or (vi) perform any other corporate act or proceedings, whether of a
similar character or otherwise.
(b) If the Corporation merges into or with or consolidates
with (such events collectively referred herein as a "Merger") any
corporation or corporations and is not the surviving corporation, then
the surviving corporation may assume the Option or substitute a new
option of the surviving corporation for the Option; provided, however,
that the excess of the aggregate fair market value of the securities
subject to the Option immediately after such assumption, or the new
option immediately after such substitution, over the aggregate Exercise
Price of such shares must be, based upon a good faith determination by
the Board of Directors of the Corporation, not less than the excess of
the aggregate fair market value of the Common Stock subject to the
Option immediately before such substitution or assumption over the
3
<PAGE> 4
aggregate Exercise Price of such Common Stock.
(c) In the event that the surviving corporation does not
utilize the provisions of (b) above, or in the event of a dissolution
or liquidation of the Corporation, the Corporation shall cause written
notice of such Merger or dissolution or liquidation (and the material
terms and conditions thereof) to be delivered to the Optionee at least
ten (10) days prior to the proposed effective date (the "Effective
Date") of such event. The Optionee shall be entitled to exercise the
Option until the Effective Date, or until the Expiration Date if
earlier. To the extent that the Merger or liquidation is consummated
after the Effective Date, the Option shall terminate and the
Corporation shall have no further obligations of any type hereunder.
The provisions of this paragraph shall not apply to any merger or
reorganization, the principal purpose of which is to change the
jurisdiction of the domicile of the Corporation.
(d) If, while the Option is outstanding, the Corporation shall
effect a subdivision or consolidation of the shares of Common Stock or
other capital readjustment, the payment of a common stock dividend, or
other increase or reduction of the number of shares of Common Stock
outstanding, without receiving compensation therefor in money, services
or property, then (i) in the event of an increase in the number of
shares of Common Stock outstanding, the number of Option Shares shall
be proportionately increased, and the per share Exercise Price shall be
proportionately reduced, and (ii) in the event of a reduction in the
number of shares of Common Stock outstanding, the number of Option
Shares shall be proportionately reduced, and the per share Exercise
Price shall be proportionately increased. No fractional share of Common
Stock shall be issued upon any such exercise and the Exercise Price
shall be appropriately reduced on account of any fractional share not
issued.
(e) The issuance by the Corporation of shares of stock of any
class of securities convertible into shares of stock of any class,
including Common Stock, for cash, property, labor or services rendered,
either upon direct sale or upon the exercise of rights, options, or
warrants to subscribe therefor, or upon conversion of shares or
obligations of the Corporation convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of Option Shares or the Exercise
Price.
Registration Rights. The Optionee shall have no registration rights
with respect to the Option Shares.
4
<PAGE> 5
11. Termination.
(a) Except as otherwise provided in this Section 11, if the
Optionee for any reason whatsoever, other than death or permanent and
total disability, as defined in (b) below, ceases to be employed by the
Corporation, or a parent or subsidiary corporation of the Corporation,
and prior to such cessation, the Optionee was employed at all times
from the date of the granting of the Option until the date of such
cessation, the Option must be exercised by the Optionee (to the extent
that the Optionee is entitled to do so at the date of cessation) within
three (3) months following the date of cessation of employment, subject
to the Expiration Date; provided, however, that if the Optionee is
terminated for cause (as defined in the Employment Agreement), the
Option will immediately terminate. Notwithstanding the foregoing, the
Corporation may, in its sole discretion, extend for a reasonable period
the time in which the Optionee may exercise the Option after the date
of cessation of employment, subject to the Expiration Date.
(b) If the Optionee becomes permanently and totally disabled,
as hereinafter defined, while employed by the Corporation or a parent
or subsidiary corporation of the Corporation, and prior to such
disability the Optionee was employed at all times from the date of the
granting of the Option until the date of disability, the Option must be
exercised by the Optionee (to the extent that the Optionee is entitled
to do so at the date of disability) at any time within one (1) year
after the date of disability or the Expiration Date, whichever is
earlier, and if not so exercised, the option shall thereupon terminate.
"Permanently and totally disabled" means being unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months. In the absence
of any specific requirements for this determination, the decision of
the Corporation, as aided by any physicians designated by the
Corporation shall be conclusive and the Corporation shall send written
notice to the Optionee of the determination that the Optionee has
become permanently and totally disabled.
(c) In the event that the Optionee dies while employed by the
Corporation or a parent or subsidiary corporation of the Corporation,
and prior to death the Optionee was employed at all times from the date
of the granting of the Option until the date of death, the Option must
be exercised (to the extent that the Optionee is entitled to do so at
the date of death) by a legatee or legatees of the Optionee under the
Optionee's will, or by the Optionee's personal representatives or
distributes, at any time within one (1) year after the date of death or
the Expiration Date, whichever is earlier, and if not so exercised, the
Option shall thereupon terminate.
Nothing in (a), (b) or (c) shall extend the time for
exercising the Option granted pursuant to this Agreement beyond the Expiration
Date.
12. Disposition of Stock After Exercise of Option. Notwithstanding any
other provision of
5
<PAGE> 6
this Agreement to the contrary, in consideration of the granting of the Option,
the Optionee agrees not to dispose of any Option Shares without the prior
approval of the Corporation unless such shares have been registered under the
Securities Act.
13. Notices. All notices, demands, requests and other communications
required or permitted hereunder shall be in writing and shall be deemed to be
delivered when actually received through U.S. Express Mail or any private
express service (as evidenced by a written receipt), or, if earlier, and
regardless of whether actually received (except where receipt is specified in
this Agreement), four (4) days following deposit in a regularly maintained
receptacle for the United States mail, registered or certified, return receipt
requested, postage fully prepaid, addressed to the addressee at its address set
forth below or at such other address as such party may have specified
theretofore by notice delivered in accordance with this Section:
If to the Corporation: GREY WOLF, Inc.
10370 Richmond Ave., Suite 600
Houston, Texas 77042
Attn: President
If to Optionee: David W. Wehlmann
22402 Wildwood Grove
Katy, Texas 77450
14. Transferability; Binding Effect. The Option shall be transferable
only as set forth in Section 4. Subject to the foregoing, all covenants, terms,
agreements and conditions of this Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the Corporation and the Optionee and their
respective successors and assigns.
15. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the Corporation and the Optionee relating to the subject
matter hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
State of Texas.
17. Captions. The section and paragraph headings in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
19. Counterparts. This Agreement may be executed in multiple original
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
6
<PAGE> 7
IN WITNESS WHEREOF, this Agreement has been executed and delivered as
of the date first written above.
CORPORATION:
GREY WOLF, INC.
By: /s/ Thomas P. Richards
-------------------------------------
Thomas P. Richards
President & Chief Executive Officer
OPTIONEE:
/s/ David W. Wehlmann
-----------------------------------------
David W. Wehlmann
7
<PAGE> 8
ACKNOWLEDGMENT OF SPOUSE TO
TERMS OF NON-QUALIFIED STOCK OPTION AGREEMENT
I, Francine B. Wehlmann , am the spouse of David W. Wehlmann
("Optionee"), and I am fully aware of, understand, and fully consent and agree
to the provisions of the Non-Qualified Stock Option Agreement, dated February
10, 1998 (the "Agreement") executed by Optionee and GREY WOLF, Inc. (the
"Corporation"). I understand the binding effect of this Agreement and its
binding effect upon any interest, community or otherwise, I may now or hereafter
own with respect to any option or stock of the Corporation which is the subject
of the Agreement, and I agree that the termination for any reason of my marital
relationship with Optionee shall not have the effect of removing any such option
or stock of the Corporation from the coverage of the Agreement.
Signed this day of March 5, 1998.
/s/ FRANCINE B. WEHLMANN
-----------------------------------------
Francine B. Wehlmann,
Spouse of David W. Wehlmann
1
<PAGE> 9
ANNEX I
GREY WOLF, INC.
EXERCISE NOTICE
------------------, -----
GREY WOLF, Inc.
10370 Richmond Ave., Suite 600
Houston, Texas 77042
Gentlemen:
I hereby acknowledge that I am acquiring _____________ shares
("Shares") of common stock, $0.10 par value, of GREY WOLF, Inc. ("Corporation")
pursuant to that certain Non-Qualified Stock Option Agreement dated June 30,
1997 (the "Agreement").
I understand that the Shares have not been registered under the
Securities Act of 1933 (the "Act") on the grounds that the transfer to me is
exempt from registration pursuant to Section 4(2) of the Act.
By executing this letter, I represent that I am acquiring the Shares
for investment for my own account and not as a nominee or agent or with a view
to, or for resale in connection with, any distribution of such Shares within the
meaning of the Act. I further represent that I do not have any contract,
undertaking, agreement, or arrangement with any person to sell, transfer or
grant participations in any of the Shares to any third persons.
I understand that, unless the Shares are then registered under the Act,
I may only dispose of the Shares with the prior written consent of the
Corporation.
I also understand that, unless the Shares are issued pursuant to an
effective registration statement under the Act, a legend substantially in the
form set below shall be placed on each certificate representing the Shares and
on any substitutes thereof:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR UNDER THE BLUE SKY LAWS OF ANY
STATE, AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED EXCEPT UPON SUCH
REGISTRATION OR UPON RECEIPT BY THE CORPORATION OF AN OPINION OF
COUNSEL FOR THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED FOR
SUCH SALE, ASSIGNMENT OR TRANSFER."
<PAGE> 10
I also understand that the Corporation may issue stop transfer
instructions to the Corporation's transfer agent, if any, with respect
to the Shares or, if the Corporation transfers its own securities, it
may make a notation in the appropriate records that the Shares cannot
be transferred without an opinion of counsel in the form required by
this paragraph.
I also understand that a legend as set forth below will be
placed on each certificate representing the Shares or any substitutes
thereof:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE GOVERNED BY THE TERMS
OF THE 1996 EMPLOYEE STOCK OPTION PLAN OF THE CORPORATION, DATED JULY
29, 1996, WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION
AND A COPY OF WHICH WILL BE PROVIDED FOR INSPECTION UPON WRITTEN
REQUEST."
I understand that I may be required to include in my taxable income the
amount by which the value of the Shares exceeds the exercise price paid and I
hereby authorizes the Corporation to withhold Shares of a value equivalent to
the amount of tax required to be withheld by the Corporation out of any taxable
income derived by me; provided, however, that I may, in the alternative, in
order to satisfy such withholding requirement, deliver to the Corporation cash
or other shares of the Corporation's common stock owned by me.
I understand the nature of the Shares and the financial risks thereof.
I do not desire any further information or data concerning the Corporation.
Very truly yours,
-----------------------------------------
Optionee Name
Date:
------------------------------------
<PAGE> 1
EXHIBIT 21.1
GREY WOLF, INC.
LIST OF SUBSIDIARIES
State/Country of
Subsidiary Incorporation
------------------------
Grey Wolf Drilling Company Texas
DI Energy, Inc. Texas
Grey Wolf International, Inc. Texas
DI/Perfensa Inc. Texas
Grey Wolf Drilling de Mexico, S.A. de C.V. Mexico
Drillers International, S.A. Argentina
Perforaciones Andinas S.A. Panama
Grey Wolf Drilling de Venezuela, C.A. Venezuela
Drillers Inc. DI de Venezuela, C. A. Venezuela
Grey Wolf Drilling International, Ltd. Cayman Islands
-57-
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to incorporation by reference in the Registration Statements
Nos. 33-34590, 33-75338 and 333-19027 of Grey Wolf, Inc. on Form S-8 and
Registration Statements Nos. 333-14783, 333-6077, 333-2043, 333-36593 and
333-39683 of Grey Wolf, Inc. on Form S-3, of our report dated March 3, 1998,
relating to the consolidated balance sheet of Grey Wolf, Inc. and Subsidiaries
as of December 31, 1997 and the related consolidated statements of operations,
changes in shareholders' equity and cash flows for the year then ended, and the
related financial statement schedule, which report appears in the December 31,
1997 annual report on Form 10-K of Grey Wolf, Inc.
KPMG Peat Marwick LLP
Houston, Texas
March 24, 1998
-58-
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements Nos. 33-34590, 33-75338 and 33-19027 of Grey Wolf, Inc. on Form S-8
and Registration Statements Nos. 333-14783, 333-6077, 333-2043, 333-36593 and
333-39683 of Grey Wolf, Inc. on Form S-3, of our report dated March 28,
1996, appearing in this Annual Report on Form 10-K of Grey Wolf, Inc. for
the year ended December 31, 1997.
Deloitte & Touche LLP
Houston, Texas
March 24, 1998
-59-
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<FISCAL-YEAR-END> DEC-31-1997
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