<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
GREY WOLF, INC.
GREY WOLF DRILLING COMPANY
GREY WOLF INTERNATIONAL, INC.
MURCO DRILLING CORPORATION
DI ENERGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1381 74-2144774
TEXAS 1381 74-1987143
TEXAS 1381 76-0000351
DELAWARE 1381 72-0512163
TEXAS 1381 74-2175411
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042
713-435-6100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DAVID W. WEHLMANN
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042
713-435-6100
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of Communications to:
NICK D. NICHOLAS
PORTER & HEDGES, L.L.P.
700 LOUISIANA, 35TH FLOOR
HOUSTON, TEXAS 77002
(713) 226-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SENIOR NOTE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8 7/8% Senior Notes due 2007, Series
C................................... 750,000 $1,000 $75,000,000 $22,125
- --------------------------------------------------------------------------------------------------------------------------
Subsidiary Guarantees of the 8 7/8%
Senior Notes due 2007, Series C..... -- -- -- (3)
- --------------------------------------------------------------------------------------------------------------------------
Total................................. 750,000 $1,000 $75,000,000 $22,125
==========================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the Registration Fee.
(2) Pursuant to Rule 457(f)(1) under the Securities Act of 1933, as amended, the
registration fee has been calculated based on the market value of the
securities to be canceled in the exchange.
(3) Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no
separate fee is payable for the Subsidiary Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED JUNE 25, 1998
GREY WOLF, INC.
OFFER TO EXCHANGE ITS 8 7/8% SENIOR NOTES DUE 2007, SERIES C, FOR ANY
AND ALL OF ITS OUTSTANDING 8 7/8% SENIOR NOTES DUE 2007, SERIES B
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Grey Wolf, Inc., a Texas Corporation ("Grey Wolf" or the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal" and together with this Prospectus, the "Exchange Offer"), to
exchange its 8 7/8% Senior Notes due 2007, Series C (the "Exchange Notes"),
which have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), for an equal principal amount of its 8 7/8% Senior Notes due
2007, Series B (the "Old Notes"), of which an aggregate of $75,000,000 in
principal amount is outstanding as of the date hereof. The Exchange Notes and
the Old Notes are collectively referred to herein as the "Notes."
The Exchange Notes are senior unsecured obligations of the Company and rank
pari passu in right of payment with the Company's existing $175,000,000 of
8 7/8% Senior Notes due 2007 (the "Series A Notes") and with all indebtedness
and other liabilities of the Company that are not subordinated by their terms to
other Indebtedness (as defined herein) of the Company and senior in right of
payment to all indebtedness of the Company that by its terms is so subordinated.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on
, 1998, unless the Exchange Offer is extended (the "Expiration
Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on the Expiration Date. The Exchange Notes will be issued and
delivered promptly after the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. See "The Exchange Offer." Old Notes may be tendered only in integral
multiples of $1,000 in principal amount. The Company has agreed to pay the
expenses of the Exchange Offer.
The Exchange Notes will be obligations of the Company evidencing the same
debt as the Old Notes and will be entitled to the benefits of the same
indenture, dated as of May 8, 1998 (the "Indenture"), between the Company and
Chase Bank of Texas, National Association, as Trustee (the "Trustee"). The form
and terms of the Exchange Notes are identical in all material respects to the
form and terms of the Old Notes (i) except the Exchange Notes have been
registered under the Securities Act, and therefore will not bear any legends
restricting their transfer and (ii) holders of the Exchange Notes, other than
holders of Transfer Restricted Securities (as defined herein) are not entitled
to the rights provided by the Registration Rights Agreement (as defined herein).
(continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
EXCHANGE NOTES
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
<PAGE> 3
Interest on each Exchange Note will accrue from the last Interest Payment
Date (as defined herein). Holders whose Old Notes are accepted for exchange will
be deemed to have waived the right to receive any payment in respect of interest
on the Old Notes accrued from the last Interest Payment Date to the date of
issuance of the Exchange Notes. Interest on the Exchange Notes is payable
semi-annually on January 1 and July 1 of each year (each an "Interest Payment
Date), commencing on January 1, 1999, at the rate of 8 7/8% per annum. On or
after July 1, 2002, the Company may redeem the Exchange Notes, in whole or in
part, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition, at any time on or before June
27, 2000, the Company, subject to certain limitations, may, at its option redeem
up to a maximum of 30% of the aggregate principal amount of the Notes with the
net cash proceeds of one or more Qualified Equity Offerings (as defined herein)
at a redemption price equal to 108.875% of the principal amount thereof, plus
accrued and unpaid interest thereon, provided that at least $50.0 million in
aggregate principal amount of Exchange Notes remain outstanding immediately
after the occurrence of such redemption. Upon the occurrence of a Change of
Control (as defined herein), each holder of Exchange Notes may require the
Company to repurchase such Exchange Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of purchase. See
"Description of the Notes -- Change of Control."
The Company's obligation to pay the principal of, premium, if any, and
interest on the Notes will be fully and unconditionally guaranteed, on a joint
and several basis (the "Guarantees"), by each of the Company's wholly-owned,
domestic Subsidiaries (as herein defined) and any other Subsidiary that
guarantees Indebtedness of the Company or a guarantor (the "Guarantors"). The
Guarantees will be senior unsecured obligations of each respective Guarantor and
will rank pari passu in right of payment with the guarantees of the Series A
Notes made by the Guarantors and all other indebtedness and liabilities of such
Guarantor that are not subordinated by their terms to other Indebtedness of such
Guarantor. The Guarantees may be released under certain circumstances. The Notes
and Guarantees will be effectively subordinated to secured Indebtedness of the
Company and the Guarantors, respectively, with respect to the assets securing
such Indebtedness, including any Indebtedness under the Bank Credit Facility (as
defined herein), which is secured by liens on substantially all of the assets of
the Company and certain of the Guarantors. As of March 31, 1998, on a pro forma
basis after giving effect to the issuance of the Notes, the Company and its
subsidiaries would have had outstanding approximately $3.0 million of secured
indebtedness. The indenture governing the Notes (the "Indenture") will permit
the Company and its subsidiaries, including the Guarantors, to incur additional
Indebtedness in the future, including senior Indebtedness of up to $100.0
million in aggregate principal amount which may be secured by liens on all of
the assets of the Company and its Subsidiaries, subject to limitations.
The Old Notes were sold by the Company on May 8, 1998, to Donaldson, Lufkin
& Jenrette Securities Corporation, Lehman Brothers, Inc. and Prudential
Securities Incorporated (collectively, the "Initial Purchasers") in a private
transaction (the "Initial Offering") not subject to the registration
requirements of the Securities Act. The Old Notes were thereupon offered and
sold by the Initial Purchasers only to persons they reasonably believed to be
qualified institutional buyers ("QIBs") in reliance on Rule 144A under the
Securities Act which agreed to comply with certain transfer restrictions and
other conditions. Accordingly, the Old Notes may not be offered, resold or
otherwise transferred unless registered under the Securities Act or unless an
applicable exemption from the registration requirements of the Securities Act is
available. The Exchange Notes are being offered hereunder in order to satisfy
the obligations of the Company under the Registration Rights Agreement entered
into with the Initial Purchasers in connection with the Initial Offering. See
"The Exchange Offer" and "Description of the Notes -- Registration Rights."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (the "Shearman & Sterling Letter"), Morgan
Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991) (the
"Morgan Stanley Letter"), Exxon Capital Holdings Corporation, SEC No-Action
Letter (available May 13, 1988) (the "Exxon Capital Letter") and similar
letters, the Company believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than broker-dealers, except
as set forth below, and any such holder that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus-delivery provisions of the Securities Act,
provided that (i) the Exchange Notes are acquired in the ordinary course of such
holder's business, (ii) such holder is not engaging in and does not intend to
engage in a distribution of the Exchange Notes, and (iii) such holder does not
have an arrangement or understanding with any person to participate in a
distribution of the Exchange Notes. Any holder who tenders in the Exchange Offer
with the intention to participate, or for the purpose of participating,
2
<PAGE> 4
in a distribution of the Exchange Notes or who is an affiliate of the Company
may not rely upon the staff interpretations in the Shearman & Sterling Letter,
the Morgan Stanley Letter, the Exxon Capital Letter and, in the absence of an
exemption therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. Failure to comply with any of the foregoing conditions may result
in a holder incurring liabilities under the Securities Act for which such holder
is not indemnified by the Company. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company in the Letter of Transmittal that
all of the foregoing conditions, if applicable, have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. To date the staff of the
Commission has taken the position that broker-dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes (other than an
unsold allotment from the Initial Offering) by delivery of this Prospectus, as
it may be supplemented or amended from time to time. The Company has agreed that
for a period of one year after consummation of the Exchange Offer, or such
shorter period as provided in the Registration Rights Agreement, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. A
broker-dealer which purchased Old Notes in the Initial Offering may not
participate in the Exchange Offer. See "Plan of Distribution."
There has been no public market for the Old Notes. The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange or
to seek the admission thereof to trading on any automated quotation system.
There can be no assurance that an active public market for the Exchange Notes
will develop. If a market for the Exchange Notes should develop, the Exchange
Notes could trade at a discount from the principal amount. The Old Notes have
been designated for trading in the Private Offerings, Resales and Trading
through Automatic Linkages ("PORTAL") Market of the National Association of
securities Dealers, Inc. However, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
FORWARD-LOOKING STATEMENTS
This Prospectus contains, or incorporates by reference, certain statements
that may be deemed "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934
as amended (the "Exchange Act"). All statements, other than statements of
historical facts so included in this Prospectus that address activities, events
or developments that the Company intends, expects, projects, believes or
anticipates will or may occur in the future, including, without limitation:
statements regarding the Company's business strategy, plans and objectives;
statements expressing beliefs and expectations regarding future rig utilization
rates, day rates and other events and conditions that may influence the land rig
drilling market and the Company's performance in the future; statements
concerning future rig refurbishment plans, including the anticipated level of
capital expenditures for, and the nature and scheduling of, rig refurbishment;
statements regarding future redeployment of the Company's rigs to different
markets and trends in the land drilling business and other such matters are
forward-looking statements. Such statements are based on certain assumptions and
analyses made by management of the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes to be appropriate. The
forward-looking statements included in this Prospectus are also subject to a
number of material risks and uncertainties. Important factors that could cause
actual results to differ materially from the Company's expectations are
discussed herein under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, and
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference, under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Prospective
investors are cautioned that such forward-looking statements are not guarantees
of future performance and that actual results, developments and business
decisions may differ from those envisaged by such forward-looking statements.
3
<PAGE> 5
LOGO
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and incorporated herein by
reference, and by the consolidated financial statements, including the notes
thereto included elsewhere in this Prospectus. Unless the context indicates
otherwise, references in this Prospectus to "Grey Wolf" or the "Company" mean
Grey Wolf, Inc. and its subsidiaries and predecessors. In September 1997, the
Company changed its corporate name from DI Industries, Inc. to Grey Wolf, Inc.
THE COMPANY
The Company is a leading provider of contract land drilling services in the
U.S. with a domestic fleet of 120 rigs. In addition to its domestic operations,
the Company operates a fleet of six rigs in Venezuela, giving the Company a
total of 126 rigs, 114 of which are currently marketed. The Company believes it
has the largest fleet of 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 12 non-marketed rigs held for refurbishment as
demand for drilling services warrants.
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. Internationally, the Company concentrates
its efforts in Venezuela and is pursuing bidding opportunities in other foreign
countries.
BUSINESS STRATEGY
The Company's business strategy is to achieve increased cash flow and
earnings through: (i) focusing on core markets and establishing leading
positions in these markets; (ii) refurbishing and reactivating inventoried rigs
to satisfy increases in demand; (iii) acquiring land drilling businesses and
assets to capitalize on anticipated improvements in the industry; and (iv)
attracting and retaining qualified personnel to support the Company's increased
level of operations.
Focus on Core 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.
Refurbishment and Reactivation of Inventoried Rigs. Since the beginning of
the fourth quarter of 1996, the Company has refurbished and reactivated 29 rigs.
Although no further rig refurbishments are currently planned for 1998 as a
result of recent declines in rig utilization rates in the Company's core
domestic markets, the Company intends to refurbish the remaining 12 rigs in its
inventory as the demand for drilling services warrants.
5
<PAGE> 7
Acquisitions. The Company has aggressively followed its business strategy
by acquiring 100 land drilling rigs in 13 transactions since August 1996. Six of
these acquisitions were of 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 or internationally. The following table summarizes the
Company's acquisitions since August 1996:
<TABLE>
<CAPTION>
NUMBER OF RIGS ACQUIRED
AND STATUS UPON ACQUISITION
--------------------------------
DATE TRANSACTION MARKETED INVENTORIED TOTAL
---- ----------- -------- ----------- -----
<S> <C> <C> <C> <C>
January 1998 Murco Acquisition 10 -- 10
October-November 1997 Justiss Acquisition 12 -- 12
Kaiser-Francis Rig
August 1997 Purchase -- 6 6
June 1997 GWDC Acquisition 18 -- 18
January 1997 Flournoy Acquisition 13 -- 13
December 1996 Diamond M Acquisition 10 -- 10
October 1996 Mesa Acquisition 3 3 6
August 1996 RTO/LRAC Acquisition -- 18 18
Various Additional Rig Purchases 1 6 7
-- -- ---
67 33 100
== == ===
</TABLE>
Attracting and Retaining 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 23 years of related experience. Many of the Company's operating
personnel joined the Company in connection with acquisitions completed since
October 1996, bringing to the Company additional customer relationships and
operating experience in their markets. The Company's ability to retain these
employees and attract additional quality employees has allowed the Company to
expand its operations and customer base significantly while ensuring quality
service to its customers.
RIG FLEET
The Company has assembled a fleet of quality drilling rigs to meet the
needs of its customers in each of the markets it serves. The following table
sets forth certain information with respect to the drilling rigs owned by the
Company:
<TABLE>
<CAPTION>
DIESEL
DIVISION ELECTRIC MECHANICAL TOTAL
-------- -------- ---------- -----
<S> <C> <C> <C>
Ark-La-Tex(1)....................................... 16 23 39
South Texas......................................... 12 24 36
Gulf Coast.......................................... 24 9 33
Venezuela........................................... -- 6 6
Inventory........................................... 10 2 12
-- -- ---
62 64 126
== == ===
</TABLE>
- ---------------
(1) The Ark-La-Tex Division manages the rigs in both the Ark-La-Tex and the
Mississippi/Alabama markets.
6
<PAGE> 8
INDUSTRY OVERVIEW
The domestic land drilling industry is undergoing a period of rapid
consolidation. The Company believes that from January 1, 1996 through May 31,
1998 there have been at least 45 completed or pending transactions involving the
acquisition of a combined total of approximately 564 rigs, over 75% of which
were acquired by six land rig companies including the Company. The Company
accounted for 13 of these transactions involving the 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
approximately 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 798 as compared to 652 for 1996. For the first quarter of
1998, the average active domestic land rig count was 806, compared with 717 for
the first quarter of 1997. By increasing the size of its rig fleet through
acquisitions and refurbishments, the Company increased its market share during
1997 in the three core markets in which it then operated in a period of rapidly
rising demand and day rates for land drilling rigs in those three markets. The
Company's larger fleet of marketable rigs, higher rig utilization rates and
increasing day rates significantly improved the Company's financial performance
during 1997 despite increased drilling operations, costs, including wages and
benefits, and debt service over the same period.
SIGNIFICANT ACQUISITIONS
The Company has completed a series of transactions since August 1996 that
have significantly increased the size of its rig fleet, refocused its
operations, established its market position with the largest or second largest
rig fleet in its core domestic markets and positioned the Company to benefit
from anticipated increases in demand in the land drilling industry. The most
significant transactions were:
- Murco Acquisition. In January 1998, the Company acquired Murco Drilling
Corporation ("Murco") for a cash purchase price of $60.5 million (the
"Murco Acquisition"). Murco operated a fleet of 10 drilling rigs in
Alabama, Louisiana, Mississippi and East Texas.
- Justiss Acquisition. In late October and early November 1997, the Company
acquired substantially all of the operating assets of Justiss Drilling
Company ("Justiss"), a division of Justiss Oil Company, Inc. for $36.1
million in cash (the "Justiss Acquisition"). The assets included a fleet
of 12 operating drilling rigs and related equipment which are currently
marketed in the Company's Ark-La-Tex and Gulf Coast markets.
Subsequently, the Company retired two of the rigs from marketed status
and is using them for spare equipment.
- Kaiser-Francis Rig Purchase. In August 1997, the Company acquired six
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 "Kaiser-Francis Rig Purchase"). Four of the
six rigs have been refurbished and are currently being marketed and two
are currently being refurbished.
- GWDC Acquisition. In June 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 (the "GWDC
Acquisition"). The consideration for the GWDC Acquisition consisted of
$61.6 million in cash and 14.0 million shares of the Company's common
stock. 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. In January 1997, the Company acquired the operating
assets of Flournoy Drilling Company, which included 13 operating drilling
rigs and other assets located in the Company's South Texas market, in
exchange for 12.4 million shares of the Company's common stock and
$800,000 in cash (the "Flournoy Acquisition"). As a result of the
Flournoy Acquisition, the Company believes it is currently the largest
land drilling contractor in its South Texas market.
7
<PAGE> 9
- Diamond M Acquisition. In December 1996, the Company acquired the assets
of Diamond M Onshore, Inc. for $26.0 million in cash (the "Diamond M
Acquisition"). The assets consisted of ten operating land drilling rigs
and other related assets located in South Texas.
- Mesa Acquisition. In October 1996, the Company acquired six diesel
electric SCR drilling rigs, three of which were operating, from Mesa
Drilling, Inc. ("Mesa") in exchange for 5.5 million shares of common
stock (the "Mesa Acquisition"). The Mesa Acquisition established the
Company's presence in South Texas.
- RTO/LRAC Acquisition. In August 1996, the Company acquired 18 land
drilling rigs in exchange for 39.4 million shares of common stock (the
"RTO/LRAC Acquisition"). These 18 rigs provided the Company with a supply
of additional rigs suitable for refurbishment and reactivation.
In addition to these transactions, 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 inventory of rigs held for refurbishment
(the "Additional Rig Purchases"). See "Business -- Significant Acquisitions and
Sales."
The Company's principal office is located at 10370 Richmond Avenue, Suite
600, Houston, Texas 77042, and its telephone number is (713) 435-6100.
RECENT OPERATING PERFORMANCE
For the first quarter of 1998, the Company experienced a decline in the
average rig utilization in its four core domestic markets to approximately 81%
from its 1997 average rig utilization of 96% in the three core markets in which
it then operated. For the two months ended May 31, 1998, the Company's average
rig utilization rate in its core domestic markets was approximately 72%. In
addition, late in the first quarter of 1998, the bid rate for new drilling
contracts in the Company's core domestic markets declined approximately 15% from
the average rates bid during the fourth quarter of 1997. The Company believes
that this decline in domestic utilization and current bid rates is generally
attributable to an overall decline in the demand for drilling services in the
Company's core domestic markets prompted in large part by lower prices for oil
and gas production and substantial uncertainty as to the future level and trend
of oil and gas prices. See "Risk Factors -- Recent Weakening of Demand for
Drilling Services."
THE EXCHANGE OFFER
Initial Offering of the Old
Notes...................... The Old Notes were sold by the Company to the
Initial Purchasers pursuant to a Purchase Agreement
dated May 8, 1998 (the "Purchase Agreement"). The
Initial Purchasers subsequently resold the Old
Notes to QIBs pursuant to Rule 144A under the
Securities Act.
Registration Rights
Agreement.................. Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into a Registration
Rights Agreement dated May 8, 1998 (the
"Registration Rights Agreement") which granted the
holders of the Old Notes certain exchange and
registration rights. If law or applicable
interpretations of the staff of the Commission do
not permit holders of Old Notes to participate in
the Exchange Offer, the Company and the Guarantors
will be required to file and use their reasonable
best efforts to cause a shelf registration
statement to become and remain effective to effect
the resale of the Notes. The Old Notes are subject
to the payment of additional interest under certain
circumstances if the Company is not in compliance
with its obligations under the Registration
8
<PAGE> 10
Rights Agreement. See "Description of the
Notes -- Registration Rights."
The Exchange Offer......... $1,000 principal amount of Exchange Notes will be
issued in exchange for each $1,000 principal amount
of Old Notes validly tendered pursuant to the
Exchange Offer. As of the date hereof, $75.0
million in aggregate principal amount of Old Notes
are outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes
promptly after the Expiration Date.
Resales.................... Based on an interpretation by the staff of the
Commission set forth in the Shearman & Sterling
Letter, the Morgan Stanley Letter, the Exxon
Capital Letter or similar letters, the Company
believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by any person receiving such Exchange
Notes, whether or not such person is the holder
(other than any such holder or other person which
is (i) a broker-dealer that receives Exchange Notes
in exchange for Old Notes acquired directly from
the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act
or (ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act
(collectively, "Restricted Holders")) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that (a) such Exchange Notes are acquired in the
ordinary course of business of such holder or other
person (b) neither such holder nor such other
person is engaged in or intends to engage in a
distribution of such Exchange Notes and (c) neither
such holder nor other person has any arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes. If any person
were to be participating in the Exchange Offer for
the purposes of participating in a distribution of
the Exchange Notes in a manner not permitted by the
Commission's interpretation, such person (a) could
not rely upon the Shearman & Sterling Letter, the
Morgan Stanley Letter, the Exxon Capital Letter or
similar letters and (b) in the absence of an
exemption, must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with a secondary resale
transaction. Failure to comply with any of the
foregoing conditions may result in a holder
incurring liabilities under the Securities Act for
which such holder is not indemnified by the
Company. Each broker or dealer that receives
Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making or
other activities, must acknowledge that it will
deliver a Prospectus in connection with any sale of
such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange
for Old Notes if such broker-dealer acquired the
Old Notes as a result of market-making activities
or other trading activities. The Company has
agreed, for a period of one year after the date of
this Prospectus, to make this Prospectus available
to any broker-dealer for use in connection with any
such resale. The Exchange Offer is not being made
to, nor will the Company accept surrenders for
exchange from,
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<PAGE> 11
holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would
not be in compliance with the securities or blue
sky laws of such jurisdiction. A broker-dealer that
purchased Old Notes in the Initial Offering may not
participate in the Exchange Offer. See "Plan of
Distribution."
Expiration Date............ 5:00 p.m., New York City time, on , 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Accrued Interest on the
Exchange Notes and Old
Notes.................... The Exchange Notes will accrue interest from the
last Interest Payment Date. Holders of Old Notes
whose Old Notes are accepted for exchange will be
deemed to have waived the right to receive any
payment in respect of interest on such Old Notes
accrued from the last Interest Payment Date to the
date of issuance of the Exchange Notes.
Consequently, holders who exchange their Old Notes
for Exchange Notes will receive the same interest
payment on the next Interest Payment Date that they
would have received had they not participated in
the Exchange Offer.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions. The Exchange Offer is not conditional
upon any minimum principal amount of Old Notes
being tendered.
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to the Exchange Agent (as
defined) at the address set forth herein and
therein. Persons holding Old Notes through the
Depository Trust Company ("DTC") and wishing to
accept the Exchange Offer must do so pursuant to
DTC's ATOP (as defined herein). By executing the
Letter of Transmittal, each holder will represent
to the Company that, among other things (i) the
Exchange Notes acquired pursuant to the Exchange
Offer are being acquired in the ordinary course of
such holder's business, (ii) such holder is not
engaging and does not intend to engage in a
distribution of such Exchange Notes, (iii) such
holder does not have an arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes, and (iv) such
holder is not an "affiliate," as defined in Rule
405 under the Securities Act, of the Company.
Special Procedures for
Beneficial Holders......... Any beneficial holder whose Old Notes are
registered in the name of his broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on his
behalf. If such beneficial holder wishes to tender
on his own behalf, such beneficial owner must,
prior to completing and executing the Letter of
Transmittal and delivering his Old Notes, either
make
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<PAGE> 12
appropriate arrangements to register ownership of
the Old Notes in such holder's name or obtain a
properly completed bond power from the registered
holder. The transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Old Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Federal Income Tax
Considerations........... The exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will generally not
be a taxable event for federal income tax purposes.
A holder's holding period for Exchange Notes will
include the holding period for Old Notes. See
"Federal Income Tax Considerations."
Exchange Agent............. Chase Bank of Texas, National Association, is
serving as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The mailing
address of the Exchange Agent is: Chase Bank of
Texas, National Association, Attention: Frank
Ivins, Corporate Trust Services, P.O. Box 2320,
Dallas, Texas 75221-2320. Deliveries by hand or
overnight courier should be addressed to: Chase
Bank of Texas, National Association, Attention:
Frank Ivins, Corporate Trust Services, 1201 Main
Street 18th Floor, Dallas Texas 75202. For
information with respect to the Exchange Offer,
call Mauri Cowen, Vice President, Chase Bank of
Texas, National Association at (713) 216-6686.
Effect of Not Tendering.... Old Notes that are not tendered or that are
tendered but not accepted, will, following the
completion of the Exchange Offer, continue to be
subject to the existing restrictions upon their
transfer. Accordingly, the trading market for Old
Notes that are not tendered or that are tendered
but not accepted, could be adversely affected. The
Company will have no further obligation (other than
to certain holders of Transfer Restricted
Securities (as defined in the Registration Rights
Agreement) as described in "Description of the
Notes -- Registration Rights" with respect to the
Shelf Registration Statement (as defined herein))
to provide for the registration of such Old Notes
under the Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Use of Proceeds............ The Company will not receive any proceeds from the
Exchange Offer. See "Use of Proceeds." The Company
has agreed to bear the expenses of the Exchange
Offer pursuant to the Registration Rights
Agreement. No underwriter is being used in
connection with the Exchange Offer.
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<PAGE> 13
TERMS OF THE EXCHANGE NOTES
Securities Offered......... $75.0 million aggregate principal amount of 8 7/8%
Senior Notes due 2007, Series C.
Maturity................... July 1, 2007
Interest Payment Dates..... Interest on the Notes is payable semi-annually in
cash in arrears on January 1 and July 1 of each
year, commencing January 1, 1999.
Ranking.................... The Notes are senior unsecured obligations of Grey
Wolf and rank pari passu in right of payment with
all Indebtedness and other liabilities of the
Company that are not subordinated by their terms to
other Indebtedness of the Company and senior in
right of payment to all Indebtedness of the Company
that by its terms is so subordinated. The Notes are
effectively subordinated to all existing and future
secured Indebtedness of the Company to the extent
of the value of the assets securing such
Indebtedness and are structurally subordinated to
all existing and future Indebtedness, if any, and
other liabilities of its Subsidiaries that are not
Guarantors. As of March 31, 1998, on a pro forma
basis after giving effect to the issuance of the
Notes, the Company and its subsidiaries would have
had outstanding approximately $3.0 million of
secured indebtedness. The Indenture permits the
Company and its subsidiaries, including the
Guarantors, to incur additional Indebtedness,
including additional senior Indebtedness, of up to
$100.0 million in aggregate principal amount which
may be secured by Liens on all of the assets of the
Company and its Subsidiaries, subject to certain
limitations.
Guarantees................. The Notes are fully and unconditionally guaranteed,
on a joint and several basis, by each of the
Company's wholly-owned, domestic Subsidiaries (as
herein defined) and any other subsidiary that
guarantees any Indebtedness of the Company or
guarantor (the "Guarantors"). The Guarantees will
be effectively subordinated to secured Indebtedness
of the Company and the Guarantors. The Guarantees
may be released under certain circumstances.
Optional Redemption........ On or after July 1, 2002, the Company may redeem
the Notes, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid
interest to the date of redemption. Notwithstanding
the foregoing, at any time prior to June 27, 2000,
the Company may redeem up to 30% of the original
aggregate principal amount of the Notes with the
net proceeds of one or more Qualified Equity
Offerings at a redemption price equal to 108.875%
of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided
that at least $50.0 million in aggregate principal
amount of the Exchange Notes remains outstanding
immediately after such redemption. See "Description
of the Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control, each holder of Notes will
have the right to require the Company to repurchase
all or a portion of such holder's Notes at a
purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to
the date of repurchase. See "Description of the
Notes -- Change of Control."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Subsidiaries to, among other
things, pay dividends or make other Restricted
Payments, make Investments,
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<PAGE> 14
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 and engage in unrelated lines of
business. In addition, the Indenture imposes
restrictions on the ability of the Subsidiaries to
issue guarantees or to create restrictions on their
ability to make distributions on their capital
stock or make loans to the Company and its
Subsidiaries. These covenants are subject to
important exceptions and qualifications.
See"Description of the Notes -- Certain Covenants."
RISK FACTORS
Prospective participants in the Exchange Offer should consider all the
information contained in this Prospectus in connection with the Exchange offer.
In particular, prospective participants should consider the factors set forth
herein. See "Risk Factors."
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<PAGE> 15
RISK FACTORS
In addition to the other matters described in this Prospectus, Holders of
the Old Notes should carefully consider the following risk factors before
accepting the Exchange Offer.
SIGNIFICANT LEVERAGE AND DEBT SERVICE REQUIREMENTS
In June 1997 the Company issued $175.0 million of Series A Notes in an
underwritten public offering, the net proceeds of which were used primarily to
finance acquisitions (including the GWDC Acquisition) and expand its operations.
After giving effect to the Initial Offering, the Company has significant debt
service requirements related to the Notes and the Series A Notes. Additionally,
the Company and GW Drilling entered into the Bank Credit Facility, which is a
$50.0 million amended and restated senior secured revolving credit facility with
a syndicate of commercial banks. Currently, the Bank Credit Facility is
substantially undrawn. The Company expects to continue to borrow under the Bank
Credit Facility and possible future credit arrangements in order to finance
possible future acquisitions and for general corporate purposes. The indenture
for the Series A Notes (the "Series A Indenture") permits, and the Indenture
permits, the Company to incur additional indebtedness, including up to $100.0
million of senior indebtedness under the Bank Credit Facility or one or more
credit or revolving credit facilities with banks, financial institutions or
other lenders which may be secured by liens on all of the assets of the Company
and its Subsidiaries, subject to certain limitations. As of March 31, 1998, on a
pro forma basis, after giving effect to the Initial Offering and the repayment
of substantially all indebtedness then outstanding under the Bank Credit
Facility from the proceeds of the Initial Offering, the Company would have had
$252.2 million in total indebtedness and $252.7 million in shareholders' equity.
The level of the Company's indebtedness could have several important
effects on the Company's future operations, including, among others, (i) its
ability to obtain additional financing for working capital, acquisitions,
capital expenditures, general corporate and other purposes may be limited, (ii)
a substantial portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing funds available for other purposes and (iii) the Company's significant
leverage could make it more vulnerable to economic downturns in the industry.
The Company's ability to meet its debt service obligations and reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to the success of its business strategy, general economic conditions,
industry cycles, levels of interest rates, and financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's business will generate
sufficient cash flow from operations to meet debt service requirements and
payments of principal, and if the Company is unable to do so, it may be required
to sell assets, to refinance all or a portion of its indebtedness, including the
Notes and the Series A 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.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE NOTES; SUBSIDIARY CASH
FLOW
The Company is a holding company that conducts substantially all of its
operations through both U.S. and foreign subsidiaries, and substantially all of
the Company's assets consist of equity in such subsidiaries. Accordingly, the
Company is and will be dependent on its ability to obtain funds from its
subsidiaries to service its indebtedness, including the Notes and the Series A
Notes.
The Notes will not be secured by any assets of the Company or its
subsidiaries. The Notes will therefore be effectively subordinated in right of
payment to all existing and future secured indebtedness of the Company and its
subsidiaries to the extent of the collateral for such secured indebtedness.
Indebtedness incurred under the Bank Credit Facility is secured by a security
interest in (i) all domestic drilling rigs and related equipment owned by the
Company, Grey Wolf Drilling Company ("GW Drilling"), Murco and Grey Wolf
International, Inc. ("International") (ii) the capital stock of GW Drilling,
Murco and International and (iii) substantially all other assets of the Company,
GW Drilling, Murco and International, wherever located (other than stock of
other subsidiaries). GW Drilling is a co-borrower with the Company under the
Bank Credit Facility and International and Murco have guaranteed the obligations
under the Bank Credit Facility. Accordingly, the
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<PAGE> 16
lenders under the Bank Credit Facility and other secured debt of the Company
have claims with respect to the rigs and other assets constituting collateral
for any indebtedness thereunder and the assets of any subsidiary guaranteeing
such indebtedness, which will be satisfied prior to the unsecured claims of
holders of the Notes. In the event of a default on the Notes or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the Notes.
In addition, the Notes are effectively subordinated to the claims of all of
the creditors, including trade creditors and tort claimants, of the Company's
subsidiaries that are not Guarantors and to all secured creditors of the
Guarantors. In the event of an insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of any subsidiary of
the Company that is not a Guarantor, creditors of such subsidiary generally will
have the right to be paid in full before any distribution will be made to the
Company or the holders of the Notes. The capital stock of the Guarantors has
been pledged to secure indebtedness under the Bank Credit Facility. In addition,
certain financing arrangements that the Company's subsidiaries are party to
(including the Bank Credit Facility) impose restrictions on the ability of the
Company to gain access to the cash flow or assets of its subsidiaries. The
Company's foreign subsidiaries may also face governmentally imposed restrictions
from time to time on their ability to transfer funds to the Company. See
"Description of Certain Indebtedness" and "Description of the Notes -- General."
UNENFORCEABILITY AND RELEASES OF SUBSIDIARY GUARANTEES
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Guarantors' issuance of the Guarantees. To the extent that a
court were to find that (i) a Guarantee was incurred by a Guarantor with intent
to hinder, delay or defraud any present or future creditor or the Guarantor
contemplated insolvency with a design to prefer one or more creditors to the
exclusion, in whole or in part, of others or (ii) a Guarantor did not receive
fair consideration or reasonably equivalent value for issuing its Guarantee and
such Guarantor (A) was insolvent, (B) was rendered insolvent by reason of the
issuance of such Guarantee, (C) was engaged or about to engage in a business or
transaction for which the remaining assets of such Guarantor constituted
unreasonably small capital to carry on its business or (D) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, the court could avoid or subordinate such Guarantee in favor of the
Guarantor's creditors. Among other things, a legal challenge of a Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Notes. The Indenture
contains a savings clause, which generally will limit the obligations of each
Guarantor under its Guarantee to the maximum amount as will, after giving effect
to all of the liabilities of such Guarantor, result in such obligations not
constituting a fraudulent conveyance. To the extent a Guarantee of any Guarantor
was avoided as a fraudulent conveyance or held unenforceable for any other
reason, Holders of the Notes would cease to have any claim against such
Guarantor (and could be required to return payments received from such
Guarantor) and would be creditors solely of the Company and any Guarantor whose
Guarantee was not avoided or held unenforceable. In such event, the claims of
the Holders of the Notes against the issuer of an invalid Guarantee would be
subject to the prior payment of all liabilities of such Guarantor. There can be
no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy the claims of the Holders of the Notes relating to
any avoided portions of any of the Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Guarantor may be considered insolvent if the sum of its debts, including
contingent liabilities, was greater than the fair market value of all of its
assets at a fair valuation or if the present fair market value of its assets was
less than the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute and
matured.
Any Guarantor may be released from its Guarantee at any time upon any sale,
exchange or transfer, in compliance with the provisions of the Indenture, by the
Company of the capital stock of such Guarantor or substantially all of the
assets of such Guarantor and in certain other circumstances. See "Description of
the Notes -- Guarantees of Notes."
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<PAGE> 17
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS; ABILITY TO MAKE CERTAIN PAYMENTS
AND DIVIDENDS
The Indenture will contain covenants restricting or limiting the ability of
the Company and certain of its subsidiaries to, among other things: (i) incur
additional indebtedness; (ii) pay dividends or make other restricted payments;
(iii) make asset dispositions; (iv) permit liens; (v) enter into sale and
leaseback transactions; (vi) enter into certain mergers, acquisitions and
consolidations; (vii) make certain investments; (viii) enter into transactions
with related persons and (ix) engage in unrelated lines of business. The
Indenture will have terms substantially identical to the Series A Indenture.
In addition, the Bank Credit Facility contains certain other and more
restrictive covenants than those contained in the Indenture and Series A
Indenture. These covenants may adversely affect the Company's ability to pursue
its acquisition and rig refurbishment strategies and limit its flexibility in
responding to changing market conditions. The Bank Credit Facility 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 Facility contains default terms that effectively cross default with the
Indenture and the Series A 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 Series A Indenture and
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 and the Series A
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 Notes. See "Description of the
Notes -- Events of Default" and "Description of Certain Indebtedness."
As of the date of this Prospectus, the Company had the ability to make
Restricted Payments (as defined under "Description of Notes -- Certain
Definitions") of $101.7 million under the Indenture and the Series A Indenture.
Restricted Payments include, among other things, dividends and other
distributions in respect of capital stock of the Company and its subsidiaries,
repayments of subordinated indebtedness and investments in subsidiaries and
other entities. See "Description of the Notes -- Certain Covenants."
RISK OF INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined in the Indenture),
the Company must offer to purchase all Notes and Series A Notes then outstanding
at a purchase price equal to 101% of the principal amount thereof plus accrued
and unpaid interest to the date of purchase. The occurrence of a Change of
Control Event (as defined in the Bank Credit Facility) gives the lenders under
the Bank Credit Facility the right to require the Company to repay all
indebtedness outstanding thereunder. There can be no assurance that the Company
will have available funds sufficient to repay all indebtedness owing under the
Bank Credit Facility or to fund the purchase of the Notes and Series A Notes
upon a Change of Control under the Indenture. In the event a Change of Control
occurs at a time when the Company does not have available funds sufficient to
pay for all of the Notes and Series A Notes delivered by Holders seeking to
accept the Company's repurchase offer, an event of default would occur under the
Indenture and the Series A Indenture. See "Description of the Notes -- Certain
Covenants", "-- Change of Control" and "Description of Certain Indebtedness."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to apply for listing of
the Old Notes or the Exchange Notes on any securities exchange or to seek the
admission thereof to trading on any automated quotation system. The Exchange
Offer is not conditioned upon any minimum or maximum aggregate principal amount
of Old Notes being tendered for exchange. Although the Initial Purchasers are
making a market in the Old Notes and have advised the Company that they
currently intend to make a market in the Exchange Notes they are not obligated
to do so,
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<PAGE> 18
and any such market making may be discontinued at any time without notice. In
addition, any such market-making activity will be subject to the limits imposed
by the Securities Act and the Exchange Act, and may be limited during the
Exchange Offer or the pendency of the Shelf Registration Statement. Future
trading prices of the Exchange Notes will depend on many factors, including,
among others, prevailing interest rates, the Company's operating results, and
the market for similar securities. Furthermore, there can be no assurance that
an active public market for the Exchange Notes will develop. See "Notice to
Investors" and "Description of the Notes -- Registration Rights."
CONSEQUENCES OF FAILURE TO EXCHANGE AND RESTRICTIONS ON TRANSFER
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
will continue to be subject to the restrictions on transfer of Old Notes set
forth in the legend thereon. In general, the Old Notes may not be sold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Therefore, to the extent that Old
Notes are tendered and accepted in the Exchange Offer, the trading market for
untendered and tendered but unaccepted Old Notes could be adversely affected.
Accordingly, no assurance can be given that an active public market or other
market will continue for the Old Notes or as to the liquidity of or the trading
market for the Old Notes.
DEPENDENCE ON OIL AND GAS INDUSTRY; INDUSTRY CONDITIONS
The Company's current 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. There can
be no assurance that current levels of oil and gas exploration expenditures will
be maintained or that demand for the Company's services will reflect the level
of such expenditures.
RECENT WEAKENING OF DEMAND FOR DRILLING SERVICES
During 1997, conditions in the oil and gas industry were such that demand
for land drilling services was generally strong in each of the three core
domestic markets in which the Company then operated. The Company's 1997 average
rig utilization rate for those three core markets was approximately 96%. In the
first quarter of 1998, however, the Company's average rig utilization rate in
its four core domestic markets declined to approximately 81%. For the two months
ended May 31, 1998, the Company's average rig utilization rate in its core
domestic markets was approximately 72%. This lower average utilization rate is
believed by the Company to be due to an overall weakening of demand for land
drilling services in its four core domestic markets. The generally reduced
demand for land drilling services in the first five months of 1998 is believed
by the Company to be attributable to lower prices for oil and gas production,
and to widespread uncertainty among potential customers as to the future level
and trend of oil and gas prices. In June 1998, the price for domestic oil
production was reported in the press to have reached the lowest level in over a
decade. Although gas prices have not declined to the same extent as oil prices,
gas prices have generally drifted down from levels at the beginning of the
fourth quarter of 1997. Some potential customers, the Company believes, may also
be postponing their near-term drilling commitments in hopes of obtaining reduced
rates for oil field goods and services, including contract land drilling
services. Through the first quarter of 1998, weakening demand had not yet caused
a material decline in the Company's average revenues per rig day worked because
most of the Company's rigs working in the first quarter of 1998 were operating
at contract rates established in earlier periods of higher demand. However, the
average revenues per rig day worked received by the Company under its most
recently awarded day rate drilling contracts in its core domestic markets have
reflected an average decline of approximately 15% from that received under day
rate contracts entered into during the fourth
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quarter of 1997 for the same or comparable rigs. 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 and $3.1 million
(unaudited) for the year ended December 31, 1997, and the quarter ended March
31, 1998, respectively, the Company has a history of losses and had not
previously 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 calendar year 1996 loss includes non-recurring
charges of $6.1 million while the 1995 loss includes 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.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its operations are dependent upon a small group
of 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.
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 bid 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 14% 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 its competitors in the future or that the level of
competition will allow the Company to obtain adequate margins from its drilling
services.
RISKS ASSOCIATED WITH TURNKEY DRILLING
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
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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
results of operations.
OPERATING HAZARDS AND INSURANCE
The Company's operations are subject to the many hazards inherent in the
land drilling business, including blowouts, cratering, fires, explosions, loss
of hole, lost or stuck drill strings and damage or loss from adverse weather.
These hazards could also cause personal injury and loss of life, substantial
damage to the environment, suspension of drilling operations or serious damage
to or destruction of the property and equipment involved and damage to producing
formations and surrounding areas. The Company maintains insurance coverage
against some but not all operating hazards. However, such insurance may not be
sufficient to protect the Company against liability for all consequences of well
disasters such as personal injury, damage to the Company's rigs, damage to the
property of others or damage to the environment. The insurance maintained by the
Company is subject to substantial deductibles and provides for premium
adjustments based on claims. In view of difficulties that may be encountered in
renewing such insurance at reasonable rates, no assurance can be given that the
Company will be able to maintain the type and amount of coverage that it
considers adequate. The occurrence of a significant event for which the Company
is not fully insured could have a material adverse effect on the Company's
financial position and results of operations. See "Business -- Insurance."
RISKS OF ACQUISITION STRATEGY
As a key component of its 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 businesses may involve
unforeseen difficulties and may require a disproportionate amount of
management's attention and the Company's financial and other resources. Possible
future 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 businesses
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. See
"Business -- Significant Acquisitions and Sales."
SHORTAGES OF EQUIPMENT, SUPPLIES AND PERSONNEL
There is a general shortage of drilling equipment and supplies which the
Company believes may intensify. The costs and delivery times of equipment and
supplies are substantially greater than in prior periods. Accordingly, in 1996
the Company formed an alliance with a drill pipe manufacturer that enables the
Company to take delivery through 1998 of 29,300 joints of drill pipe in commonly
used diameters at fixed prices plus possible escalations for increases in the
manufacturer's cost of raw materials. As is common in the industry, the drill
pipe supply alliance is not a formal contractual agreement but represents an
informal arrangement in which both parties undertake to satisfy the supply
objectives of the alliance. Due in part to its alliance arrangement, the Company
is not currently experiencing any material shortages of, or material price
increases in, drill pipe. The Company believes that the alliance may reduce, but
not eliminate, its exposure to price increases and supply shortages of drill
pipe. In addition, the Company and its supplier under the drill pipe supply
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 for
drill pipe. Additionally, the
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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. See "Business -- Equipment and Supplies."
The demand for, and wage rates of, qualified rig crews rose during 1997 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.
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
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 controlling 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 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.
RISKS OF INTERNATIONAL OPERATIONS
The Company derives revenues 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
Mexico. 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
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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,
the Company expended $3.6 million for capital improvements to these rigs in
1997. 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. See "Business -- Foreign
Operations -- Venezuela Division" for a discussion of certain management,
operating and financial reporting deficiencies relating to the Company's
operations in Venezuela prior to 1997.
QUALIFICATION OF THE GWDC ACQUISITION AS A REORGANIZATION FOR U.S. FEDERAL
INCOME 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, GW Drilling (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.
SIGNIFICANT CUSTOMER
During the year ended December 31, 1997, the largest customer for the
Company's contract drilling services, Swift Energy Company, accounted for
approximately 10% of total revenues. There was no such significant customer for
the quarter ended March 31, 1998. There can be no assurance that such customer
or any of the Company's other principal customers will continue to employ the
Company's services or that the loss of any of such customers or adverse
developments affecting any of such customers would not have a material adverse
effect on the Company's financial condition and results of operations.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes, having been sold by the Company in a private transaction not
subject to the registration requirements of the Securities Act, are subject to
certain restrictions on transfer. In connection with the sale of the Old Notes,
the Company entered into the Registration Rights Agreement with the Initial
Purchasers which requires that the Company conduct the Exchange Offer. The
Registration Rights Agreement further provides that the Company use its
reasonable best efforts to (i) cause a registration statement with respect to
the Exchange Offer (the "Exchange Offer Registration Statement") to be declared
effective on or before the 120 days after the date on which the Old Notes were
originally issued under the Indenture (the "Closing Date") and (ii) consummate
the Exchange Offer on or before the 150th day after the Closing Date. Except as
provided below, upon the completion of the Exchange Offer, the Company's
obligation with respect to the registration of the Exchange Notes will
terminate. The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference thereto. The Registration Rights Agreement is
incorporated herein by reference as an exhibit to the Registration Statement and
can be copied or reviewed as set forth under "Available Information." Following
the completion of the Exchange Offer (except as set forth in the paragraph
immediately below), certain holders of Old Notes not tendered will not have any
further registration rights and those Old Notes will continue to be subject to
certain restrictions on transfer.
In order to participate in the Exchange Offer, a holder must represent to
the Company, among other things, that (i) the Exchange Notes acquired pursuant
to the Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder is not engaging in and does not intend to engage in a
distribution of the Exchange Notes, (iii) such holder does not have an
arrangement or understanding with any person to participate in the distribution
of the Exchange Notes, and (iv) such holder is not a Restricted Holder. Pursuant
to the Registration Rights Agreement, the Company is required to file a Shelf
Registration Statement for a continuous offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes (and cause such shelf registration
statement to be declared effective by the Commission and keep it continuously
effective, supplemented, and amended for prescribed periods) if (i) the Company
is not permitted to consummate the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission policy, or (ii) any holder of
Transfer Restricted Securities notifies the Company prior to the 30th day
following consummation of the Exchange Offer (A) that such holder is prohibited
by law or Commission policy from participating in the Exchange Offer and stating
the reason for the application of such prohibition to the holder, or (B) that
such holder may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus contained
in the Exchange Offer Registration Statement would not be available for such
resales by such holder, or (C) such holder is a broker-dealer and holds Old
Notes acquired directly from the Company or any of its Affiliates. Other than as
set forth in this paragraph, no holder will have the right to participate in the
Shelf Registration Statement nor otherwise to require that the Company register
such holder's shares of Old Notes under the Securities Act. See "Description of
the Notes -- Registration Rights."
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the Old
Notes may be offered for sale, resold, or otherwise transferred by any holder
without compliance with the registration and prospectus-delivery provisions of
the Securities Act. Based on interpretations by the staff of the Commission set
forth in the Shearman & Sterling Letter, the Morgan Stanley Letter and the Exxon
Capital Letter, or similar letters, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by holders thereof (other than a
broker-dealer that receives Exchange Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market making or other trading activities, without compliance with the
registration and prospectus-delivery provisions of the Securities Act, provided
that (i) the Exchange Notes are acquired in the ordinary course of such holder's
business, (ii) such holder is not engaging in and does not intend to engage in a
distribution of the Exchange Notes, and
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(iii) such holder does not have an arrangement or understanding with any person
to participate in the distribution of the Exchange Notes. Any holder who tenders
in the Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of the Exchange Notes or who is a Restricted
Holder may not rely upon such interpretation by the staff of the Commission and,
in the absence of an exemption therefrom, must comply with the registration and
prospectus-delivery requirements of the Securities Act in connection with any
secondary resale transaction. Failure to comply with such requirements in such
instance may result in such holder incurring liabilities under the Securities
Act for which the holder is not indemnified by the Company. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Old Notes,
where those Old Notes were acquired by the broker-dealer as a result of its
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of these Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period of one year after the effective date of the Exchange Offer
Registration Statement, it will make the Prospectus available to any
broker-dealer for use in connection with any such resale.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, holders of Old Notes in any jurisdiction in which
this Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to tender their Old Notes. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions on whether to participate in the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Old Notes that are not tendered for exchange in the Exchange Offer will
remain outstanding and interest thereon will continue to accrue. Following the
completion of the Exchange Offer (except as set forth above in the second
paragraph under "-- Purpose and Effect"), holders of Old Notes not tendered will
not have any further registration rights and those Old Notes will remain
restricted securities within the meaning of Rule 144 of the Securities Act.
Accordingly, the liquidity of the market for a holder's Old Notes could be
adversely affected upon completion of the Exchange Offer if the holder does not
participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. Old Notes may be tendered, however, only
in integral multiples of $1,000 in principal amount.
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Old Notes except that (i) the Exchange
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and (ii) holders of the Exchange Notes,
other than certain broker-dealers, will not be entitled to the rights of holders
of the Transfer Restricted Securities under the Registration Rights Agreement.
The Exchange Notes will evidence the same indebtedness as the Old Notes, will be
issued pursuant to, and entitled to the benefits of, the Indenture pursuant to
which the Old Notes were issued, and will be treated as a single class
thereunder with any Old Notes that remain outstanding. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Old Notes being
tendered for exchange.
As of the date of this Prospectus, $75.0 million aggregate principal amount
of Old Notes were outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to registered holders and to
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others believed to have beneficial interests in the Old Notes. Holders of Old
Notes do not have any appraisal or dissenters' rights under the Texas Business
Corporation Act or the Indenture in connection with the Exchange Offer. The
Company intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder.
The Company will be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes for the purpose of receiving the Exchange Notes from the Company
and delivering the Exchange Notes to such holders. If any tendered Old Notes are
not accepted for exchange because of an invalid tender, the occurrence of
certain other events set forth herein or otherwise, certificates for any such
unaccepted Old Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer.
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent and each registered
holder of any extension by oral or written notice prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. During any extension of the Exchange Offer, all Old Notes previously
tendered pursuant to the Exchange Offer and not withdrawn will remain subject to
the Exchange Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth under "-- Conditions to Exchange Offer" have not been
satisfied and have not been waived by the Company, to terminate the Exchange
Offer, by giving oral or written notice of such delay, extension, or
termination, to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders. If the Exchange Offer is amended in any manner determined by
the Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders, and the Company will extend the Exchange Offer for a
period of time, depending upon the significance of the amendment and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
Interest on the Exchange Notes
Interest on each Exchange Note will accrue from the last Interest Payment
Date. The Exchange Notes bear interest at 8 7/8% per annum, payable
semi-annually on January 1 and July 1 of each year. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of the January
1, 1999 interest payment for the Old Notes, holders who exchange their Old Notes
for Exchange Notes will receive the same interest payment on January 1, 1999
that they would have received had they not accepted the Exchange Offer. Interest
on the Old Notes accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
Procedures for Tendering Old Notes
The tender to the Company of Old Notes by a holder thereof pursuant to one
of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. A holder of the
Old Notes may
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tender such Old Notes by (i) properly completing, signing, and dating a Letter
of Transmittal or a facsimile thereof (all references in this Prospectus to
Letter of Transmittal shall be deemed to include a facsimile thereof) and
delivering the same, together with any corresponding certificate or certificates
representing the Old Notes being tendered (if in certificated form) and any
required guarantees, to the Exchange Agent at its address set forth in the
Letter of Transmittal on or prior to the Expiration Date (or complying with the
procedure for book-entry transfer described below), or (ii) complying with the
guaranteed-delivery procedures described below.
Any participant in DTC's Book-entry Transfer Facility system may tender
such Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's automated tender offer program
("ATOP"). Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at the Depositary, an Agent's Message
(as defined herein), must, in any case, be transmitted to and received by the
Exchange Agent at its address set forth herein under "-- Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS
TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT. See "-- Book Entry Transfer."
If tendered Old Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefore
are to be issued (and any untendered Old Notes are to be reissued) in the name
of the registered holder (which term, for the purposes described herein, shall
include any participant in DTC (also referred to as a book-entry facility) whose
name appears on a security listing as the owner of Old Notes), the signature of
such signers need not be guaranteed. In any other case, the tendered Old Notes
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Company and duly executed by the registered holder, and the
signature on the endorsement or instrument of transfer must be guaranteed by an
eligible guarantor institution that is a member of or a participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program, the Stock Exchange Medallion Program or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution"). If the Exchange Notes or Old Notes not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the note register for the Old Notes, the signature in the
Letter of Transmittal must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL, AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE TENDERING HOLDER. DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED
OR CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IF OLD NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY OR DTC. ONLY HOLDERS OF OLD NOTES MAY TENDER SUCH OLD NOTES IN THE
EXCHANGE OFFER. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES, OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR
SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker-dealer, commercial bank, trust company, or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf. If the beneficial
owner wishes to tender on the owner's own behalf, the owner must, prior to
completing and executing the Letter of Transmittal and delivering the owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in the beneficial owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
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The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Old Notes. The Company
further understands that the Exchange Agent will request, within two business
days after the date the Exchange Offer commences, that DTC establish an account
with respect to the Old Notes for the purpose of facilitating the Exchange
Offer, and any participant may make book-entry delivery of Old Notes by causing
DTC to transfer such Old Notes into the Exchange Agent's account in accordance
with DTC's ATOP procedures for transfer. However, the exchange of the Old Notes
so tendered will be made only after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message, and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by DTC and
received by the Exchange Agent and forming a part of Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from a participant
tendering Old Notes which are the subject to such Book-Entry Confirmation and
that such participant has received and agrees to bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such participant.
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Old Notes (or a confirmation of book-entry transfer of such
Old Notes into the Exchange Agent's account at DTC), is received by the Exchange
Agent, or (ii) a Notice of Guaranteed Delivery or letter, telegram, or facsimile
transmission to similar effect from an Eligible Institution is received by the
Exchange Agent. Issuances of Exchange Notes in exchange for Old Notes tendered
pursuant to a Notice of Guaranteed Delivery or letter, telegram, or facsimile
transmission to similar effect by an Eligible Institution will be made only
against submission of a duly signed Letter of Transmittal (and any other
required documents) and deposit of the tendered Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company, in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of counsel for the Company, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularity in the tender of any Old Notes. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Company, the Exchange Agent, nor any other person
shall be under any duty to give notification of any defects or irregularities in
tenders or incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
DTC, a properly completed and duly executed Letter of Transmittal, and all other
required documents. If any tendered Old Notes are not accepted for any reason
set forth in the terms and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires to exchange,
such unaccepted or non-exchanged Old Notes will be returned without expense to
the tendering Holder thereof (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at DTC pursuant to the
book-entry transfer procedures described below, such non-exchanged Old Notes
will be credited to an account maintained with such book-entry transfer
facility) as promptly as practicable after the expiration or termination of the
Exchange Offer.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, if the Old Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
26
<PAGE> 28
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes.
Guaranteed-Delivery Procedures
If the holder desires to accept the Exchange Offer and time will not permit
a Letter of Transmittal or Old Notes to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
its office, on or prior to the Expiration Date, a letter, telegram, or facsimile
transmission from an Eligible Institution setting forth the name and address of
the tendering holder, the name(s) in which the Old Notes are registered and the
certificate number(s) of the Old Notes to be tendered, and stating that the
tender is being made thereby and guaranteeing that, within five business days
after the date of execution of such letter, telegram, or facsimile transmission
by the Eligible Institution, such Old Notes, in proper form for transfer (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at DTC), will be delivered by such Eligible Institution together with a
properly completed and duly executed Letter of Transmittal (and any other
required documents). Unless Old Notes being tendered by such method are
deposited with the Exchange Agent within the time period set forth above
(accompanied or preceded by a properly completed Letter of Transmittal and any
other required documents), the Company may, at its option, reject the tender.
Copies of a Notice of Guaranteed Delivery that may be used by Eligible
Institutions for the purposes described in this paragraph are available from the
Exchange Agent.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at DTC for purposes of the Exchange Offer within two business
days after the date of this Prospectus, and any financial institution that is a
participant in DTC's systems may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account at DTC
in accordance with DTC's ATOP procedures for transfer. Although delivery of Old
Notes may be effected through book-entry transfer at DTC, an Agent's Message
must be transmitted to and received by the Exchange Agent at the address set
forth below under "-- Exchange Agent" on or prior to the Expiration Date or
pursuant to the guaranteed delivery procedures described below.
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, certain terms and
conditions that are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent, with the Letter of Transmittal or
an Agent's Message and any other required documents, by the Expiration Date or
within the time periods set forth above pursuant to a Notice of Guaranteed
Delivery from an Eligible Institution. Each holder tendering the Old Notes for
exchange sells, assigns, and transfers the Old Notes to the Exchange Agent, as
agent of the Company, and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
transferred and exchanged. Furthermore, each holder who tenders Old Notes will
be deemed to have waived to right to receive any payment in respect of interest
on the Old Notes accrued from the last Interest Payment Date to the date of the
issuance of the Exchange Notes. The holder warrants that it has full power and
authority to tender, exchange, sell, assign, and transfer the Old Notes and to
acquire the Exchange Notes issuable upon the exchange of such tendered Old
Notes, that the Exchange Agent, as agent of the Company, will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all Liens,
restrictions, charges and encumbrances, and that
27
<PAGE> 29
the Old Notes tendered for exchange are not subject to any adverse claims when
accepted by the Exchange Agent, as agent of the Company. The holder also
warrants and agrees that it will, upon request, execute and deliver any
additional documents deemed by the Company or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the Old
Notes. All authority conferred or agreed to be conferred in the Letter of
Transmittal by the holder will survive the death, incapacity or dissolution of
the holder and any obligation of the holder shall be binding upon the heirs,
personal representatives, successors and assigns of such holder.
Withdrawal Rights
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date
unless previously accepted for exchange.
To withdraw a tender of Old Notes in the Exchange Offer, a written,
facsimile, or (for DTC participation) electronic ATOP transmission notice of
withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date prior to
acceptance for exchange thereof by the Company. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes), (iii) contain a statement that such holder is withdrawing its election
to have such Old Notes exchanged, (iv) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee register the
transfer of such Old Notes in the name of the person withdrawing the tender, and
(v) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer, any notice of withdrawal must specify
the name and number of the account at the book-entry transfer facility. All
questions as to the validity, form, and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes that have been tendered but are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender, or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures (described above) under
"-- Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer if at any time
before the acceptance of such Old Notes for exchange or the exchange of the
Exchange Notes for such Old Notes, this Company determines that the Exchange
Offer violates applicable law or Commission policy.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept and Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes, or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of time,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders of the Old Notes, if the Exchange Offer would otherwise
expire during such period. Holders of Old
28
<PAGE> 30
Notes will have certain rights against the Company under the Registration Rights
Agreement should the Company fail to consummate the Exchange Offer. See
"Description of the Notes -- Registration Rights."
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time in its sole discretion. The failure by the Company at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for, any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Exchange Offer Registration Statement of which this Prospectus
constitutes a part of the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). In any such event
the Company is required to use every reasonable effort to obtain the withdrawal
of any stop order at the earliest possible time.
EXCHANGE AGENT
Chase Bank of Texas, National Association has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent addressed as follows:
For Information by Telephone:
Mauri Cowen, Vice President
(713) 266-6686
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Delivery Services:
Chase Bank of Texas, National Association Chase Bank of Texas, National Association
Attention: Frank Ivins, Corporate Trust Attention: Frank Ivins, Corporate Trust
Services Services
P.O. Box 2320 1201 Main Street, 18th Floor
Dallas, Texas 75221-2320 Dallas, Texas 75202
</TABLE>
By Facsimile Transmission:
(214) 672-5932
(Eligible Institutions Only)
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitations
may be made by telecopy, telephone, or in person by officers and regular
employees of the Company. No additional compensation will be paid to any such
officers and employees who engage in soliciting tenders. The Company will not
make any payments to brokers, dealers, or other persons soliciting acceptances
of the Exchange Offer. The Company will, however, pay the Exchange Agent
reasonable and customary fees for its services and will reimburse the Exchange
Agent for its reasonable out-of-pocket expenses in connection therewith. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Old Notes and in handling or forwarding tenders for
exchange.
The expenses to be incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent, accounting, legal and related
fees and expenses, will be paid by the Company.
29
<PAGE> 31
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any change in capitalization
of the Company.
30
<PAGE> 32
CAPITALIZATION
The historical data presented below sets forth the cash and cash
equivalents, short-term debt and capitalization of the Company as of March 31,
1998. The pro forma data gives effect to the Initial Offering, the application
of the net proceeds therefrom and the Exchange Offer. This table should be read
in conjunction with the consolidated financial statements and the notes thereto
and the pro forma consolidated financial data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 1,105 $ 42,622
======== ========
Current maturities of long-term debt........................ $ 1,139 $ 1,139
Long-term debt, net of current maturities:
Bank Credit Facility...................................... 30,000 --
8 7/8% Senior Notes due 2007, Series A(1)................. 174,204 174,204
8 7/8% Senior Notes due 2007, Series B.................... -- --
8 7/8% Senior Notes due 2007, Series C.................... -- 75,000
Other..................................................... 1,839 1,839
-------- --------
Total long-term debt, net of current maturities... 206,043 251,043
Series A preferred stock -- mandatory redeemable............ 305 305
Shareholders' equity:
Common stock, $.10 par value per share.................... 16,489 16,489
Additional paid-in capital................................ 270,090 270,090
Cumulative translation adjustments........................ (454) (454)
Accumulated deficit....................................... (33,428) (33,428)
-------- --------
Total shareholders' equity........................ 252,697 252,697
-------- --------
Total capitalization.............................. $460,184 $505,184
======== ========
</TABLE>
- ------------------------------------
(1) Historical data represents $175.0 million aggregate principal amount of
Series A Notes originally issued to the public at approximately 99.5% of
face value.
31
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statements of operations for
the three months ended March 31, 1998 include the unaudited historical results
of the Company for the three months ended March 31, 1998 and give effect to the
Murco Acquisition and related borrowings under the bank credit facility, as if
it occurred January 1, 1997. The following unaudited pro forma consolidated
statements of operations for the year ended December 31, 1997 include the
historical results of the Company for the year ended December 31, 1997 and give
effect to each of the above transactions as if they occurred on January 1, 1997
and the Justiss Acquisition, the Flournoy Acquisition, the issuance of the $175
million Series A Notes, the GWDC Acquisition and the Common Stock Offering as if
they occurred on January 1, 1997. The basis of presentation and the pro forma
adjustments are described in the accompanying notes.
The following unaudited pro forma consolidated statements of operation are
not necessarily indicative of the actual results of operations that would have
been reported if the events described above had occurred on the dates noted
above nor do they purport to indicate the results of the Company's future
operations. Furthermore, the pro forma results do not give effect to all cost
savings or incremental costs that may occur as a result of the integration and
consolidation of the acquisitions, mergers and sale of assets. In the opinion of
management, all adjustments necessary to present fairly such pro forma financial
statements have been made.
The unaudited pro forma consolidated financial information should be read
in conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included elsewhere herein or incorporated by
reference herein.
32
<PAGE> 34
GREY WOLF, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
GREY WOLF MURCO ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling.............................. $ 74,015 $ 2,073 -- $ 76,088
Costs and expenses:
Drilling operations............................ 54,877 1,296 -- 56,173
Depreciation and amortization.................. 8,587 178 301(a) 9,066
General and administrative..................... 2,485 589 (581)(b) 2,493
-------- ------- ------- --------
Total costs and expenses............... 65,949 2,063 (280) 67,732
-------- ------- ------- --------
Operating income................................. 8,066 10 280 8,356
Other income (expense):
Interest income................................ 337 -- -- 337
Gain on sale of assets......................... 1,770 -- -- 1,770
Interest expense............................... (4,074) -- (206)(c) (4,280)
Foreign currency translation losses............ (67) -- -- (67)
Other, net..................................... -- 98 (98)(b) 0
-------- ------- ------- --------
Other income (expenses), net........... (2,034) 98 (304) (2,240)
-------- ------- ------- --------
Income before income taxes....................... 6,032 108 (24) 6,116
Income taxes..................................... 2,923 -- 13(d) 2,936
-------- ------- ------- --------
Net income applicable to common stock............ 3,109 108 (37) 3,180
======== ======= ======= ========
Basic net income per share....................... $ 0.02 $ 0.02
======== ========
Basic weighted average common shares
outstanding.................................... 164,761 164,761
======== ========
Diluted income per share......................... $ 0.02 $ 0.02
======== ========
Diluted average common shares outstanding........ 168,191 168,191
======== ========
</TABLE>
33
<PAGE> 35
GREY WOLF, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------------------------------------
FLOURNOY GWDC JUSTISS MURCO PRO FORMA PRO
COMPANY ACQUISITION ACQUISITION ACQUISITION ACQUISITION ADJUSTMENTS FORMA
-------- ----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Contract drilling................. $215,923 $3,871 $29,001 $15,425 $34,206 -- 298,426
Costs and expenses:
Drilling operations............... 162,552 3,098 22,203 11,835 23,340 1,312(b) 224,340
Depreciation and amortization..... 20,957 138 1,321 1,355 2,163 11,922(a) 37,856
General and administrative........ 8,081 250 2,121 860 2,443 (4,765)(b) 8,990
-------- ------ ------- ------- ------- -------- --------
Total costs and expenses.... 191,590 3,486 25,645 14,050 27,946 8,469 271,186
-------- ------ ------- ------- ------- -------- --------
Operating Income.................... 24,333 385 3,356 1,375 6,260 (8,469) 27,240
Other income (expense):
Interest income................... 1,248 -- 20 -- -- -- 1,268
Gain on sale of assets............ 1,692 -- 576 -- -- -- 2,268
Interest expense.................. (8,748) (7) (65) (159) (9,652)(c) (18,631)
Minority interest and other....... 324 -- -- -- -- -- 324
Other, net........................ -- -- 8 -- 2,202 (2,202)(b) 8
-------- ------ ------- ------- ------- -------- --------
Other income (expenses),
net....................... (5,484) (7) 539 0 2,043 (11,854) (14,763)
-------- ------ ------- ------- ------- -------- --------
Income before income taxes.......... 18,849 378 3,895 1,375 8,303 (20,323) 12,477
Income taxes........................ 8,631 -- 1,574 -- 1,290 (6,130)(d) 5,365
-------- ------ ------- ------- ------- -------- --------
Net income.......................... 10,218 378 2,321 1,375 7,013 (14,193) 7,112
Series A preferred stock redemption
premium........................... (240) -- -- -- -- -- (240)
-------- ------ ------- ------- ------- -------- --------
Net income applicable to common
stock............................. $ 9,978 $ 378 $ 2,321 $ 1,375 7,013 (14,193) 6,872
======== ====== ======= ======= ======= ======== ========
Basic net income per common share... $ 0.07 $ 0.04
======== ========
Basic weighted average shares
outstanding....................... 145,854 164,335
======== ========
Diluted net income per common
share............................. $ 0.07 $ 0.04
======== ========
Diluted weighted average shares
outstanding....................... 149,724 168,205
======== ========
</TABLE>
34
<PAGE> 36
GREY WOLF, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(1) Basis of Presentation
The following sets forth the assumptions used in preparing the Company's
unaudited pro forma consolidated statements of operations for the three months
ended March 31, 1998 and for the year ended December 31, 1997.
The unaudited pro forma consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company as of and
for the three months ended March 31, 1998 (unaudited) and for the year ended
December 31, 1997 and the notes thereto included elsewhere herein or
incorporated by reference herein. Pro forma financial data are not necessarily
indicative of future operations of the Company due to numerous factors,
including changes in utilization rates for drilling rigs, changes in the rates
received for drilling services and future equipment sales and acquisitions.
(2) Adjustment to Historical Statements of Operations
The unaudited pro forma consolidated statement of operations data for the
three months ended March 31, 1998 assumes that the Murco Acquisition occurred on
January 1, 1998, while the Flournoy Acquisition, GWDC Acquisition and Justiss
Acquisition are included in historical results for the period. The unaudited pro
forma consolidated statement of operations data for the year ended December 31,
1997 assume all of the Transactions occurred on January 1, 1997. Neither of the
periods presented includes the pro forma effect of the Initial Offering as the
proceeds were not required to fund the above transactions.
(a) To reflect the additional depreciation expense for the three months
ended March 31, 1998 for the assets acquired in the Murco Acquisition and the
additional depreciation expense for the year ended December 31, 1997 for the
assets acquired in the Murco Acquisition (approximately $5 million), the
Flournoy Acquisition ($221,000), the GWDC Acquisition (approximately $4.9
million) and the Justiss Acquisition (approximately $1.9 million). Pro forma
depreciation was calculated on a straight line basis over twelve years for 1997
and over fifteen years for 1998. Effective January 1, 1998, the Company changed
the estimated useful lives of the majority of its drilling rigs from 12 to 15
years to better reflect the useful lives of the Company's refurbished and
upgraded rig fleet.
(b) To reflect, for the three months ended March 31, 1998 the elimination
of general and administrative and other expenses of Murco for the cost of
employees and office expenses that will not be absorbed by the Company. To
reflect, for the year ended December 31, 1997, (i) the elimination of $67,000 of
general and administrative expenses of Flournoy Drilling Company ("Flournoy")
for the cost of the founder and president of Flournoy and one other employee who
did not join the Company, (ii) the reclassification of $1.3 million of general
and administrative expenses of GWDC to drilling operations costs to conform to
the Company's presentation of expenses, and the elimination of general and
administrative expenses for the cost of the president and other employees of
GWDC who did not join the Company ($114,000) and (iii) $860,000 for the
elimination of general and administrative expenses of Justiss for the cost of
employees and office expenses that will not be absorbed by the Company.
(c) To reflect, for the three months ended March 31, 1998 the additional
interest expense for the outstanding long-term debt under the bank credit
facility ("the Facility") as a result of the Murco Acquisition. To reflect, for
the year ended December 31, 1997, (i) the elimination of $7,000 of interest
expense on the debt that was repaid by the Company at the closing of the
Flournoy Acquisition, (ii) the additional interest expense for the $175 million
Senior Notes and (iii) the reduction of interest expense associated with the
retirement of the Company's outstanding long-term debt under the Facility.
(d) To adjust income tax expense to conform to the Company's pro forma
income tax position.
35
<PAGE> 37
SELECTED FINANCIAL DATA
The following selected financial data, except for the Drilling Rig Activity
Data, for the years ended or as of December 31, 1997, 1996 and 1995 have been
derived from the audited consolidated financial statements and the notes thereto
of the Company included elsewhere herein or incorporated by reference in this
Prospectus. This data should be read in conjunction with such consolidated
financial statements and the notes thereto. The selected financial data for the
three-month periods ended March 31, 1998 and 1997 and as of March 31, 1998 have
been derived from the unaudited consolidated financial statements of the Company
which have been included elsewhere herein or incorporated by reference in this
Prospectus, and which include all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of its
financial position and results of operations for these periods. Operating
results for the three-month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the entire year. The selected
financial data for the nine months ended December 31, 1994 and for the year
ended March 31, 1994 have been derived from audited consolidated financial
statements of the Company which are not incorporated by reference herein. The
selected financial data for the twelve-month period ended December 31, 1994 has
been derived from the unaudited consolidated financial statements of the Company
which are not included herein or incorporated by reference herein.
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31, ENDED MARCH 31,
------------------- ------------------------------------------- DECEMBER 31, ---------
1998 1997 1997 1996 1995 1994 1994(1) 1994(1)
-------- -------- -------- -------- -------- ------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, RATIOS AND DRILLING RIG ACTIVITY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 74,015 $ 35,975 $215,923 $ 81,767 $ 94,709 $65,393 $50,987 $67,855
Drilling operations costs........ 54,877 28,792 162,552 80,388 93,825 62,929 48,988 62,574
Depreciation and amortization.... 8,587 2,207 20,957 4,689 4,832 3,247 2,377 3,523
General and administrative....... 2,485 1,654 8,081 4,274 3,555 3,007 2,074 2,910
Provision for asset
impairment(2).................. -- -- -- -- 5,290 -- -- --
Non-recurring charges(3)......... -- -- -- 6,131 -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -------
Operating income (loss).......... 8,066 3,322 24,333 (13,715)(6) (12,793) (3,790) (2,452) (1,152)
Interest expense................. 4,074 672 8,748 1,220 1,472 404 332 257
Other income (expense), net...... 2,040 326 3,264 4,058 1,590 637 524 25
-------- -------- -------- -------- -------- ------- ------- -------
Income (loss) from continuing
operations..................... 6,032 2,976 18,849 (10,877) (12,675) (3,557) (2,260) (1,384)
Income (loss) from discontinued
operations(4).................. -- -- -- -- (772) 55 51 (1,274)
-------- -------- -------- -------- -------- ------- ------- -------
Income (loss) before income
taxes.......................... 6,032 2,976 18,849 (10,877) (13,447) (3,502) (2,209) (2,658)
Income taxes..................... 2,923 662 8,631 845 -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -------
Net income (loss)................ 3,109 2,314 10,218 (11,722) (13,447) (3,502) (2,209) (2,658)
Series A preferred stock
redemption premium............. -- 22 240 13 -- -- -- --
Series B preferred stock
subscription dividend.......... -- -- -- 402 -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -------
Net income (loss) applicable to
common stock................... $ 3,109 $ 2,292 $ 9,978 $(12,137) $(13,447) $(3,502) $(2,209) $(2,658)
======== ======== ======== ======== ======== ======= ======= =======
Basic net income (loss) per
share -- continuing
operations..................... $ .02 $ .02 $ .07 $ (.18) $ (.33) $ (.09) $ (.06) $ (.04)
Basic net income (loss) per
share -- discontinued
operations(4).................. -- -- -- -- (.02) -- -- (.03)
-------- -------- -------- -------- -------- ------- ------- -------
Basic net income (loss) per
share.......................... $ .02 $ .02 $ .07 $ (.18) $ (.35) $ (.09) $ (.06) $ (.07)
======== ======== ======== ======== ======== ======= ======= =======
Basic weighted average shares
outstanding.................... 164,761 133,334 145,854 67,495 38,669 38,607 38,641 38,416
Diluted net income (loss) per
share -- continuing
operations..................... $ .02 $ .02 $ .07 $ (.18) $ (.33) $ (.09) $ (.06) $ (.04)
Diluted net income (loss) per
share -- discontinued
operations(4).................. -- -- -- -- (.02) -- -- (.03)
-------- -------- -------- -------- -------- ------- ------- -------
Diluted net income (loss) per
share.......................... $ .02 $ .02 $ .07 $ (.18) $ (.35) $ (.09) $ (.06) $ (.07)
======== ======== ======== ======== ======== ======= ======= =======
Diluted weighted average shares
outstanding.................... 168,191 137,106 149,724 67,495 38,669 38,607 38,641 38,416
OTHER DATA (UNAUDITED):
EBITDA(5)........................ $ 18,693 $ 5,855 $ 48,554 $ 1,163(6) $ (1,853) $ 149 $ 500 $ 1,122
Capital expenditures............. $106,756 $ 47,750 345,264 $ 71,219 $ 5,657 $14,837 $14,350 $ 2,849
Ratio of EBITDA to interest
expense........................ 4.0x 8.7x 4.6x 1.0x -- 0.4x 1.5x 4.4x
Ratio of earnings to fixed
charges(7)..................... 2.1x 5.2x 2.6x -- -- -- -- --
</TABLE>
36
<PAGE> 38
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED YEAR ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31, ENDED MARCH 31,
------------------- ---------------------------------------- DECEMBER 31, ---------
1998 1997 1997 1996 1995 1994 1994(1) 1994(1)
-------- -------- -------- -------- -------- ------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, RATIOS AND DRILLING RIG ACTIVITY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DRILLING RIG ACTIVITY DATA
(UNAUDITED)(8):
Average utilization rate of drilling
rigs available for service........ 78% 76% 81% 63% 66% 51% 58% 51%
Average revenues per day(9)......... $ 9,407 $ 8,134 $ 8,847 $ 7,610 $ 7,739 $ 8,520 $ 9,609 $ 9,102
Drilling rigs available for
service -- end of period.......... 112 70 100 52 58 57 57 57
Inventoried drilling rigs -- end of
period............................ 14 23 16 25 22 13 13 13
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
--------- ------------------------------------------ ---------
1998 1997 1996 1995 1994(1) 1994(1)
--------- -------- -------- ------- ------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(10):
Working capital........................................... $ 26,347 66,644 $ 6,195 $ 7,503 $12,462 $ 9,053
Property and equipment, net............................... 506,443 409,088 88,476 25,910 30,786 19,797
Total assets.............................................. 580,359 533,752 117,819 57,783 62,860 46,524
Long-term debt net of current maturities.................. 206,043 176,225 26,846 11,146 10,224 198
Series A preferred stock -- mandatory redeemable.......... 305 305 764 900 1,900 --
Shareholders' equity...................................... 252,697 249,216 64,646 19,694 29,141 31,150
</TABLE>
- ------------------------------------
(1) During 1994, the Company changed its fiscal year end from March 31 to
December 31.
(2) Represents impairment to certain drilling rigs and equipment caused by
market indications that the carrying amounts were not recoverable. See note
1 to the Company's consolidated financial statements included elsewhere in
this Prospectus.
(3) Primarily represents employment severance costs for the Company's former
President and Chief Executive Officer and costs to exit the Argentine and
Mexican markets. See note 11 to the Company's consolidated financial
statements included elsewhere in this Prospectus.
(4) To account for the discontinued operations of DI Energy, Inc. effective
April 1, 1995.
(5) EBITDA (earnings before interest, taxes, depreciation and amortization,
asset impairment and non-recurring charges) is presented here to provide
additional information about the Company's operations. EBITDA should not be
considered as an alternative to net income, as determined in accordance
with GAAP, as an indicator of the Company's operating performance or as an
alternative to cash flows (as determined in accordance with GAAP) as a
better measure of liquidity.
(6) Includes $8.1 million of operating losses related to the Company's
operations in Argentina and Mexico which have since been discontinued.
(7) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings before income taxes plus
fixed charges less capitalized interest) by fixed charges (interest expense
plus capitalized interest and the portion of operating lease rental expense
that represents the interest factor). There were insufficient earnings to
cover fixed charges in each period presented as follows: years ended
December 1996, 1995 and 1994 -- $10,759, $12,675 and $3,557, respectively;
nine months ended December 31, 1994 -- $2,260; and the year ended March 31,
1994 -- $1,384
(8) Excludes the Company's workover rigs.
(9) Represents total contract drilling revenues divided by the total number of
rig days the Company's drilling rig fleet operated during the period.
(10) Except for shareholders' equity, these items have been restated to account
for the discontinued operations of DI Energy, Inc. effective April 1, 1995.
37
<PAGE> 39
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 and notes thereto of the Company included
elsewhere herein.
GENERAL
The consolidated balance sheets, statements of operations and cash flows
for the year ended December 31, 1997 and for the quarter ended March 31, 1998 do
not reflect the Initial Offering. See "Unaudited Pro Forma Consolidated
Financial Data."
For the three months ended March 31, 1998, for the months of April 1998 and
May 1998, the Company experienced decreases in average rig utilization rates in
its core domestic markets to approximately 81%, 71% and 72%, respectively, as
compared to an average rig utilization rate of 96% in its core domestic markets
for 1997. In addition, the bid rate for new drilling contracts in the Company's
core domestic markets for the three months ended March 31, 1998 decreased
approximately 12% from the highest bid rates achieved during the three months
ended December 31, 1997. The Company believes that these trends are attributable
to lower prices for oil and gas production, and to widespread uncertainty among
potential customers as to the future level and trend of oil and gas prices. If
these trends continue, or worsen, they could have a material adverse effect on
the Company's results of operations.
FINANCIAL CONDITION AND LIQUIDITY
During the first three months of 1998, the Company funded its activities
through a combination of cash generated from operations, borrowings under the
Company's bank credit facility (the "Bank Credit Facility"), and the remaining
proceeds from the November 1997 issuance of common stock.
The following table summarizes the Company's financial position at March
31, 1998 and as of December 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- ------------------
AMOUNT % AMOUNT %
-------- --- ---------- -----
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Working capital..................................... $ 26,347 5 $ 66,644 14
Property and equipment, net......................... 506,443 94 409,088 85
Other noncurrent assets............................. 6,494 1 6,983 1
-------- --- -------- ---
Total..................................... $539,284 100 $482,715 100
======== === ======== ===
Long-term debt...................................... $206,043 38 $176,225 36
Other long-term liabilities......................... 80,544 15 57,274 12
Shareholders' equity................................ 252,697 47 249,216 52
-------- --- -------- ---
Total..................................... $539,284 100 $482,715 100
======== === ======== ===
</TABLE>
The significant changes in the Company's financial position from December
31, 1997 to March 31, 1998 are the decrease in working capital of $40.3 million
and the increase in property and equipment, net and long-term debt of $97.4
million and $29.8 million, respectively. These changes are primarily due to the
acquisition of Murco discussed below.
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco for $60.5 million in cash and assumed net liabilities of
approximately $4.5 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 $30.0 million of borrowings under the
Facility. Murco operated ten land drilling rigs in the Ark-La-Tex and
Mississippi/Alabama markets.
38
<PAGE> 40
Operating Activities
During the first three months of 1998, the Company generated cash flow from
operations of $665,000. While cash generated from operations increased to $12.4
million, working capital requirements increased by $11.7 million due to the
increase in the overall level of activity by the Company and additional working
capital requirements resulting from the acquisition of Murco.
Investing Activities
During the three months ended March 31, 1998, the Company invested $83.4
million in fixed assets, net of asset sales. The cash portion of the acquisition
of Murco, including transaction costs, accounted for $66.2 million, in addition
to $21.0 million in non-cash additions to property and equipment for the Murco
rigs. Capital expenditures for rig refurbishments and capital maintenance were
approximately $19.6 million.
Financing Activities
During the first three months of 1998, cash provided by financing
activities totaled $30.2 million consisting principally of net proceeds from
borrowings of $30.0 million under the Bank Credit Facility. These borrowings
were used to fund the acquisition of Murco and additional working capital
requirements discussed above. The Company had cash and cash equivalents at March
31, 1998, of $1.1 million.
Subsequent Event and Future Activities
On May 8, 1998 the Company completed the Initial Offering. The net proceeds
from the Initial Offering were $71.5 million, after deducting commissions, fees
and expenses. A portion of the net proceeds from the offering was used to repay
approximately $30.0 million of indebtedness incurred under the Bank Credit
Facility to partially finance the acquisition of Murco. The remaining proceeds
will be used for rig refurbishment and for general corporate purposes.
Substantially all indebtedness outstanding under the Bank Credit Facility was
repaid from the net proceeds of the Initial Offering, and pursuant to the terms
of the Facility the Company can now incur up to $50.0 million dollars of
additional indebtedness under the Bank Credit Facility.
During the three months ended March 31, 1998 the Company completed the
refurbishment of two rigs and began the refurbishment of two additional rigs for
deployment in the Company's core domestic markets. The estimated cost to
refurbish the two rigs currently being refurbished is approximately $2.8 million
per rig including the cost of a new drill string. Funding requirements to
refurbish the remaining 12 rigs from inventory could be substantial based upon
1998 estimates. The Company estimates costs for pending and planned
refurbishments for these 12 rigs will total $ 29.2 million. These estimates are
based on deployment of all rigs undergoing or planned for refurbishment to the
Company's four core domestic markets at an estimated average refurbishment cost
of $ 2.4 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 could be as high as $12.0 million per rig, including the cost of a new
drill string, transportation and importation duties. Overall estimated capital
expenditures for rig refurbishments would be correspondingly increased by the
incremental refurbishment cost of rigs destined for international markets. As a
result of the recent decline for land drilling services in the Company's
domestic markets, the Company has delayed the refurbishment of its 12 remaining
inventory rigs until such time as management believes that demand for drilling
services in the Company's core domestic markets again justifies resumption of
the Company's refurbishment program. In the event that the Company is successful
in obtaining long-term drilling contracts in foreign markets, the Company may
refurbish certain of its inventory rigs for service in those foreign markets.
The Company believes that the cash flow from operations, proceeds from the
Initial Offering discussed above, and to the extent required, further borrowings
under the Bank Credit Facility, will be sufficient to fund the Company's
refurbishment program and meet its other anticipated capital expenditures for
the remainder of 1998.
39
<PAGE> 41
The Company continues to actively review possible acquisition
opportunities. While the Company has no agreements to acquire additional
businesses or equipment, 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 transaction. There can be no assurance that adequate
funding will be available on terms satisfactory to the Company.
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 currency
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 has not during the three months ended March 31,
1998, 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 these efforts, however,
the Company remains subject to the risk of foreign currency losses. During the
three months ended March 31, 1998 the Company recognized foreign currency
translation losses of $67,000. (See Note 1 "Significant Accounting
Policies -- Foreign Currency" to the Consolidated Financial Statements).
Other
The Company has not paid any cash dividends on the Company's common stock
and does not anticipate paying dividends on the 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.
The Company is a holding company, substantially all of its operations are
conducted through, and substantially all of its assets consist of equity
interest in, its subsidiaries, including the Guarantors. As a holding company,
Grey Wolf's liquidity is dependent on the operations of its subsidiaries.
Certain financing arrangements that the Company and its subsidiaries are party
may restrict the Company's ability to access funds from its subsidiaries. See
"Description of Certain Indebtedness."
40
<PAGE> 42
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1998 and 1997
The following table highlights rig days worked, revenues and operating
expenses for the Company's domestic and foreign operations for the three months
ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
--------------------------------- ---------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT RIG DAYS WORKED AND AVERAGE REVENUES PER DAY)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked................. 7,690 178 7,868 3,973 450 4,423
Drilling revenues............... $71,910 $ 2,105 $74,015 $32,600 $3,375 $35,975
Operating expenses(1)........... 52,699 2,178 54,877 25,817 2,975 28,792
------- ------- ------- ------- ------ -------
Gross profit (loss)............. $19,211 $ (73) $19,138 $ 6,783 $ 400 $ 7,183
======= ======= ======= ======= ====== =======
Averages per rig day worked
Drilling revenues............. $ 9,351 $11,826 $ 9,407 $ 8,205 $7,500 $ 8,134
Operating expenses(1)......... 6,853 12,236 6,974 6,498 6,611 6,510
------- ------- ------- ------- ------ -------
Gross profit (loss)........... $ 2,498 $ (410) $ 2,433 $ 1,707 $ 889 $ 1,624
======= ======= ======= ======= ====== =======
</TABLE>
- ------------------------------
(1) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
Revenues increased approximately $38.0 million, or 106%, to $74.0 million
for the three months ended March 31, 1998, from $36.0 million for the three
months ended March 31, 1997. This increase is primarily due to an increase in
revenue from domestic operations of $39.3 million due to an increase in the
average revenue per day worked of $1,146 and an increase in rig days worked of
3,717. The increase in operating days is due to the acquisition of 54 operating
rigs during 1997 and January of 1998. The increase in revenue from domestic
operations was partially offset by a decrease in revenue from foreign operations
of $1.3 million where rig days worked decreased by 272 days while the average
revenue per day worked increased by $4,326.
Drilling operating expenses increased by approximately $26.1 million, or
91%, to $54.9 million for the three months ended March 31, 1998, as compared to
$28.8 million for the three months ended March 31, 1997. The increase is due to
a $26.9 million increase in drilling operating expenses from domestic operations
partially offset by a decrease of $797,000 in drilling operating expenses from
foreign operations. The increase in domestic drilling operating expenses is a
direct result of the increase in the number of rigs owned and available for
service and the corresponding 3,717 increase in the days worked. The decrease in
drilling operating expenses from foreign operations is due to fewer rigs
operating as a result of the Company's decreased activity in Venezuela as
discussed above.
Depreciation and amortization expense increased by $6.4 million, or 289%,
to $8.6 million for the three months ended March 31, 1998, compared to $2.2
million for the three months ended March 31, 1997. The increase is primarily due
to additional depreciation associated with the acquisition of additional
operating rigs noted above and 23 rigs refurbished from inventory and placed
into service during 1997 and the first quarter of 1998.
General and administrative expenses increased by $831,000 or 50%, to $2.5
million for the three months ended March 31, 1998, from $1.7 million for the
same period of 1997 due primarily to the increased size of the Company's
operations.
Interest expense increased by $3.4 million or 506% to $4.1 million for the
three months ended March 31, 1998, compared to $672,000 for the three months
ended March 31, 1997. The increase is due to a $161.5 million increase in the
average outstanding debt balance to $192.3 million for the three months ended
March 31, 1998, from $30.8 million for the three months ended March 31, 1997.
This increase in the outstanding debt balance is primarily due to (i) the
issuance of $175.0 million of Senior Notes during
41
<PAGE> 43
June 1997 to complete the Grey Wolf Drilling Company merger and continue the
refurbishment of the additional rigs purchased and (ii) the borrowings of $30.0
million under the Facility which were used for the purchase of Murco.
Other income, net increased by $1.7 million to $2.0 million for the three
months ended March 31, 1998 as compared to $326,000 for the three months ended
March 31, 1997. The increase is primarily due to the gain of $1.8 million on the
sale of the rigs and drilling related equipment of the Company's Eastern
division located in Ohio to Union Drilling, Inc., an affiliate of two of the
Company's directors.
Comparison of Fiscal Year Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------- ---------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- -------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT RIG DAYS WORKED AND AVERAGE REVENUES PER DAY)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked................ 23,575 830 24,405 7,050 3,694 10,744
Drilling revenues.............. $209,423 $ 6,500 $215,923 $52,495 $29,272 $81,767
Operating expenses(1).......... 154,821 7,731 162,552 49,431 30,957 80,388
-------- ------- -------- ------- ------- -------
Gross profit (loss)............ $ 54,602 $(1,231) $ 53,371 $ 3,064 $(1,685) $ 1,379
======== ======= ======== ======= ======= =======
Averages per rig day worked
Drilling revenues............ $ 8,883 $ 7,831 $ 8,847 $ 7,446 $ 7,924 $ 7,610
Operating expenses........... 6,567 9,314 6,661 7,011 8,380 7,482
-------- ------- -------- ------- ------- -------
Gross profit (loss).......... $ 2,316 $(1,483) $ 2,186 $ 435 $ (456) $ 128
======== ======= ======== ======= ======= =======
</TABLE>
- ---------------
(1) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
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 was 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 was 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 was 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 was 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 was primarily due to increased
utilization but was also partially due to increases in 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 was 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
42
<PAGE> 44
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 was 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 $800,000 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
Series A Notes during June 1997 to complete the Grey Wolf Acquisition and
continue the refurbishment of the rigs purchased in the stacked rig
acquisitions.
Comparison of Fiscal Year Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------------------- ---------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
---------- ---------- ------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT RIG DAYS WORKED AND AVERAGE REVENUES PER DAY)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked................. 7,050 3,694 10,744 6,289 5,405 11,694
Drilling revenues............... $52,495 $29,272 $81,767 $44,797 $45,698 $90,495
Export Sales.................... -- -- -- -- 4,214 4,214
Operating expenses(1)........... 49,431 30,957 80,388 40,867 48,277 89,144
Export sales expenses........... -- -- -- -- 4,681 4,681
------- ------- ------- ------- ------- -------
Gross profit (loss)............. $ 3,064 $(1,685) $ 1,379 $ 3,930 $(3,046) $ 884
======= ======= ======= ======= ======= =======
Averages per rig day worked
Drilling revenues............. $ 7,446 $ 7,924 $ 7,610 $ 7,123 $ 8,455 $ 7,739
Operating expenses(1)......... 7,011 8,380 7,482 6,498 8,932 7,623
------- ------- ------- ------- ------- -------
Gross profit (loss)........... $ 435 $ (456) $ 128 $ 625 $ (477) $ 116
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Operating expenses exclude depreciation and amortization and general and
administrative expenses.
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
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<PAGE> 45
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
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$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.
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.
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 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.
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BUSINESS
GENERAL
Grey Wolf is a leading provider of contract land drilling services in the
United States with a domestic fleet of 120 rigs at May 31, 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, 114 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. By increasing the size of its rig fleet through
acquisitions and refurbishments, the Company increased its market share during
1997 in the three core markets in which it then operated in a period of rapidly
rising demand and day rates for land drilling rigs in those key markets. The
Company's larger fleet of marketable rigs, higher rig utilization rates and
increasing day rates significantly improved the Company's financial performance
during 1997 despite increased drilling operation costs, including wages and
benefits, and debt service over the same period.
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. For the quarter ended March 31, 1998, the
Company reported net income of $3.1 million.
BUSINESS STRATEGY
The Company's business strategy is to achieve increased cash flow and
earnings through: (i) focusing on core markets and establishing leading
positions in these markets; (ii) refurbishing and reactivating inventoried rigs
to satisfy increases in demand; (iii) acquiring land drilling businesses and
assets to capitalize on anticipated improvements in the industry; and
(iv) 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 and is pursuing other international
bidding opportunities.
Refurbishment and Reactivation of Inventoried Rigs. From the beginning of
the fourth quarter of 1996 through May 1998, the Company has refurbished and
reactivated 29 rigs. Although no further rig refurbishments are currently
planned for 1998 as a result of recent declines in rig utilization rates in the
Company's core domestic markets, the Company intends to refurbish the remaining
12 rigs in its inventory as the demand for drilling services warrants.
Acquisitions. The Company has aggressively followed its operating strategy
by acquiring 100 land drilling rigs in 13 transactions from August 1996 through
May 1998. Six of these acquisitions were of 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
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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 23 years of related experience. Many
of the Company's operating personnel joined the Company in connection with
acquisitions completed since October 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 May 31, 1998, there have been at least 45 completed or pending
transactions involving the acquisition of a combined total of approximately 564
rigs, over 75% 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
798 as compared to 652 for 1996. For the first quarter of 1998 the average
active domestic land rig count was 806, compared with 717 for the first quarter
of 1997. By increasing the size of its rig fleet through acquisitions and
refurbishments, the Company increased its market share during 1997 in the three
core markets in which it then operated in a period of rapidly rising demand and
day rates for land drilling rigs in those key markets. The Company's larger
fleet of marketable rigs, higher rig utilization rates and increasing day rates
significantly improved the Company's financial performance during 1997 despite
increased drilling operations, costs, including wages and benefits, and debt
service over the same period.
SIGNIFICANT ACQUISITIONS AND SALES
Murco Acquisition. On January 30, 1998, the Company acquired all of the
outstanding common stock of Murco for $60.5 million in cash and assumed net
liabilities of approximately $4.5 million. The Company funded this acquisition
through the use of working capital and its Bank Credit Facility. Murco operated
ten land drilling rigs in Ark-La-Tex and Mississippi/Alabama. 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. In late October and early November 1997, the Company
acquired substantially all of the operating assets of Justiss. The assets
included a fleet of 12 operating drilling rigs and related equipment which were
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. 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 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. Two of the six rigs are currently being
refurbished and four 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 Series A Notes offering.
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GWDC Acquisition. On June 27, 1997, the Company acquired 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
the Company's 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 for approximately 12.4 million shares of the
Company's 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.
Diamond M Acquisition. On December 31, 1996, the Company acquired the
assets of 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 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 its 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 the Company's 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 sold its 65%
interest in INDRILLERS, L.L.C. ("Indrillers") and certain related drilling
assets to Dart Energy Corporation ("Dart") for $1.65 million in cash and title
to a 1,200 horsepower SCR rig previously held by Indrillers. Indrillers 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 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. for $2.4
million in cash, the last transaction being completed on March 4, 1998. The
Eastern Division's rig fleet consisted of six 450 horsepower mechanical rigs.
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DOMESTIC OPERATIONS
The Company's total domestic rig fleet consists of 120 rigs, 108 of which
are actively marketed, and 12 of which are held for refurbishment as demand
warrants.
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. Two of the markets, the Ark-La-Tex and Mississippi/Alabama
markets are served by one operating division, the Ark-La-Tex Division, while the
South Texas and Gulf Coast market areas are each 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 and Mississippi/Alabama markets. 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 "-- Significant
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 39 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. The other two principal geologic targets in the
market, are found at substantially greater depths, typically from 15,500 to
22,000 feet. In the Mississippi/Alabama market, most drilling is directed to
five principal target geologic formations ranging from 11,000 to 22,000 feet.
The Company has 28 marketable rigs operated by the Ark-La-Tex Division suitable
for drilling to target formations below 15,000 feet.
During 1997, the approximate percentages of the division's revenues derived
from daywork, footage and turnkey contracts were 76%, 4% and 20%, respectively,
and for the first quarter of 1998 were 95%, 1% and 4%, respectively. The average
revenues per rig day worked and the average rig utilization rate for the
division were approximately $8,239 and 95% during 1997, and for the first
quarter of 1998 were approximately $8,305 and 77%.
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 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, the approximate percentages of the division's revenues derived
from daywork, footage and turnkey contracts were 61%, 15% and 24%, respectively,
and for the first quarter of 1998 were 83%, 8% and 9%, respectively. The average
revenues per rig day worked and the average rig utilization rate for the
Division were approximately $9,395 and 97% during 1997, and for the first
quarter of 1998 were approximately $10,127 and 86%.
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 33 drilling rigs, including nine
1,500 to 2,000 horsepower diesel electric rigs with rated depth capacities of
20,000 to 25,000 feet, fourteen 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.
This division's rig fleet is comprised primarily of rigs acquired in the
GWDC Acquisition on June 27, 1997. During the last six months of 1997, the
approximate percentages of the division's revenues derived from daywork, footage
and turnkey contracts were 85%, 1% and 14%, respectively, and for the first
quarter of 1998
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were 98%, 0% and 2%, respectively. The average revenues per rig day worked and
the average rig utilization rate for the division were approximately $10,219 and
96% during the last six months of 1997, and for the first quarter of 1998 were
approximately $10,126 and 77%.
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. The Company currently has three rigs working in
Venezuela and is actively marketing its three remaining rigs. 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 May 1998, 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 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 and one workover rig 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, respectively, but 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
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1995. During 1997, the Company's 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 its foreign operations are conducted only in Venezuela, the
Company is considering expansion into additional international markets as
bidding opportunities arise. In this regard, the Company has and will in the
future bid on long-term contracts for drilling in Bolivia, Mexico and other
foreign markets.
RIG INVENTORY AND REFURBISHMENTS
The Company has an inventory of 12 rigs, or approximately 10% 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.
Since the fourth quarter of 1996 through April 15, 1998, the Company has
completed the refurbishment of 29 rigs at an aggregate cost of approximately
$70.7 million. Of these 29 recently refurbished rigs, 23 are diesel electric SCR
inventory rigs ranging from 1,000 to 4,000 horsepower with depth ratings of
15,000 to 40,000 feet and one rig is a 1,500 horsepower mechanical rig with a
depth rating of 20,000 feet. The remaining 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 29 recently refurbished rigs are now assigned to the
Company's Ark-La-Tex, Gulf Coast and South Texas Divisions.
As a result of the recent decline for land drilling services in the
Company's core domestic markets, the Company has delayed any further
refurbishments to its 12 remaining inventory rigs (excluding the two
refurbishments underway) until such time as management believes that demand for
drilling services in the Company's core domestic markets again justifies
resumption of the Company's refurbishment program. 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 $2.4 million per rig for rigs refurbished in 1996 and 1997 and are
estimated to be $2.8 million per rig for those to be refurbished in 1998.
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 "Risk
Factors -- Dependence on Oil and Gas Industry; Industry Conditions."
RIG FLEET
A land drilling rig consists of engines, drawworks, a mast, substructure,
pumps to circulate drilling fluid, blowout preventers, drill string and other
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.
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<PAGE> 53
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, mechanical and diesel electric.
Mechanical rigs transmit power generated by a diesel engine directly to an
operation (for example the 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 May 31,
1998, by maximum rated depth capacity:
<TABLE>
<CAPTION>
MAXIMUM RATED DEPTH CAPACITY
-------------------------------------------------
UNDER 10,000' 15,000' 20,000'
10,000' TO 14,999' TO 19,999' AND DEEPER TOTAL
------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Ark-La-Tex Division(1)
Diesel Electric................... -- 1 5 10 16
Mechanical........................ -- 10 9 4 23
South Texas Division
Diesel Electric................... -- 2 5 5 12
Mechanical........................ 4 20 -- -- 24
Gulf Coast Division
Diesel Electric................... -- -- 2 22 24
Mechanical........................ -- 3 2 4 9
Venezuela Division
Diesel Electric................... -- -- -- -- --
Mechanical........................ -- 5 1 -- 6
-- -- -- -- ---
Total Marketed...................... 4 41 24 45 114
Inventory
Diesel Electric................... -- -- 2 8 10
Mechanical........................ -- 1 1 -- 2
-- -- -- -- ---
Total Rig Fleet..................... 4 42 27 53 126
== == == == ===
</TABLE>
- ------------------------------
(1) The Ark-La-Tex Division manages rigs in both the Ark-La-Tex and
Mississippi/Alabama markets.
CONTRACTS
The Company's contracts for drilling oil and gas wells are obtained either
through competitive bidding or as a result of negotiations with customers.
Contract terms offered by the Company are generally dependent on the complexity
and risk of operations, on-site drilling conditions, type of equipment used and
the anticipated duration of the work to be performed. Generally, domestic
drilling contracts are for a single well, while foreign drilling contracts are
for multiple wells 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
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<PAGE> 54
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 86% of the wells it drilled in 1997 were principally targeted by
its customers for production of natural gas and the balance for crude oil. One
unaffiliated customer, Swift Energy Company, 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 or for the quarter
ended March 31, 1998.
The Company primarily markets its drilling rigs on a regional basis through
employee sales representatives. These sales representatives utilize personal
contacts and industry periodicals and publications to determine which operators
are planning to drill oil and gas wells in the immediate future. Once the
Company has been placed on the "bid list" for an operator, the Company will
typically be given the opportunity to bid on all future wells for that operator
in the area.
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.
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<PAGE> 55
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 14% 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.
EQUIPMENT AND SUPPLIES
Although equipment and supplies used in the Company's business are
generally available from multiple sources, there is a general shortage of
drilling equipment and supplies. The costs and delivery times of equipment and
supplies are substantially greater than in prior periods. In response to this
trend, the Company in 1996 formed an alliance with a major drill pipe
manufacturer. The alliance enables the Company to take delivery through 1998 of
29,300 joints of drill pipe in commonly used diameters at fixed prices plus
possible escalations for increases in the manufacturer's cost of raw materials.
As is common in the industry, the drill pipe supply alliance is not a formal
contractual agreement but represents an informal arrangement in which both
parties undertake to satisfy the supply objective of the alliance. Due in part
to its alliance arrangement, the Company is not currently experiencing any
material shortages of, or material price increases in, drill pipe. In addition,
the Company and its supplier under the drill pipe supply alliance have entered
into a formal contractual arrangement for the purchase and supply of a 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 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 drilling equipment and supplies on satisfactory terms, but there can
be no assurance that it will be able to do so. Accordingly, there can be no
assurance that the Company will not experience shortages of, or material price
increases in, drilling equipment and supplies, including drill pipe, in the
future. Any such shortages could delay and adversely affect the Company's
ability to refurbish its rigs held in inventory and obtain contracts for its
marketable rigs.
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
54
<PAGE> 56
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.
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 statutes. 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
55
<PAGE> 57
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.
LEGAL PROCEEDINGS
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's financial condition or results of
operations.
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 or
death, 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),
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.
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<PAGE> 58
FACILITIES
The following table summarizes the Company's significant owned and leased
properties:
<TABLE>
<CAPTION>
LOCATION INTEREST USES
-------- -------- ----
<S> <C> <C>
Houston, Texas........................... Leased Executive Offices
Houston, Texas........................... Owned Rig Yard
Alice, Texas............................. Owned Field Office, Rig Yard, Truck Yard
Duson, Louisiana......................... Owned Rig Yard
Eunice, Louisiana........................ Owned Field Office
Fillmore, Louisiana...................... Owned Field Office
Oklahoma City, Oklahoma.................. Owned Rig Yard
Midvale, Ohio............................ Owned Field Office, Rig Yard
</TABLE>
The Company leases approximately 22,700 square feet of office space for its
principal executive offices at a cost of approximately $32,000 per month. The
Company considers all of its facilities to be in good operating condition and
adequate for their present uses.
EMPLOYEES
At May 31, 1998, the Company had approximately 2,400 employees. None of the
Company's employees are subject to collective bargaining agreements, and
management believes its employee relations are satisfactory.
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<PAGE> 59
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table and descriptions below set forth certain information regarding
the Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Thomas P. Richards..................... 54 President, Chief Executive Officer and
Director
David W. Wehlmann...................... 39 Senior Vice President, Chief Financial Officer
and Secretary
Terrell L. Sadler...................... 49 Senior Vice President -- Domestic Operations
Ronnie E. McBride...................... 48 Senior Vice President -- Domestic Operations
Forrest M. Conley, Jr.................. 50 Senior Vice President -- International
Operations
Merrie S. Costley...................... 39 Vice President and Controller
Gary D. Lee............................ 52 Vice President -- Human Resources
John D. Peterson, Jr................... 43 Vice President
Donald J. Guedry, Jr................... 41 Vice President and Treasurer
Ivar Siem.............................. 52 Chairman of the Board and Director
William R. Ziegler..................... 55 Vice Chairman of the Board and Director
William T. Donovan..................... 46 Director
Peter M. Holt.......................... 49 Director
James K. B. Nelson..................... 70 Director
Roy T. Oliver, Jr...................... 45 Director
Steven A. Webster...................... 46 Director
</TABLE>
Thomas P. Richards joined the Company in September 1996 as President and
Chief Executive Officer. He became a director on March 24, 1998. Mr. Richards
was with Diamond Offshore Drilling, Inc. ("Diamond Offshore") from September
1990 until September 1996. He started as Senior Vice President of Diamond M
Corporation, a subsidiary of Diamond Offshore ("Diamond M"), in 1990 and was
serving as Senior Vice President of Worldwide Operations when he left Diamond
Offshore in 1996. Mr. Richards served as Vice President -- Land for Penrod
Drilling Corporation ("Penrod") from January 1989 until September 1990, when
Diamond M purchased substantially all of Penrod's land drilling assets. From
February 1974 until December 1988, Mr. Richards owned and served as President
and Chief Executive Officer of Richards Drilling Company, a land drilling
contractor based in Bay City, Texas.
David W. Wehlmann joined the Company in July 1996 as Vice President and
Controller. He was promoted to Senior Vice President, Chief Financial Officer
and Secretary in February 1998. From November 1994 until he joined the Company,
Mr. Wehlmann was Vice President and Chief Accounting Officer of EnerVest
Management Company, L.C., a privately-held oil and gas property acquisition and
management company. Mr. Wehlmann was Controller of Convest Energy Corporation
from April 1991 to November 1994. Mr. Wehlmann is a certified public accountant.
Terrell L. Sadler joined the Company in 1989 as the Ark-La-Tex District
Manager. He was promoted to Vice President -- Mid Continent Division in November
1994, and became Vice President -- Domestic Drilling in April 1996. Mr. Sadler
was promoted to Senior Vice President -- Domestic Operations in September 1996.
Ronnie E. McBride joined the Company in September 1996 as Senior Vice
President -- Domestic Operations. Mr. McBride was the Vice President of Turnkey
Services at Diamond Offshore from December 1995 until September 1996. He served
as Operational Manager of Diamond M from October 1991 until March 1993, at which
time he was promoted to Vice President -- Onshore Operations and served in this
position until December 1995. Prior to October 1991, Mr. McBride was Vice
President -- Operations for Harkins & Company for four years until it was
acquired by Diamond M.
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<PAGE> 60
Forrest M. Conley, Jr. joined the Company in September 1996 as Senior Vice
President -- International Operations. Mr. Conley has twenty-six years of
drilling industry experience. From May 1993 until joining the Company, he was
with Noble Drilling Corporation -- Triton Engineering where he served as
Manager -- Sales and Marketing, Manager -- International Marketing and most
recently as the Vice President and General Manager of Triton International.
Previously, he was General Manager of ENSCO Tool & Supply's West Africa division
from December 1991 until May 1993.
Merrie S. Costley joined the Company in January 1997 as Assistant
Controller. She was promoted to Vice President and Controller in February 1998.
She served as Financial Reporting Manager of Transworld Mortgage Corp., a
mortgage service company, from February 1996 until December 1996, most recently
as Audit Experienced Manager at Arthur Andersen LLP from June 1988 until
February 1996. Ms. Costley is a certified public accountant.
Gary D. Lee joined the Company in March 1997 as Vice President -- Human
Resources. For the past 15 years, he was with Diamond Offshore where from 1990
until March 1997, he served as Vice President -- Human Resources.
John D. Peterson, Jr. became Vice President of the Company in 1997 upon the
closing of the GWDC Acquisition. Mr. Peterson was Secretary-Treasurer of GWDC
from April 1990 until closing. Mr. Peterson held various positions with GWDC
from March 1982 to March 1990. Mr. Peterson is a certified public accountant.
Donald J. Guedry, Jr. has been the Company's Vice President and Treasurer
since October 1996 and was promoted to Vice President in November 1997. During
the seven years prior to joining the Company, Mr. Guedry served in various
treasury management positions for Weatherford Enterra, Inc. and a predecessor
company.
Ivar Siem has been Chairman of the Board since August 1995 and was
President and Chief Executive Officer from April 1996 through August 1996. He
has been an international consultant in energy, technology and finance since
1985. He is a member of the board of directors of several privately held and
publicly traded companies, including: Chairman of the Board of Blue Dolphin
Energy Company, an oil and gas pipeline and exploration company, since 1989;
Chairman of the Board of Directors of Seateam Technology ASA, a provider of
subsea surveys and support for the offshore oil and gas industry, since January
1997; and director of DSND ASA, a Norwegian service company that operates
specialty vessels and provides subsea engineering services, since 1993.
William R. Ziegler has been a director of the Company since August 1996 and
is currently Vice Chairman of the Board of Directors. He has been a partner of
the law firm of Parson & Brown LLP since June 1994. Prior to that time he was a
partner in the law firm of Whitman Breed Abbott & Morgan and a predecessor firm
for over five years. Mr. Ziegler is a director of R&B Falcon Corporation; a
general partner of Somerset Capital Partners, a New York general partnership
("SCP"), the managing member of Somerset Drilling Associates, L.L.C., a Delaware
limited liability company ("SDA"); a director of Geokinetics, Inc., a 3-D
seismic acquisition and geophysical services provider to the oil and gas
industry; a director of Ponder Industries, Inc., an oil service and rental tool
company; and a director of Flotek Industries, Inc., an oil services equipment
supplier.
William T. Donovan became a director of the Company in 1997 upon closing of
the GWDC Acquisition. Since 1980, Mr. Donovan has been a Principal and Managing
Director of Lubar & Co., a private investment and venture capital firm. Mr.
Donovan also serves as President and Chief Financial Officer of Christiana
Companies, Inc. and as a director of various private industrial companies. Prior
to joining Lubar & Co., Mr. Donovan was an officer with Manufacturers Hanover
Trust Company from 1976 to 1980, where he specialized in merger acquisition
financing.
Peter M. Holt has been a director of the Company since August 1996. He has
been the President, Chief Executive Officer and principal owner of Holt
Companies for over 13 years. Holt Companies is comprised of two Caterpillar
dealerships in central/south Texas and western Ohio and various other business
interests.
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<PAGE> 61
James K. B. Nelson became a director of the Company in 1997 upon closing of
the GWDC Acquisition. He joined GWDC in 1960 and has served as President and
Chief Executive Officer of GWDC since 1978. He began his career in the oil field
drilling industry as a roughneck in 1946.
Roy T. Oliver, Jr. has been a director of the Company since August 1996. He
has been the Chairman of the Board and Chief Executive Officer of U.S. Rig &
Equipment, Inc., an Oklahoma corporation, a world supplier of drilling
equipment, since its organization in 1982.
Steven A. Webster has been a director of the Company since August 1996. He
was the Chairman of the Board and Chief Executive Officer of Falcon Drilling
Company, Inc., a marine oil and gas drilling contractor from 1988 until 1997. He
has been the President and Chief Executive Officer of R&B Falcon Corporation, a
marine oil and gas drilling contractor since 1998. He serves as a director of
Crown Resources Corporation, (a mining company); Trust Manager of Camden
Property Trust; a general partner of SCP, the managing member of SDA; Chairman
of the Board of Carrizo Oil & Gas, Inc., an independent oil and gas exploration
company; a director of Ponder Industries, Inc., an oil service and rental tool
company; and a director of Geokinetics, Inc., a 3-D seismic acquisition and
geophysical services provider to the oil and gas industry.
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<PAGE> 62
DESCRIPTION OF THE NOTES
The Old Notes were and the Exchange Notes will be issued under the
Indenture, dated as of May 8, 1998 by and among the Company, the Guarantors and
Chase Bank of Texas, National Association, as trustee under the Indenture (the
"Trustee"), the terms of which will be substantially identical to those of the
Series A Indenture. The Notes are subject to the terms stated in the Indenture
and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
Holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a statement of those terms. The statements and definitions of terms under
this caption relating to the Notes, the Guarantees and the Indenture described
below are summaries and do not purport to be complete. Such summaries make use
of certain terms defined in the Indenture and are qualified in their entirety by
express reference to the Indenture. A copy of the Indenture in substantially the
form in which it was executed may be obtained from the Company. Certain terms
used herein are defined below under "-- Certain Definitions."
GENERAL
The Notes will be general unsecured senior obligations of the Company,
limited in aggregate principal amount at stated maturity to $75.0 million. The
Indebtedness evidenced by the Notes will rank pari passu in right of payment
with the Series A Notes and all other indebtedness and other liabilities of the
Company that are not subordinated by their terms to other Indebtedness of the
Company and senior to all Indebtedness of the Company that by its terms is so
subordinated.
The Indenture provides that each of the Company's wholly-owned domestic
Subsidiaries (and any other Subsidiaries that guarantee any Indebtedness of an
Obligor) shall be a Guarantor. The Guarantees will be senior unsecured
obligations of each respective Guarantor and will rank pari passu in right of
payment with such Guarantor's guarantee of the Series A Notes and all other
indebtedness and liabilities of such Guarantor that are not subordinated by
their terms to other Indebtedness of such Guarantor, and senior in right of
payment to all Subordinated Indebtedness of such Guarantor. The holders of
secured indebtedness of the Company and the Guarantors (including Indebtedness
under the Company's Bank Credit Facility, which is secured by first priority
liens on substantially all of the assets of the Company and its domestic
Subsidiaries), will have claims with respect to the assets constituting
collateral for such Indebtedness that are prior to claims of holders of the
Notes and the Trustee. In the event of a default on the Notes or the Guarantees,
or a bankruptcy, liquidation or reorganization of the Company or any Guarantors,
such assets will be available to satisfy obligations with respect to the
indebtedness secured thereby before any payment therefrom could be made on the
Notes or the Guarantees. To the extent that the value of such collateral is not
sufficient to satisfy the indebtedness secured thereby, amounts remaining
outstanding on such indebtedness would be entitled to share with the holders of
the Notes and the Trustee and their claims with respect to any other assets of
the Company and the Guarantors. At March 31, 1998, on a pro forma basis after
giving effect to the issuance of the Notes, the Company and the Guarantors would
have had outstanding approximately $3.0 million of secured Indebtedness.
The Notes will be effectively subordinated to claims of creditors (other
than the Company) of the Company's subsidiaries other than the Guarantors.
Claims of creditors (other than the Company) of such subsidiaries, including
trade creditors, tort claimants, secured creditors, taxing authorities and
creditors holding guarantees, will generally have priority as to assets of such
subsidiaries over the claims and equity interest of the Company and, thereby
indirectly, the holders of the indebtedness of the Company, including the Notes
and the Guarantees.
The Indenture permits under limited circumstances the creation of, or the
designation of existing subsidiaries as, Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be generally subject to the covenants applicable to the
Company and the Subsidiaries under the Indenture. See "-- Certain Covenants --
Unrestricted Subsidiaries."
The Old Notes have not been registered under the Securities Act and, until
so registered, may not be resold by holders thereof except pursuant to an
exemption from the registration requirements of the Securities Act. The Company
and the initial Guarantors entered into the Registration Rights Agreement with
the Initial
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Purchasers, for the benefit of the holders of the Old Notes, pursuant to which
the Company agrees to (i) issue the Exchange Notes registered under the
Securities Act as evidence of the Company's indebtedness initially evidenced by
the Old Notes and (ii) register the Old Notes, if necessary, for resale pursuant
to a shelf registration statement under the Securities Act. See "-- Registration
Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on July 1, 2007, and will bear interest at 8 7/8% per
annum from the date of issuance or from the most recent Interest Payment Date to
which interest has been paid or provided for. Interest on the Notes will be
payable semi-annually in arrears on January 1 and July 1 of each year,
commencing July 1, 1998, to the Persons in whose names such Notes are registered
at the close of business on the December 15 or June 15, immediately preceding
such interest payment date. Interest will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
The Notes may be presented or surrendered for payment of principal,
premium, if any, and interest, and for registration of transfer or exchange, at
the office or agency of the Company within the City and State of New York
maintained for such purpose. In addition, in the event the Notes do not remain
in book-entry form, interest may be paid, at the option of the Company, by check
mailed to the registered holders of the Notes at the respective addresses as set
forth on the Note Register. The Old Notes were, and the Exchange Notes will be,
issued only in fully registered form, without coupons, in denominations of
$1,000 and integral multiples thereof. No service charge will be made for any
registration of transfer or exchange or redemption of Notes, but the Company or
Trustee may require in certain circumstances payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
GUARANTEES OF NOTES
Each Guarantor will fully and unconditionally guarantee, jointly and
severally, to each holder and the Trustee, the full and prompt performance of
the Company's Obligations under the Indenture and the Notes, including the
payment of principal of, premium, if any, and interest on the Notes pursuant to
its Guarantee. If any Subsidiary of the Company that is not an initial Guarantor
guarantees any Indebtedness of the Company or any other Obligor on the Notes or
the Indenture at any time in the future, then the Company will cause the Notes
to be equally and ratably guaranteed by such Subsidiary. In addition, the
Company will cause each Wholly-Owned Subsidiary that is a domestic Subsidiary to
execute and deliver a supplement to the Indenture pursuant to which such
Subsidiary will guarantee the payment of the Notes on the same terms and
conditions as the Guarantees by the initial Guarantors.
The Obligations of each Guarantor will be limited to the maximum amount as
will, after giving effect to all other contingent and fixed liabilities of such
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Guarantor in respect of the Obligations of such other
Guarantor under its Guarantee or pursuant to its contribution obligations under
the Indenture, result in the Obligations of such Guarantor under its Guarantee
not constituting a fraudulent conveyance or fraudulent transfer under federal or
state law or otherwise not being void, voidable or unenforceable under any
bankruptcy, reorganization, receivership, insolvency, liquidation or other
similar legislation or legal principles under any applicable foreign law. Each
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Guarantor.
Each Guarantor may consolidate with or merge into or sell or otherwise
dispose of all or substantially all of its Property and assets to the Company or
another Guarantor without limitation, except to the extent any such transaction
is subject to the "Consolidation, Merger, Conveyance, Lease or Transfer"
covenant of the Indenture. Each Guarantor may consolidate with or merge into or
sell all or substantially all of its Property and assets to a Person other than
the Company or another Guarantor (whether or not Affiliated with the Guarantor),
provided that (a) if the surviving Person is not the Guarantor, the surviving
Person agrees to assume such Guarantor's Guarantee and all its Obligations
pursuant to the Indenture (except to the extent the following paragraph would
result in the release of such Guarantee) and (b) such transaction does not
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(i) violate any of the covenants described below under "-- Certain Covenants" or
(ii) result in a Default or Event of Default being in existence or continuing
immediately thereafter.
Upon the sale or other disposition (by merger or otherwise) of a Guarantor
(or all or substantially all of its Property and assets) to a Person other than
the Company or another Guarantor and pursuant to a transaction that is otherwise
in compliance with the Indenture (including as described in clause (b) of the
foregoing paragraph and as described below in the covenant described "-- Certain
Covenants -- Limitation on Asset Sales"), such Guarantor (unless it otherwise
remains a Subsidiary) shall be deemed released from its Guarantee and the
related Obligations set forth in the Indenture; provided that any such
termination shall occur only to the extent that all Obligations of such
Guarantor under all of its guarantees of and under all of its pledges of assets
or other security interests which secure, other Indebtedness of the Company or
any other Subsidiary shall also terminate or be released upon such sale or other
disposition. Each Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Guarantee and the
related Obligations set forth in the Indenture so long as it remains an
Unrestricted Subsidiary.
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be redeemable
at the option of the Company prior to July 1, 2002. On or after such date, the
Notes will be redeemable at the option of the Company, in whole at any time or
in part from time to time, at the following prices (expressed in percentages of
the principal amount), if redeemed during the 12 months beginning July 1 of the
years indicated below, in each case together with interest accrued to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.4375%
2003........................................................ 102.9580%
2004........................................................ 101.4792%
2005 and thereafter......................................... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time on or before June 27, 2000, the
Company may, at its option, redeem up to a maximum of 30% of the aggregate
principal amount of the Notes with the net cash proceeds of one or more
Qualified 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 $50.0 million aggregate principal amount
of Notes shall remain outstanding immediately after the occurrence of any such
redemption; and provided, further, that each such redemption shall occur within
90 days of the closing of such Qualified Equity Offering. No Qualified Equity
Offering has occurred within the 90-day period ending on the date of this
Prospectus.
The Indenture will contain a covenant that limits the ability of the
Company to optionally redeem the Notes unless a pro rata portion of the Series A
Notes are simultaneously redeemed, as more particularly described below under
"-- Certain Covenants -- Limitation on Redemptions and Other Repayments of Notes
and Series A Notes."
If fewer than all the Notes are redeemed, selection for redemption will be
made by the Trustee in accordance with the principal stock exchange, if any, on
which the Notes are listed, or, if the Notes are not so listed, on a pro rata
basis, by lot or by any other means which the Trustee determines to be fair and
appropriate.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require the Company to repurchase all of such holder's Notes in whole or in
part (the "Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") in cash equal to 101% of the aggregate principal amount
thereof,
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plus accrued and unpaid interest thereon, if any, to the Change of Control
Payment Date (as defined below) on the terms described below.
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) will mail a notice to each holder and to the
Trustee stating, among other things, (i) that a Change of Control has occurred
and a Change of Control Offer is being made as provided for in the Indenture,
and that, although holders are not required to tender their Notes, all Notes
that are timely tendered will be accepted for payment; (ii) the Change of
Control Purchase Price and the repurchase date, which will be no earlier than 30
days and no later than 60 days after the date such notice is mailed (the "Change
of Control Payment Date"); (iii) that any Note accepted for payment pursuant to
the Change of Control Offer (and duly paid for on the Change of Control Payment
Date) will cease to accrue interest after the Change of Control Payment Date;
and (iv) the instructions and any other information necessary to enable holders
to tender their Notes and have such Notes purchased pursuant to the Change of
Control Offer. The Company will comply with any applicable tender offer rules
(including, without limitation, any applicable requirements of Rule 14e-1 under
the Exchange Act) in the event that the Change of Control Offer is triggered
under the circumstances described herein.
The existence of the holders' rights to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter a
third party from acquiring the Company in a transaction that constitutes a
Change of Control. The source of funds for the repurchase of Notes upon a Change
of Control will be the Company's cash or cash generated from operations or other
sources, including borrowings or sales of assets; however, a "Change of Control
Event" (as defined in the Bank Credit Facility) constitutes an event of default
thereunder that relieves the lenders from any obligation to make loans and
allows them to accelerate the Indebtedness outstanding thereunder. There can be
no assurance that sufficient funds will be available at the time of any Change
of Control to repay all amounts owing under such other Indebtedness or to make
the required payments of the Notes. In the event that a Change of Control Offer
occurs at a time when the Company does not have sufficient available funds to
pay the Change of Control Purchase Price for all Notes timely tendered pursuant
to such offer or at a time when the Company is prohibited from purchasing the
Notes (and the Company is unable either to obtain the consent of the holders of
the relevant Indebtedness or to repay such Indebtedness), an Event of Default
would occur under the Indenture. In addition, one of the events that constitutes
a Change of Control under the Indenture is a sale, conveyance, transfer or lease
of all or substantially all of the assets of the Company or the Company and the
Subsidiaries, taken as a whole. The Indenture will be governed by New York law,
and there is no established quantitative definition under New York law of
"substantially all" of the assets of a corporation. Accordingly, if the Company
or its Subsidiaries were to engage in a transaction in which it or they disposed
of less than all of the assets of the Company or the Company and its
Subsidiaries taken as a whole, as applicable, a question or interpretation could
arise as to whether such disposition was of "substantially all" of its assets
and whether the Company was required to make a Change of Control Offer.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
repurchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders to require the
Company to repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring. The provisions of the Indenture may
not afford holders protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction affecting the
Company that may adversely affect holders because (i) such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control to require the Company to make a Change of Control Offer or (ii) such
transactions may include an actual shift in voting power or beneficial ownership
to a Permitted Holder which is excluded under the definition of Change of
Control from the amount of shares involved in determining whether or not the
transaction involves a shift of the magnitude required to trigger the
provisions. A transaction involving the management of the Company or its
Affiliates, or a transaction involving a
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recapitalization of the Company, will result in a Change of Control only if it
is the type of transaction specified in such definition.
The Series A Indenture provides that upon the occurrence of a Change of
Control (as defined therein), the Company will be required to make an offer to
the holders of the Series A Notes to repurchase any or all of the Series A Notes
at a purchase price equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, to the date of purchase. Such event
would result in an event of default under the Bank Credit Facility.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture.
Transactions with Affiliates. Subsequent to the Issue Date, the Company
will not, and will not permit any Subsidiary to, directly or indirectly, enter
into or permit to exist any transaction or series of related transactions
(including, but not limited to, the purchase, sale or exchange of Property, the
making of any Investment, the giving of any guarantee or the rendering of any
service with any Affiliate of the Company, other than transactions among the
Company and any Guarantors or any Wholly Owned Subsidiaries) unless (i) such
transaction or series of related transactions is on terms no less favorable to
the Company or such Subsidiary than those that could be obtained in a comparable
arm's length transaction with a Person that is not such an Affiliate and (ii)
(a) with respect to a transaction or series of related transactions that has a
Fair Market Value in excess of $2.0 million but less than $5.0 million, the
Company delivers an Officers' Certificate to the Trustee certifying that such
transaction or series of related transactions complies with clause (i) above; or
(b) with respect to a transaction or series of related transactions that has a
Fair Market Value equal to or in excess of $5.0 million, the transaction or
series of related transactions is approved by a majority of the Board of
Directors of the Company (including a majority of the disinterested directors),
which approval is set forth in a Board Resolution certifying that such
transaction or series of transactions complies with clause (i) above. The
foregoing provisions shall not be applicable to (i) reasonable and customary
compensation, indemnification and other benefits paid or made available to an
officer, director or employee of the Company or a Subsidiary for services
rendered in such person's capacity as an officer, director or employee
(including reimbursement or advancement of reasonable out-of-pocket expenses and
provisions of directors' and officers' liability insurance) or (ii) the making
of any Restricted Payment otherwise permitted by the Indenture.
Limitation on Restricted Payments. The Company will not, and will not
permit any Subsidiary to, make any Restricted Payment, unless at the time of and
after giving effect to the proposed Restricted Payment, (a) no Default shall
have occurred and be continuing (or would result therefrom), (b) the Company
could incur at least $1.00 of additional Indebtedness under the tests described
in the first sentence under the caption "-- Certain Covenants -- Limitation on
Indebtedness" and (c) the aggregate amount of all Restricted Payments declared
or made on or after the Series A Issue Date by the Company or any Subsidiary
shall not exceed the sum of (i) 50% (or if such Consolidated Net Income shall be
a deficit, minus 100% of such deficit) of the aggregate Consolidated Net Income
accrued during the period beginning on the first day of the fiscal quarter in
which the Series A Issue Date occurred and ending on the last day of the fiscal
quarter ending immediately prior to the date of such proposed Restricted
Payment, minus 100% of the amount of any writedowns, write-offs and other
negative extraordinary charges not otherwise reflected in Consolidated Net
Income during such period, plus (ii) an amount equal to the aggregate net cash
proceeds received by the Company, subsequent to the Series A Issue Date, from
the issuance or sale (other than to a Subsidiary) of shares of its Capital Stock
(excluding Redeemable Stock, but including Capital Stock issued upon the
exercise of options, warrants or rights to purchase Capital Stock (other than
Redeemable Stock) of the Company) and the liability (expressed as a positive
number) as expressed on the face of a balance sheet in accordance with GAAP in
respect of any Indebtedness of the Company or any of its Subsidiaries, or the
carrying value of Redeemable Stock, which has been converted into, exchanged for
or satisfied by the issuance of shares of Capital Stock (other than Redeemable
Stock) of the Company, subsequent to the Series A Issue Date, plus (iii) 100% of
the net reduction in Restricted Investments, subsequent to the Series A Issue
Date, in any Person, resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of Property (but
only to the extent such interest, dividends, repayments or other transfers of
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Property are not included in the calculation of Consolidated Net Income), in
each case to the Company or any Subsidiary from any Person (including, without
limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Subsidiaries (valued in each case as provided in
the definition of "Investments"), not to exceed in the case of any Person the
amount of Restricted Investments previously made by the Company or any
Subsidiary in such Person and in each such case which was treated as a
Restricted Payment.
As of the date of this Prospectus, the aggregate amount of Restricted
Payments that could be declared or made on or after the Series A Issue Date
under clause (c) of the preceding paragraph is $101.7 million, and the aggregate
amount of Restricted Payments actually declared or made on or after the Series A
Issue Date is $0, resulting in $101.7 million of Restricted Payments
availability as of the date of this Prospectus.
The foregoing provisions will not prevent (A) the payment of any dividend
on Capital Stock of any class within 60 days after the date of its declaration
if at the date of declaration such payment would be permitted by the Indenture;
(B) any repurchase or redemption of Capital Stock or Subordinated Indebtedness
of the Company or a Subsidiary made by exchange for Capital Stock of the Company
(other than Redeemable Stock), or out of the net cash proceeds from the
substantially concurrent issuance or sale (other than to a Subsidiary) of
Capital Stock of the Company (other than Redeemable Stock), provided that the
net cash proceeds from such sale are excluded from computations under clause
(c)(ii) above to the extent that such proceeds are applied to purchase or redeem
such Capital Stock or Subordinated Indebtedness; (C) so long as no Default shall
have occurred and be continuing or should occur as a consequence thereof, any
repurchase or redemption of Subordinated Indebtedness of the Company or a
Subsidiary solely in exchange for, or out of the net cash proceeds from the
substantially concurrent sale of, new Subordinated Indebtedness of the Company
or a Subsidiary, so long as such Subordinated Indebtedness is permitted under
the covenant described under "-- Limitation on Indebtedness" and (x) is
subordinated to the Notes at least to the same extent as the Subordinated
Indebtedness so exchanged, purchased or redeemed, (y) has a stated maturity
later than the stated maturity of the Subordinated Indebtedness so exchanged,
purchased or redeemed and (z) has an Average Life at the time incurred that is
greater than the remaining Average Life of the Subordinated Indebtedness so
exchanged, purchased or redeemed; (D) Investments subsequent to the Series A
Issue Date in any Joint Ventures, foreign Subsidiaries not constituting
Guarantors and Indrillers in an aggregate amount not to exceed $10.0 million;
and (E) redemptions subsequent to the Series A Issue Date of the Series A
Preferred Stock issued and outstanding on the Series A Issue Date for an
aggregate redemption price of not more than $1.0 million. Notwithstanding the
foregoing, the amount available for Investments in Joint Ventures and foreign
Subsidiaries pursuant to clause (D) of the preceding sentence may be increased
by the aggregate amount received by the Company and its Subsidiaries subsequent
to the Series A Issue Date from a Joint Venture or a foreign Subsidiary on or
before the date of such proposed Investment resulting from payments of interest
on Indebtedness, dividends, repayments of loans or advances or other transfers
of Property made to such Joint Venture or foreign Subsidiary (but only to the
extent such interest dividends, repayments or other transfers of Property are
not included in the calculation of Consolidated Net Income). Restricted Payments
permitted to be made as described in the first sentence of this paragraph will
be excluded in calculating the amount of Restricted Payments thereafter, except
that any such Restricted Payments permitted to be made pursuant to clause (D)
will be included in calculating the amount of Restricted Payments made pursuant
to such clause (D) thereafter.
For purposes of this covenant, if a particular Restricted Payment involves
a non-cash payment, including a distribution of assets, then such Restricted
Payment shall be deemed to be an amount equal to the cash portion of such
Restricted Payment, if any, plus an amount equal to the Fair Market Value of the
non-cash portion of such Restricted Payment.
Limitation on Indebtedness. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, incur any Indebtedness (including
Acquired Indebtedness), unless after giving pro forma effect to the incurrence
of such Indebtedness, the Consolidated Interest Coverage Ratio for the
Determination Period preceding the Transaction Date is at least 2.0 to 1.0 if
such Indebtedness is incurred prior to July 1, 1998 and at least 2.25 to 1.0 if
such Indebtedness is incurred thereafter. Notwithstanding the foregoing, the
Company or any Subsidiary (subject to the following paragraph) may incur
Permitted Indebtedness. Any Indebtedness of
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a Person existing at time at which such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Subsidiary at the time at which it becomes a Subsidiary.
Limitation on Subsidiary Indebtedness and Preferred Stock. The Company will
not permit any Subsidiary to, directly or indirectly, incur any Indebtedness or
issue any Preferred Stock except:
(a) Indebtedness or Preferred Stock issued to and held by the Company, a
Guarantor or a Wholly Owned Subsidiary, so long as any transfer of such
Indebtedness or Preferred Stock to a Person other than the Company, Guarantor or
a Wholly Owned Subsidiary will be deemed to constitute an incurrence of such
Indebtedness or Preferred Stock by the issuer thereof as of the date of such
transfer;
(b) Acquired Indebtedness or Preferred Stock of a Subsidiary issued and
outstanding prior to the date on which such Subsidiary was acquired by the
Company (other than Indebtedness or Preferred Stock issued in connection with or
in anticipation of such acquisition);
(c) Indebtedness or Preferred Stock outstanding on the Series A Issue Date
and listed in a schedule attached to the Series A Indenture;
(d) Indebtedness described in clauses (b), (c), (d), (e), (f), (g) and (h)
under the definition of "Permitted Indebtedness";
(e) Permitted Subsidiary Refinancing Indebtedness of such Subsidiary;
(f) Indebtedness or Preferred Stock issued in exchange for, or the proceeds
of which are used to refinance, repurchase or redeem, Indebtedness or Preferred
Stock described in clauses (a) and (c) of this paragraph (the "Retired
Indebtedness or Stock"), provided that the Indebtedness or the Preferred Stock
so issued has (i) a principal amount or liquidation value, as the case may be,
not in excess of the principal amount or liquidation value of the Retired
Indebtedness or Stock plus related expenses for redemption and issuance, (ii) a
final redemption date later than the stated maturity or final redemption date
(if any) of the Retired Indebtedness or Stock and (iii) an Average Life at the
time of issuance of such Indebtedness or Preferred Stock that is greater than
the Average Life of the Retired Indebtedness or Stock;
(g) Indebtedness of a Subsidiary which represents the assumption by such
Subsidiary of Indebtedness of another Subsidiary in connection with a merger of
such Subsidiaries, provided that no Subsidiary or any successor (by way of
merger) thereto existing on the Series A Issue Date shall assume or otherwise
become responsible for any Indebtedness of an entity which was not a Subsidiary
on the Series A Issue Date, except to the extent that a Subsidiary would be
permitted to incur such Indebtedness under this paragraph; and
(h) Non-Recourse Indebtedness incurred by a foreign Subsidiary not
constituting a Guarantor.
Limitations on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any Subsidiary, directly
or indirectly, to create, enter into any agreement with any Person or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind which by its terms restricts the ability of any
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock to the Company or any Subsidiary, (b) pay any
Indebtedness owed to the Company or any Subsidiary, (c) make loans or advances
to the Company or any Subsidiary or (d) transfer any of its Property or assets
to the Company or any Subsidiary except any encumbrance or restriction contained
in any agreement or instrument:
(i) existing on the Issue Date (including those under the Series A
Indenture);
(ii) relating to any Property or assets acquired after the Series A Issue
Date, so long as such encumbrance or restriction relates only to the Property or
assets so acquired and is not and are not created in anticipation of such
acquisition;
(iii) relating to any Acquired Indebtedness of any Subsidiary at the date
on which such Subsidiary was acquired by the Company or any Subsidiary (other
than Indebtedness incurred in anticipation of such acquisition);
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(iv) effecting a refinancing of Indebtedness incurred pursuant to an
agreement referred to in the foregoing clauses (i) through (iii), so long as the
encumbrances and restrictions contained in any such refinancing agreement are no
more restrictive than the encumbrances and restrictions contained in such
agreements;
(v) constituting customary provisions restricting subletting or assignment
of any lease of the Company or any Subsidiary or provisions in license
agreements or similar agreements that restrict the assignment of such agreement
or any rights thereunder;
(vi) constituting restrictions on the sale or other disposition of any
Property securing Indebtedness as a result of a Permitted Lien on such Property;
or
(vii) constituting any temporary encumbrance or restriction with respect to
a Subsidiary pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or Property and
assets of, such Subsidiary.
Limitation on Asset Sales. The Company will not engage in, and will not
permit any Subsidiary to engage in, any Asset Sale unless (a) except in the case
of (i) an Asset Sale resulting from the requisition of title to, seizure or
forfeiture of any Property or assets or any actual or constructive total loss or
an agreed or compromised total loss or (ii) a Bargain Purchase Contract, the
Company or such Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the Fair Market Value of the Property;
(b) at least 75% of such consideration consists of Cash Proceeds (or the
assumption of Indebtedness of the Company or such Subsidiary relating to the
Capital Stock or Property or asset that was the subject of such Asset Sale and
the unconditional release of the Company or such Subsidiary from such
Indebtedness); (c) after giving effect to such Asset Sale, the total non-cash
consideration held by the Company from all such Asset Sales made after the
Series A Issue Date does not exceed $10 million; and (d) the Company delivers to
the Trustee an Officers' Certificate certifying that such Asset Sale complies
with clauses (a), (b) and (c). The Company or such Subsidiary, as the case may
be, may apply the Net Available Proceeds from each Asset Sale (x) to the
acquisition of one or more Replacement Assets, or (y) to repurchase or repay
Senior Debt (with a permanent reduction of availability in the case of revolving
credit borrowings); provided that such acquisition or such repurchase or
repayment shall be made within 270 days after the consummation of the relevant
Asset Sale.
Any Net Available Proceeds from any Asset Sale made after the Series A
Issue Date that are not used to so acquire Replacement Assets or to repurchase
or repay Senior Debt within 270 days after consummation of the relevant Asset
Sale constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $15.0 million, the Company shall within 30 days thereafter (or at any
time after receipt of Excess Proceeds but prior to there being $15.0 million of
Excess Proceeds, the Company may, at its option) make a pro rata offer (an
"Asset Sale Offer") to purchase from all holders of Notes and all holders of
other Senior Debt containing provisions similar to those set forth in the
Indenture with respect to offers to purchase or redeem such Indebtedness with
the proceeds of sales of assets (including, without limitation, the Series A
Notes) (collectively, "Asset Sale Senior Debt") an aggregate principal amount of
Indebtedness equal to the Excess Proceeds, at a price in cash (the "Asset Sale
Offer Purchase Price") equal to 100% of the outstanding principal thereof plus
accrued interest, if any, to the purchase date, in accordance with the
procedures set forth in the Indenture. Upon completion of such Asset Sale Offer,
the amount of Excess Proceeds shall be reset to zero and the Company may use any
remaining amount for general corporate purposes.
Notwithstanding the foregoing, the Company may, at its option, elect to
limit the Asset Sale Offer referred to above to Asset Sale Senior Debt other
than the Series A Notes. In such event, the Company shall (i) allocate the
Excess Proceeds pro rata among all Asset Sale Senior Debt (for this purpose,
including, without limitation, the Series A Notes), (ii) make the Asset Sale
Offer only with respect to that portion of the Excess Proceeds allocated to the
Asset Sale Senior Debt other than the Series A Notes, and (iii) retain the
portion of the Excess Proceeds allocated to the Series A Notes and use such
funds to make an "Asset Sale Offer" as defined in the Series A Indenture.
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The Company will comply with any applicable tender offer rules (including,
without limitation, any applicable requirements of Rule 14e-1 under the Exchange
Act) in the event that an Asset Sale Offer is required under the circumstances
described herein.
As of the date of this Prospectus, the total non-cash consideration held by
the Company from all Asset Sales made after the Series A Issue Date is $0, the
Net Available Proceeds from Asset Sales made after the Series A Issue Date is
$2.4 million, and the amount of Excess Proceeds is $0.
Limitation on Sale and Lease-Back Transactions. The Company will not, and
will not permit any Subsidiary to, directly or indirectly, enter into, assume,
guarantee or otherwise become liable with respect to any Sale and Lease-Back
Transaction unless (i) the proceeds from such Sale and Lease-Back Transaction
are at least equal to the Fair Market Value of such Property being transferred
and (ii) the Company or such Subsidiary would have been permitted to enter into
such transaction under the covenants described in "-- Certain
Covenants -- Limitation on Indebtedness" and "-- Certain Covenants -- Limitation
on Liens," and "-- Certain Covenants -- Limitation on Subsidiary Indebtedness
and Preferred Stock."
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, affirm, incur, assume or suffer
to exist any Liens of any kind other than Permitted Liens on or with respect to
any Property or assets of the Company or such Subsidiary or any interest therein
or any income or profits therefrom, whether owned at the Series A Issue Date or
thereafter acquired, without effectively providing that the Notes shall be
secured equally and ratably with (or prior to) the Indebtedness so secured for
so long as such obligations are so secured.
Limitation on Guarantees by Guarantors. The Company will not permit any
Guarantor to guarantee the payment of any Subordinated Indebtedness of the
Company unless such guarantee shall be subordinated to such Guarantor's
Guarantee at least to the same extent as such Subordinated Indebtedness is
subordinated to the Notes; provided that this covenant will not be applicable to
any guarantee of any Guarantor that (i) existed at the time at which such Person
became a Subsidiary of the Company and (ii) was not incurred in connection with,
or in contemplation of, such Person becoming a Subsidiary of the Company.
Unrestricted Subsidiaries. The Indenture provides that the Company may
designate a subsidiary (including a newly formed or newly acquired subsidiary)
of the Company or any of its Subsidiaries as an Unrestricted Subsidiary;
provided that (i) immediately after giving effect to the transaction, the
Company could incur $1.00 of additional Indebtedness pursuant to the first
sentence of "-- Certain Covenants -- Limitation on Indebtedness" and (ii) such
designation is at the time permitted under "-- Certain Covenants -- Limitation
on Restricted Payments." Notwithstanding any provisions of this covenant all
subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
The Indenture further provides that the Company will not, and will not
permit any of its Subsidiaries to, take any action or enter into any transaction
or series of transactions that would result in a Person (other than a newly
formed subsidiary having no outstanding Indebtedness (other than Indebtedness to
the Company or a Subsidiary) at the date of determination) becoming a Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless, after giving effect to such action, transaction or series
of transactions on a pro forma basis, (i) the Company could incur at least $1.00
of additional Indebtedness pursuant to the first sentence of "-- Certain
Covenants -- Limitation on Indebtedness" and (ii) no Default or Event of Default
would occur.
Subject to the preceding paragraphs, an Unrestricted Subsidiary may be
redesignated as a Subsidiary. The designation of a subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Subsidiary in
compliance with the preceding paragraphs shall be made by the Board of Directors
pursuant to a Board Resolution delivered to the Trustee and shall be effective
as of the date specified in such Board Resolution, which shall not be prior to
the date such Board Resolution is delivered to the Trustee. Any Unrestricted
Subsidiary shall become a Subsidiary if it incurs any Indebtedness other than
Non-Recourse Indebtedness. If at any time Indebtedness of an Unrestricted
Subsidiary which was Non-Recourse Indebtedness no longer so qualifies, such
Indebtedness shall be deemed to have been incurred when such Non-Recourse
Indebtedness becomes Indebtedness.
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Limitations on Line of Business. The Indenture provides that neither the
Company nor any of its Subsidiaries will directly or indirectly engage to any
substantial extent in any line or lines of business activity other than a
Related Business.
Reports. The Indenture provides that, whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the Commission the annual reports,
quarterly reports and other documents which the Company would have been required
to file with the Commission pursuant to such Section 13(a) or 15(d) or any
successor provision thereto if the Company were subject thereto, such documents
to be filed with the Commission on or prior to the respective dates (the
"Required Filing Dates") by which the Company would have been required to file
them. The Company shall also (whether or not it is required to file reports with
the Commission), within 30 days of each Required Filing Date, (i) transmit by
mail to all holders of Notes, as their names and addresses appear in the
applicable Security Register, without cost to such holders or Persons, and (ii)
file with the Trustee, copies of the annual reports, quarterly reports and other
documents (without exhibits) which the Company has filed or would have filed
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act, any
successor provisions thereto or this covenant. The Company shall not be required
to file any report with the Commission if the Commission does not permit such
filing.
Limitation on Restrictive Covenants. The Indenture will provide that,
notwithstanding any other provision of the Indenture, the restrictive covenants
set forth in the Indenture, including, without limitation, those described under
"-- Limitation on Restricted Payments," "-- Limitation on Transactions with
Affiliates" and "-- Limitation on Asset Sales," shall be and shall be deemed
limited to the extent necessary so that the creation, existence and
effectiveness of such restrictive covenants shall not result in a breach of the
covenant of the Series A Indenture relating to "Limitations on Dividends and
Other Payment Restrictions Affecting Subsidiaries."
Limitation on Redemptions and Other Repayments of Notes and Series A Notes.
The Company will not optionally make any principal payment on, or redeem,
repurchase, defease (including in-substance or legal defeasance) or otherwise
acquire or retire for value (including pursuant to mandatory repurchase
covenants), prior to any scheduled principal payment, scheduled sinking fund
payment or other stated maturity (collectively, for purposes of this covenant
only, "redeem," and such action being a "redemption") the Notes unless,
substantially concurrently with such redemption, the Company redeems (or, if
such redemption requires the consent of the holders of the Series A Notes,
offers to redeem) an aggregate principal amount of the Series A Notes (rounded
to the nearest integral multiple of $1,000) equal to the product of (i) a
fraction, the numerator of which is the aggregate principal amount of the Notes
to be so redeemed (or for which such offer to redeem will be made) and the
denominator of which is the aggregate principal amount of the Notes outstanding
immediately prior to such proposed redemption and (ii) the aggregate principal
amount of the Series A Notes outstanding immediately prior to such proposed
redemption.
The Company will not optionally redeem the Series A Notes unless,
substantially concurrently with such redemption, the Company redeems (or, if
such redemption requires the consent of the holders of the Notes, offers to
redeem) an aggregate principal amount of the Notes (rounded to the nearest
integral multiple of $1,000) equal to the product of (i) a fraction, the
numerator of which is the aggregate principal amount of the Series A Notes to be
so redeemed (or for which such offer to redeem will be made) and the denominator
of which is the aggregate principal amount of the Series A Notes outstanding
immediately prior to such proposed redemption and (ii) the aggregate principal
amount of the Notes outstanding immediately prior to such proposed redemption.
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CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of transactions,
consolidate with or merge into any other Person (other than a merger of a
Subsidiary into the Company in which the Company is the continuing corporation),
or continue in a new jurisdiction or sell, convey, assign, transfer, lease or
otherwise dispose of all or substantially all of the Property and assets of the
Company and the Subsidiaries, taken as a whole, to any Person, unless
(i) either (a) the Company shall be the continuing corporation or (b) the
corporation (if other than the Company) formed by such consolidation or into
which the Company is merged, or the Person which acquires, by sale, assignment,
conveyance, transfer, lease or disposition, all or substantially all of the
Property and assets of the Company and the Subsidiaries, taken as a whole (such
corporation or Person, the "Surviving Entity"), shall be a corporation organized
and validly existing under the laws of the United States of America, any
political subdivision thereof or any state thereof or the District of Columbia,
and shall expressly assume, by a supplemental indenture, the due and punctual
payment of the principal of (and premium, if any) and interest on all the Notes
and the performance of the Company's covenants and obligations under the
Indenture;
(ii) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Event of Default or
Default shall have occurred and be continuing or would result therefrom;
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), the Company (or the
Surviving Entity if the Company is not continuing) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transactions; and
(iv) immediately after giving effect to any such transaction or series of
transactions on a pro forma basis as if such transaction or series of
transactions had occurred on the first day of the Determination Period, the
Company (or the Surviving Entity if the Company is not continuing) would be
permitted to incur $1.00 of additional Indebtedness pursuant to the test
described in the first sentence under the caption "-- Certain
Covenants -- Limitation on Indebtedness."
The provision of clause (iv) shall not apply to any merger or consolidation
into or with, or any such transfer of all or substantially all of the Property
and assets of the Company and the Subsidiaries taken as a whole into, the
Company.
In connection with any consolidation, merger, continuance, transfer of
assets or other transactions contemplated by this provision, the Company shall
deliver, or cause to be delivered, to the Trustee, in form and substance
reasonably satisfactory to the Trustee, an Officers' Certificate and an opinion
of counsel, each stating that such consolidation, merger, continuance, sale,
assignment, conveyance or transfer and the supplemental indenture in respect
thereto comply with the provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transactions have been complied
with.
Upon any transaction or series of transactions that are of the type
described in, and are effected in accordance with, the foregoing paragraphs, the
Surviving Entity shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the Notes with the
same effect as if such Surviving Entity had been named as the Company in the
Indenture; and when a Surviving Person duly assumes all of the obligations and
covenants of the Company pursuant to the Indenture and the Notes, except in the
case of a lease, the predecessor Person shall be relieved of all such
obligations.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(a) default in the payment of interest on any Note issued pursuant to the
Indenture when the same becomes due and payable, and the continuance of such
default for a period of 30 days;
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(b) default in the payment of the principal of (or premium, if any, on) any
Note issued pursuant to the Indenture at its Maturity, whether upon optional
redemption, required repurchase (including pursuant to a Change of Control Offer
or an Asset Sale Offer) or otherwise or the failure to make an offer to purchase
any such Note as required;
(c) the Company fails to comply with any of its covenants or agreements
contained in "-- Change of Control," "-- Certain Covenants -- Limitation on
Restricted Payments," "-- Certain Covenants -- Limitation on Asset Sales,"
"-- Certain Covenants -- Limitation on Indebtedness," "-- Certain Covenants --
Limitation on Sale and Lease-back Transactions" or "-- Consolidation, Merger,
Conveyance, Lease or Transfer";
(d) default in the performance, or breach, of any covenant or warranty of
the Company in the Indenture (other than a covenant or warranty addressed in
clause (a), (b) or (c) above) and continuance of such Default or breach for a
period of 30 days after written notice thereof has been given to the Company by
the Trustee or to the Company and the Trustee by holders of at least 25% of the
aggregate principal amount at Stated Maturity of the outstanding Notes;
(e) Indebtedness of the Company or any Subsidiary is not paid when due
within the applicable grace period, if any, or is accelerated by the holders
thereof and, in either case, the principal amount of such unpaid or accelerated
Indebtedness exceeds $10.0 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Subsidiary in an uninsured or unindemnified
aggregate amount in excess of $5.0 million which is not discharged, waived,
appealed, stayed, bonded or satisfied for a period of 60 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Significant
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state, or foreign
bankruptcy, insolvency, or other similar law or (ii) a decree or order adjudging
the Company or any Significant Subsidiary a bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company or any Significant Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency, or similar law, or appointing
a custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Significant Subsidiary or of any
substantial part of the Property or assets of the Company or any Significant
Subsidiary, or ordering the winding up or liquidation of the affairs of the
Company or any Significant Subsidiary, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect for a
period of 60 consecutive days;
(h) (i) the commencement by the Company or any Significant Subsidiary of a
voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent; or (ii) the consent by the Company or any
Significant Subsidiary to the entry of a decree or order for relief in respect
of the Company or any Significant Subsidiary in an involuntary case or
proceeding under U.S. bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state, or foreign bankruptcy, insolvency or other
similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against the Company or any Significant Subsidiary; or (iii) the
filing by the Company or any Significant Subsidiary of a petition or answer or
consent seeking reorganization or relief under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by the Company
or any Significant Subsidiary to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or of any substantial part of the Property or assets of
the Company or any Significant Subsidiary or of any substantial part of the
Property or assets of the Company or any Significant Subsidiary, or the making
by the Company or any Significant Subsidiary of an assignment for the benefit of
creditors; or (v) the admission by the Company or any Significant Subsidiary in
writing of its inability to pay its debts generally as they become due; or
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(vi) the taking of corporate action by the Company or any Significant Subsidiary
in furtherance of any such action; or
(i) any Guarantee shall for any reason cease to be, or be asserted by the
Company or any Guarantor, as applicable, not to be, in full force and effect
(except pursuant to the release of any such Guarantee in accordance with the
Indenture).
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the holders of not less than 25% of the outstanding aggregate
principal amount at Stated Maturity of the Notes, may declare the principal
amount at Stated Maturity, premium, if any, and any accrued and unpaid interest
on all such Notes then outstanding to be immediately due and payable by a notice
in writing to the Company (and to the Trustee if given by holders of such
Notes), and upon any such declaration all amounts payable in respect of the
Notes will become and be immediately due and payable. If any Event of Default
specified in clause (g) or (h) above occurs, the principal amount at Stated
Maturity, premium, if any, and any accrued and unpaid interest on the Notes then
outstanding shall become immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of such Notes. In the event
of a declaration of acceleration because an Event of Default set forth in clause
(e) above has occurred and is continuing, such declaration of acceleration shall
be automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured or waived by
the holders of the relevant Indebtedness within 30 days after such event of
default; provided that no judgment or decree for the payment of the money due on
the Notes has been obtained by the Trustee as provided in the Indenture. Under
certain circumstances, the holders of a majority in principal amount at Stated
Maturity of the outstanding Notes by notice to the Company and the Trustee may
rescind an acceleration and its consequences.
The holders of a majority in aggregate principal amount at Stated Maturity
of the Notes then outstanding by notice to the Trustee may on behalf of the
holders of all such Notes waive any existing Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, premium, if any on or the principal of, such Notes. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the holders, unless such
holders have offered to such Trustee reasonable security or indemnity. Subject
to the provisions of the Indenture and applicable law, the holders of a majority
in aggregate principal amount at Stated Maturity of the Notes at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred upon the Trustee.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required within five
Business Days after becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement describing such Default or Event of Default,
its status and what action the Company is taking or proposes to take with
respect thereto.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company, the Guarantors and the Trustee may, at any time and from time
to time, without notice to or consent of any holder, enter into one or more
indentures supplemental to the Indenture (a) to evidence the succession of
another Person to the Company and the Guarantors and the assumption by such
successor of the covenants and Obligations of the Company under the Indenture
and contained in the Notes and the Guarantors contained in the Indenture and the
Guarantees, (b) to add to the covenants of the Company, for the benefit of the
holders, or to surrender any right or power conferred upon the Company or the
Guarantors by the Indenture, (c) to add any additional Events of Default, (d) to
provide for uncertificated Notes in addition to or in place of certificated
Notes, (e) to evidence and provide for the acceptance of appointment under the
Indenture by the successor Trustee, (f) to secure the Notes and/or the
Guarantees, (g) to cure any ambiguity, to correct or supplement any provision in
the Indenture which may be inconsistent with any other provision therein or to
add any other provisions with respect to matters or questions arising under the
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Indenture, provided that such actions will not adversely affect the interests of
the holders in any material respect or (h) to add or release any Guarantor
pursuant to the terms of the Indenture.
With the consent of the holders of not less than a majority in principal
amount at Stated Maturity of the outstanding Notes (including consents obtained
in connection with a tender offer or exchange offer for the Notes), the Company,
the Guarantors and the Trustee may enter into one or more indentures
supplemental to the Indenture for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Indenture or
of modifying in any manner the rights of the holders; provided, however, that no
such supplemental indenture will, without the consent of the holder of each
outstanding Note affected thereby, (a) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, or reduce the
principal amount thereof (or premium, if any), or the interest thereon that
would be due and payable upon Maturity thereof, or change the place of payment
where, or the coin or currency in which, any Note or any premium or interest
thereon is payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof, (b) reduce the
percentage in principal amount at Stated Maturity of the Outstanding Notes, the
consent of whose Holders is necessary for any such supplemental indenture or
required for any waiver of compliance with certain provisions of the Indenture,
or certain Defaults thereunder, (c) modify the Obligations of the Company to
make offers to purchase Notes upon a Change of Control or from the proceeds of
Asset Sales, (d) subordinate in right of payment, or otherwise subordinate, the
Notes or the Guarantees to any other Indebtedness, (e) amend, supplement or
otherwise modify the provisions of the Indenture relating to Guarantees or (f)
modify any of the provisions of this paragraph (except to increase any
percentage set forth herein).
The holders of not less than a majority in principal amount at Stated
Maturity of the outstanding Notes may on behalf of the holders of all the Notes
waive any past Default or Event of Default under the Indenture and its
consequences, except a Default or Event of Default (a) in the payment of the
principal of (or premium, if any) or interest on any Note or (b) in respect of a
covenant or provision hereof which under the proviso to the prior paragraph
cannot be modified or amended without the consent of the Holder of each
outstanding Note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may terminate its obligations and the obligations of the
Guarantors under the Notes, the Indenture, and the Guarantees when (i) either
(A) all outstanding Notes have been delivered to the Trustee for cancellation or
(B) all such Notes not therefore delivered to the Trustee for cancellation have
become due and payable, will become due and payable within one year or are to be
called for redemption within one year under irrevocable arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name and at the expense of the Company, and the Company has
irrevocably deposited or caused to be deposited with the Trustee funds in an
amount sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of
(premium, if any, on) and interest to the date of deposit or Maturity or date of
redemption; (ii) the Company has paid or caused to be paid all sums then due and
payable by the Company under the Indenture; and (iii) the Company has delivered
an Officers' Certificate and an opinion of counsel relating to compliance with
the conditions set forth in the Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture and Guarantees shall cease to
be of further effect as to all outstanding Notes (except as to (i) rights of
registration of transfer, substitution and exchange of Notes, (ii) the Company's
right of optional redemption, (iii) rights of holders to receive payments of
principal of, premium, if any, and interest on the Notes (but not the Change of
Control Purchase Price or the Asset Sale Offer Purchase Price) and any rights of
the holders with respect to such amounts, (iv) the rights, obligations and
immunities of the Trustee under the Indenture, and (v) certain other specified
provisions in the Indenture) or (b) cease to be under any obligation to comply
with certain restrictive covenants that are described in the Indenture, after
the irrevocable deposit by the Company with the Trustee, in trust for the
benefit of the holders, at any time prior to the Stated Maturity of the Notes,
of (A) money in an amount, (B) U.S. Government Obligations which through the
payment of interest and principal will provide, not later than one Business Day
before the due date
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of payment in respect of such Notes, money in an amount, or (C) a combination
thereof sufficient to pay and discharge the principal of, premium, if any on,
and interest on, such Notes then outstanding on the dates on which any such
payments are due in accordance with the terms of the Indenture and of such
Notes. Such defeasance or covenant defeasance shall be deemed to occur only if
certain conditions are satisfied, including, among other things, delivery by the
Company to the Trustee of an opinion of outside counsel acceptable to the
Trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) the Company's deposit will not result in the
trust or such Trustee being subject to regulation under the Investment Company
Act of 1940.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Grey Wolf at 10370 Richmond Avenue, Suite 600,
Houston, Texas 77042.
BOOK-ENTRY, DELIVERY; FORM AND TRANSFER
The Old Notes were, and the Exchange Notes will be, issued in the form of
one or more registered global notes without interest coupons (collectively, the
"Global Notes"). The Global Notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee in
certain limited circumstances. Beneficial interests in the Global Notes may be
exchanged for Notes in certificated form in certain limited circumstances. See
"-- Transfer of Interests in Global Notes for Certificated Notes."
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar.
Depositary Procedures
DTC has advised Grey Wolf that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities that clear through or maintain
a direct or indirect, custodial relationship with a Direct Participant
(collectively, the "Indirect Participants").
DTC has advised Grey Wolf that, pursuant to DTC's procedures, (i) upon
deposit of the Global Notes, DTC will credit the accounts of the Direct
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Notes allocated by the Initial Purchasers to such Direct
Participants, and (ii) DTC will maintain records of the ownership interests of
such Direct Participants in the Global Notes and the transfer of ownership
interests by and between Direct Participants. DTC will not maintain records of
the ownership interests of, or the transfer of ownership interests by and
between, Indirect Participants or other owners of beneficial interests in the
Global Notes. Direct Participants and Indirect Participants must maintain their
own records of the ownership interests of, and the transfer of ownership
interests by and between, Indirect Participants and other owners of beneficial
interests in the Global Notes.
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Direct Participants in DTC or indirectly through
organizations that are Direct Participants in DTC. All ownership interests in
any Global Notes may be subject to the procedures and requirements of DTC.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of
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physical certificates evidencing such interests. For certain other restrictions
on the transferability of the Notes see "-- Transfers of Interests in Global
Notes for Certificated Notes."
Except as described in "--Transfer of Interests in Global Notes for
Certificated Notes," owners of beneficial interests in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
Notes in certificated form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, Grey Wolf, the Guarantors and the Trustee
will treat the persons in whose names the Notes are registered (including Notes
represented by Global Notes) as the owners thereof for the purpose of receiving
payments and for any and all other purposes whatsoever. Payments in respect of
the principal, premium, Special Interest, if any, and interest on Global Notes
registered in the name of DTC or its nominee will be payable by the Trustee to
DTC or its nominee as the registered holder under the Indenture. Consequently,
neither Grey Wolf, the Trustee nor any agent of Grey Wolf, or the Trustee has or
will leave any responsibility or liability for (i) any aspect of DTC's records
or any Direct Participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised Grey Wolf that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, Grey Wolf or the Guarantors. Neither Grey Wolf, the Guarantors nor the
Trustee will be liable for any delay by DTC or its Direct Participants or
Indirect Participants in identifying the beneficial owners of the Notes and Grey
Wolf and the Trustee may conclusively rely on and will be protected in relying
on instructions from DTC or its nominee as the registered owner of the Notes for
all purposes.
The Global Notes will trade in DTC's Same-Day Funds Settlement System and,
therefore, transfers between Direct Participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in immediately available
funds. Transfers between Indirect Participants who hold an interest through a
Direct Participant will be effected in accordance with the procedures of such
Direct Participant but generally will settle in immediately available funds.
DTC has advised Grey Wolf that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more Direct
Participants to whose accounts interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
as to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Notes, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its Direct Participants) for legended Notes in certificated form, and to
distribute such certificated forms of Notes to its Direct Participants. See
"-- Transfers of Interests in Global Notes for Certificated Notes."
The information in this section concerning DTC and its book-entry system
has been obtained from sources that Grey Wolf believes to be reliable, but Grey
Wolf takes no responsibility for the accuracy thereof.
Transfers of Interests in Global Notes for Certificated Notes
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC (x)
notifies Grey Wolf that it is unwilling or unable to continue as depositary for
the Global Notes and Grey Wolf thereupon fails to appoint a successor depositary
within 90 days or (y) has ceased to be a clearing agency registered under the
Exchange Act, (ii) Grey Wolf, at its option, notifies the Trustee in writing
that it elects to cause the issuance of Certificated Notes or (iii) there shall
have occurred and be continuing a Default or an Event of Default with respect to
the Notes.
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In any such case, Grey Wolf will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interest in such
Global Note, Certificated Notes will be issued to each person that such Direct
and Indirect Participants and DTC identify as being the beneficial owner of the
related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC, by such
Direct Participant (for itself or on behalf of an Indirect Participant), to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct and Indirect Participants (in accordance with DTC's
customary procedures).
Neither Grey Wolf, the Guarantors nor the Trustee will be liable for any
delay by the holder of the Notes or DTC in identifying the beneficial owners of
Notes, and Grey Wolf, the Guarantors and the Trustee may conclusively rely on,
and will be protected in relying on, instructions from the holder of the Global
Note or DTC for all purposes.
Transfers of Certificated Notes for Interests in Global Notes
Certificated Notes may only be transferred if the transferor first delivers
to the Trustee a written certificate.
Same Day Settlement and Payment
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Special Interest, if any) be made by wire transfer of immediately available
same day funds to the accounts specified by the holder of interests in such
Global Note. With respect to Certificated Notes, Grey Wolf will make all
payments of principal, premium, if any, interest and Special Interest, if any,
by wire transfer of immediately available same day funds to the accounts
specified by the holders thereof or, if no such account is specified, by mailing
a check to each such holder's registered address. Grey Wolf expects that
secondary trading in the Certificated Notes will also be settled in immediately
available funds.
REGISTRATION RIGHTS
Grey Wolf and the Guarantors have agreed pursuant to the Registration
Rights Agreement with the Initial Purchasers, for the benefit of the holders of
the Old Notes, that Grey Wolf will, at its cost, (i) within 60 days after the
date of the Initial Offering, file registration statement with the Commission
with registering the exchange of the Old Notes for the Exchange Notes and (ii)
use its reasonable best efforts to cause such registration statement to be
declared effective under the Securities Act within 120 days after the Issue
Date.
In the event that applicable interpretations of the staff of the Commission
do not permit Grey Wolf to effect the Exchange Offer, or if for any other reason
the Exchange Offer is not consummated within 150 days of the date of the
Registration Rights Agreement, or if the Initial Purchasers so request with
respect to Old Notes not eligible to be exchanged for Exchange Notes in the
Exchange Offer, or if any holder of Old Notes is not eligible to participate in
the Exchange Offer or does not receive freely tradable Exchange Notes in the
Exchange Offer, Grey Wolf will, at its cost, (a) as promptly as practicable,
file a Shelf Registration Statement covering resales of the Old Notes or the
Exchange Notes, as the case may be, (b) use its reasonable best efforts to cause
the Shelf Registration Statement to be declared effective under the Securities
Act and (c) keep the Shelf Registration Statement effective (subject to certain
exceptions) until the earlier of (i) the time when the Notes covered by the
Shelf Registration Statement can be sold pursuant to Rule 144 without any
limitations under clauses (c), (e), (f) and (h) of Rule 144 and (ii) two years
from the Initial Offering. Grey Wolf will, in the event a Shelf Registration
Statement is filed, among other things, provide to each holder for whom such
Shelf Registration Statement was filed copies of the prospectus which is a part
of the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Notes or the Exchange
Notes, as the case may be. A holder selling such Old Notes or Exchange Notes
pursuant to the Shelf
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Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations. The Registration Rights
Agreement will entitle Grey Wolf to suspend resales of Notes and Exchange Notes
under the Exchange Offer Registration Statement and the Shelf Registration
Statement for a period of no more than 30 consecutive days and no more than 60
days in any twelve-month period, if a material event or condition exists or is
anticipated (including, for example, a significant potential acquisition or
possible financing) the premature disclosure of which by an amendment or
supplement to such registration statement would be detrimental to Grey Wolf.
If (a) Grey Wolf fails to file any of the Registration Statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) Grey Wolf fails to consummate the Exchange
Offer within 30 days of the Effectiveness Target Date with respect to the
Exchange Offer Registration Statement, or (d) the Shelf Registration Statement
or the Exchange Offer Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of Old
Notes or Exchange Notes during the period specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (c) above, a
"Registration Default"), then Grey Wolf will pay additional interest ("Special
Interest") to each holder of Notes, with respect to the first 90-day period
immediately following the occurrence of such Registration Default in an amount
equal to $.05 per week per $1,000 principal amount of Notes held by such holder.
The amount of the Special Interest will increase by an additional $.05 per week
per $1,000 principal amount of Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Special Interest of $.25 per week per $1,000 principal amount of Notes. All
accrued Special Interest will be paid by Grey Wolf on each interest payment date
to the Global Note holder by wire transfer of immediately available funds or by
federal funds check and to holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Following the cure of all
Registration Defaults, the accrual of Special Interest will cease. The right of
Holders of Notes to receive Special Interest will be the exclusive remedy and
liquidated damages for any Registration Defaults.
Holders of Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Old Notes or Exchange
Notes, as the case may be included in the Shelf Registration Statement and
benefit from the provisions regarding Special Interest.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to Grey Wolf.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no definition
is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a subsidiary of such specified Person,
but excluding Indebtedness which is extinguished, retired or repaid in
connection with such other Person merging with or into or becoming a subsidiary
of such specified Person.
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"Affiliate" of any specified Person means another Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that beneficial ownership of 10% or more of the Voting Stock of a Person shall
be deemed to be control.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
or other disposition (including, without limitation, by way of merger or
consolidation or by means of a Sale and Lease-Back Transaction) by the Company
or any Subsidiary to any Person other than the Company, a Guarantor or a Wholly
Owned Subsidiary, in one transaction, or a series of related transactions, of
(i) any Capital Stock of any Subsidiary (except for directors' qualifying shares
or certain minority interests sold to other Persons solely due to local law
requirements that there be more than one stockholder, but which are not in
excess of what is required for such purpose), or (ii) any other Property or
assets of the Company or any Subsidiary, other than (A) sales of drill-string
components and obsolete or worn out equipment in the ordinary course of business
or other assets that, in the Company's reasonable judgment, are no longer used
or useful in the conduct of the business of the Company and its Subsidiaries),
(B) any drilling contract, charter or other lease of Property or other assets
entered into by the Company or any Subsidiary in the ordinary course of
business, other than any Bargain Purchase Contract, (C) a Restricted Payment or
Restricted Investment permitted under "-- Certain Covenants -- Limitation on
Restricted Payments," (D) a Change of Control, (E) a consolidation, merger,
continuance or the disposition of all or substantially all of the assets of the
Company and the Subsidiaries, taken as a whole in compliance with the provision
of the Indenture described in "-- Consolidation, Merger, Conveyance, Lease or
Transfer," (F) any trade or exchange by the Company or any Subsidiary of one or
more drilling rigs for one or more other drilling rigs of like kind owned or
held by another Person, provided that (x) the Fair Value of the rig or rigs
traded or exchanged by the Company or such Subsidiary (including cash or cash
equivalents to be delivered by the Company or such Subsidiary) is reasonably
equivalent to the Fair Value of the drilling rig or rigs (together with cash or
cash equivalents to be received by the Company or such Subsidiary) or other
assets as determined by written appraisal by a nationally (or industry)
recognized investment banking firm or appraisal firm and (y) such exchange is
approved by a majority of the disinterested directors of the Company. An Asset
Sale shall include the requisition of title to, seizure of or forfeiture of any
Property or assets, or any actual or constructive total loss or an agreed or
compromised total loss of any Property or assets.
"Attributable Indebtedness" in respect of a Sale and Lease-Back Transaction
means, at any date of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease (or to
the first date on which the lessee is permitted to terminate such lease without
the payment of a penalty) included in such Sale and Lease-Back Transaction
(including any period for which such lease has been extended).
"Average Life" means, as of any date, with respect to any debt security,
the quotient obtained by dividing (i) the sum of the products of (x) the number
of years from such date to the date of each scheduled principal payment
(including any sinking fund or mandatory redemption payment requirements) of
such debt security multiplied in each case by (y) the amount of such principal
payment by (ii) the sum of all such principal payments.
"Bank Credit Facility" means the $50.0 million Amended and Restated Senior
Secured Revolving Credit Agreement dated as of April 30, 1997 among the Company
and GW Drilling as co-borrowers, International and Murco as guarantors and the
lending institutions party thereto, Bankers Trust Company, as agent and
administrative agent, and ING (US) Capital Corporation, as co-agent and
documentation agent, as from time to time amended.
"Bargain Purchase Contract" means a drilling contract, charter or lease
that provides for acquisition of Property by the other party to such agreement
during or at the end of the term thereof for less than Fair Market Value thereof
at the time such right to acquire such Property is granted.
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"Capital Lease Obligation" means, at any time as to any Person with respect
to any Property leased by such Person as lessee, the amount of the liability
with respect to such lease that would be required at such time to be capitalized
and accounted for as a capital lease on the balance sheet of such Person
prepared in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests,
partnership interests, participations or other equivalents in the equity
interest (however designated) in such Person and any rights (other than debt
securities convertible into an equity interest), warrants or options to acquire
any equity interest in such Person.
"Cash Proceeds" means, with respect to any Asset Sale by any Person, the
aggregate consideration received for such Asset Sale by such Person in the form
of cash or cash equivalents (including any amounts of insurance or other
proceeds received in connection with an Asset Sale of the type described in the
last sentence of the definition thereof), including payments in respect of
deferred payment obligations when received in the form of cash or cash
equivalents (except to the extent that such obligations are financed or sold
with recourse to such Person or any subsidiary thereof).
"Change of Control" means (i) a determination by the Company that any
Person or group (as defined in Section 13(d)(3) or 14(d)(2) of the Exchange Act)
has become the direct or beneficial owner (as defined in Rule 13d-3 under the
Exchange Act) of more than 50% of the Voting Stock of the Company other than
Permitted Holders; (ii) the Company is merged with or into or consolidated with
another corporation and, immediately after giving effect to the merger or
consolidation, less than 50% of the outstanding voting securities entitled to
vote generally in the election of directors or persons who serve similar
functions of the surviving or resulting entity are then beneficially owned
(within the meaning of Rule 13d-3 of the Exchange Act) in the aggregate by (x)
the stockholders of the Company immediately prior to such merger or
consolidation, or (y) if the record date has been set to determine the
stockholders of the Company entitled to vote on such merger or consolidation,
the stockholders of the Company as of such a record date; (iii) the Company,
either individually or in conjunction with one or more Subsidiaries, sells,
conveys, transfers or leases, or the Subsidiaries sell, convey, transfer or
lease, all or substantially all of the assets of the Company or the Company and
the Subsidiaries, taken as a whole (either in one transaction or a series of
related transactions), including Capital Stock of the Subsidiaries, to any
Person (other than a Wholly Owned Subsidiary); (iv) the liquidation or
dissolution of the Company; or (v) the first day on which a majority of the
individuals who constitute the Board of Directors of the Company are not
Continuing Directors.
"Consolidated Interest Coverage Ratio" means as of the date of the
transaction giving rise to the need to calculate the Consolidated Interest
Coverage Ratio (the "Transaction Date"), the ratio of (i) the aggregate amount
of EBITDA of the Company and its consolidated Subsidiaries for the four fiscal
quarters for which financial information in respect thereof is available
immediately prior to the applicable Transaction Date (the "Determination
Period") to (ii) the aggregate Consolidated Interest Expense of the Company and
its consolidated Subsidiaries that is anticipated to accrue during a period
consisting of the fiscal quarter in which the Transaction Date occurs and the
three fiscal quarters immediately subsequent thereto (based upon the pro forma
amount and maturity of, and interest payments in respect of, Indebtedness of the
Company and its consolidated Subsidiaries expected by the Company to be
outstanding on the Transaction Date), assuming for the purposes of this
measurement the continuation of market interest rates prevailing on the
Transaction Date and base interest rates in respect of floating interest rate
obligations equal to the base interest rates on such obligations in effect as of
the Transaction Date, provided that if the Company or any of its consolidated
Subsidiaries is a party to any Interest Swap Obligation that would have the
effect of changing the interest rate on any Indebtedness of the Company or any
of its consolidated Subsidiaries for such four-quarter period (or a portion
thereof), the resulting rate shall be used for such four-quarter period or
portion thereof; provided, further, that any Consolidated Interest Expense of
the Company with respect to Indebtedness incurred or retired by the Company or
any of its Subsidiaries during the fiscal quarter in which the Transaction Date
occurs shall be calculated as if such debt was incurred or retired on the first
day of the fiscal quarter in which the Transaction Date occurs; provided,
further, that if the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio would have the effect of increasing or
decreasing EBITDA in the future and if such increase or decrease is readily
quantifiable and is attributable to such transaction, EBITDA shall be calculated
on a pro forma basis as if such transaction had occurred on the first day of the
four fiscal
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quarters referred to in clause (i) of this definition, and if, during the same
four fiscal quarters, (x) the Company or any of its consolidated Subsidiaries
shall have engaged in any Asset Sale, EBITDA for such period shall be reduced by
an amount equal to the EBITDA (if positive), or increased by an amount equal to
the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale for such period calculated on a pro forma basis as if
such Asset Sale and any related retirement of Indebtedness had occurred on the
first day of such period or (y) after the Series A Issue Date, the Company or
any of its consolidated Subsidiaries shall have acquired any material assets
other than in the ordinary course of business, EBITDA and Consolidated Interest
Expense shall be calculated on a pro forma basis as if such acquisition had
occurred on the first day of such period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (i) the aggregate amount of cash and
noncash interest expense (including capitalized interest) of such Person and its
subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP in respect of Indebtedness (including, without limitation, (v) any
amortization of debt discount, (w) net costs associated with Interest Swap
Obligations (including any amortization of discounts), (x) the interest portion
of any deferred payment obligation calculated in accordance with the effective
interest method, (y) all accrued interest and (z) all commissions, discounts and
other fees and charges owed with respect to letters of credit, bankers
acceptances or similar facilities) paid or accrued, or scheduled to be paid or
accrued, during such period; (ii) dividends on Preferred Stock or Redeemable
Stock of such Person (and Preferred Stock or Redeemable Stock of its
subsidiaries if paid to a Person other than such Person or its subsidiaries)
declared and payable in cash; (iii) the portion of any rental obligation of such
Person or its subsidiaries in respect of any Capital Lease Obligation allocable
to interest expense in accordance with GAAP; (iv) the portion of any rental
obligation of such Person or its subsidiaries in respect of any Sale and
Lease-Back Transaction allocable to interest expense (determined as if such were
treated as a Capital Lease Obligation); and (v) to the extent any debt of any
other Person is guaranteed by such Person or any of its subsidiaries, the
aggregate amount of interest paid, accrued or scheduled to be paid or accrued,
by such other Person during such period attributable to any such debt, less (B)
to the extent included in (A) above, amortization or write-off of deferred
financing costs of such Person and its subsidiaries during such period and any
charge related or any premium or penalty paid in connection with redeeming or
retiring any Indebtedness of such Person and its subsidiaries prior to its
stated maturity; in the case of both (A) and (B) above, after elimination of
intercompany accounts among such Person and its subsidiaries and as determined
in accordance with GAAP. For purposes of clause (ii) above, dividend
requirements attributable to any Preferred Stock or Redeemable Stock shall be
deemed to be an amount equal to the amount of dividend requirements on such
Preferred Stock or Redeemable Stock times a fraction, the numerator of which is
one, and the denominator of which is one minus the applicable combined federal,
state, local and foreign income tax rate of the Company and its Subsidiaries
(expressed as a decimal), on a consolidated basis, for the fiscal year
immediately preceding the date of the transaction giving rise to the need to
calculate Consolidated Interest Expense.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss, as the case may be) of such Person and its
subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP, provided that there shall be excluded therefrom, without duplication,
(i) any net income of any Unrestricted Subsidiary, except that the Company's or
any Subsidiary's interest in the net income of such Unrestricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash or cash equivalents actually distributed by such
Unrestricted Subsidiary during such period to the Company or a Subsidiary as a
dividend or other distribution, (ii) gains and losses, net of taxes, from Asset
Sales or reserves relating thereto, (iii) the net income of any Person that is
not a subsidiary or that is accounted for by the equity method of accounting
which shall be included only to the extent of the amount of dividends or
distributions paid to such Person or its subsidiaries, (iv) items (but not loss
items) classified as extraordinary, unusual or nonrecurring (other than the tax
benefit, if any, of the utilization of net operating loss carryforwards or
alternative minimum tax credits), (v) the net income (but not net loss) of any
Person acquired by such specified Person or any of its subsidiaries in a
pooling-of-interests transaction for any period prior to the date of such
acquisition, (vi) any gain or loss, net of taxes, realized on the termination of
any employee pension benefit plan, (vii) the net income (but not net loss) of
any subsidiary
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of such specified Person to the extent that the transfer to that Person of that
income is not at the time permitted, directly or indirectly, by any means
(including by dividend, distribution, advance or loan or otherwise), or by
operation of the terms of its charter or any agreement with a Person other than
with such specified Person, instrument held by a Person other than by such
specified Person, judgment, decree, order, statute, law, rule or governmental
regulations applicable to such subsidiary or its stockholders, except for any
dividends or distributions actually paid by such subsidiary to such Person, and
(viii) with regard to a non-Wholly Owned Subsidiary, any aggregate net income
(or loss) in excess of such Person's or such subsidiary's pro rata share of such
non-Wholly Owned Subsidiary's net income (or loss).
"Consolidated Net Worth" of any Person means, as of any date, the sum of
the Capital Stock and additional paid-in capital plus retained earnings (or
minus accumulated deficit) of such Person and its subsidiaries on a consolidated
basis at such date, each item determined in accordance with GAAP, less amounts
attributable to Redeemable Stock of such Person or any of its subsidiaries.
"Continuing Director" means an individual who (i) is a member of the Board
of Directors of the Company and (ii) either (A) was a member of the Board of
Directors of the Company on the Series A Issue Date or (B) whose nomination for
election or election to the Board of Directors of the Company was approved by
vote of at least a majority of the directors then still in office who were
either directors on the Series A Issue Date or whose election or nomination for
election was previously so approved.
"Currency Hedge Obligations" means, at any time as to any Person, the
obligations of such Person at such time which were incurred in the ordinary
course of business pursuant to any foreign currency exchange agreement, option
or future contract or other similar agreement or arrangement designed to protect
against or manage such Person's or any of its subsidiaries' exposure to
fluctuations in foreign currency exchange rates.
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage time or both would be, an Event of Default.
"Determination Period" has the meaning specified under clause (i) of the
definition of "Consolidated Interest Coverage Ratio."
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period, plus to the extent reflected in the
income statement of such Person for such period from which Consolidated Net
Income is determined, without duplication, (i) Consolidated Interest Expense,
(ii) income tax expense, (iii) depreciation expense, (iv) amortization expense,
(v) any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity, (vi) any
other non-cash charges and (vii) to the extent not otherwise covered by the
adjustments contained in the proviso to this definition, non-recurring charges
of approximately $6.1 million incurred during 1996 in employment severance
costs, exit costs attributable to its exiting Argentina and Mexico and other
non-recurring charges, all as described in the Company's Form 10-K for the year
ended December 31, 1996 and minus, to the extent reflected in such income
statement, any noncash credits that had the effect of increasing Consolidated
Net Income of such Person for such period; provided that for purposes of
determining EBITDA with respect to the Company, Consolidated Net Income shall
exclude any net income or loss for the year ended December 31, 1996 associated
with the Company's Argentine and Mexican divisions.
"Fair Market Value" means, with respect to consideration received or to be
received pursuant to any transaction by any Person, the fair market value of
such consideration as determined in good faith by the Board of Directors of the
Company.
"Fair Value" means, with respect to any asset or Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction.
"GAAP" means, at any date, United States generally accepted accounting
principles, consistently applied, as set forth in the opinions of the Accounting
Principles Board of the American Institute of Certified Public Accountants
("AICPA") and statements of the Financial Accounting Standards Board, or in such
other statements by such other entity as may be designated by the AICPA, that
are applicable to the circumstances
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as of the date of determination; provided, however, that all calculations made
for purposes of determining compliance with the provisions set forth in the
Indenture shall utilize GAAP in effect at the Series A Issue Date.
"Guarantee" means any guarantee of the Notes by any Guarantor in accordance
with the provisions described under "-- Guarantees of Notes."
"Guarantor" means Grey Wolf Drilling Company ("GW Drilling"), Grey Wolf
International, Inc. ("International"), Murco and DI Energy, Inc. and each other
Subsidiary of the Company that is required to guarantee the Company's
Obligations under the Notes and the Indenture as described in "-- Guarantees of
Notes" and any other Subsidiary of the Company that executes a supplemental
indenture in which such Subsidiary agrees to guarantee the Company's Obligations
under the Notes and the Indenture. GW Drilling was formerly named "Drillers,
Inc." and International was formerly named "DI International, Inc." Both GW
Drilling and International were renamed following the GWDC Acquisition.
"incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, suffer to exist, incur (by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or obligation on the balance sheet of
such Person (and "incurrence," "incurred," "incurrable" and "incurring" shall
have meanings correlative to the foregoing); provided that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an incurrence of such Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary shall
be deemed to have been incurred at the time at which it becomes a Subsidiary.
"Indebtedness" as applied to any Person means, at any time, without
duplication, whether recourse is to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
borrowed money; (ii) any obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, including, without limitation,
any such obligations incurred in connection with acquisition of Property, assets
or businesses, excluding accounts payable made in the ordinary course of
business which are not more than 90 days overdue or which are being contested in
good faith and by appropriate proceedings; (iii) any obligation of such Person
for all or any part of the purchase price of Property or for the cost of
Property constructed or of improvements thereto (including any obligation under
or in connection with any letter of credit related thereto), other than accounts
payable incurred in respect of Property and services purchased in the ordinary
course of business which are no more than 90 days overdue or which are being
contested in good faith and by appropriate proceedings; (iv) any obligation of
such Person upon which interest charges are customarily paid (other than
accounts payable incurred in the ordinary course of business); (v) any
obligation of such Person under conditional sale or other title retention
agreements relating to purchased Property; (vi) any obligation of such Person
issued or assumed as the deferred purchase price of Property (other than
accounts payable incurred in the ordinary course of business which are no more
than 90 days overdue or which are being contested in good faith and by
appropriate proceedings); (vii) any Capital Lease Obligation or Attributable
Indebtedness pursuant to any Sale and Lease-Back Transaction of such Person;
(viii) any obligation of any other Person secured by (or for which the obligee
thereof has an existing right, contingent or otherwise, to be secured by) any
Lien on Property owned or acquired, whether or not any obligation secured
thereby has been assumed, by such Person; (ix) any obligation of such Person in
respect of any letter of credit supporting any obligation of any other Person;
(x) the maximum fixed repurchase price of any Redeemable Stock of such Person
(or if such Person is a subsidiary, any Preferred Stock of such Person); (xi)
the notional amount of any Interest Swap Obligation or Currency Hedge Obligation
of such Person at the time of determination; and (xii) any obligation which is
in economic effect a guarantee, regardless of its characterization (other than
an endorsement in the ordinary course of business), with respect to any
Indebtedness of another Person, to the extent guaranteed. For purposes of the
preceding sentence, the maximum fixed repurchase price of any Redeemable Stock
or subsidiary Preferred Stock that does not have a fixed repurchase price shall
be calculated in accordance with the terms of such Redeemable Stock or
subsidiary Preferred Stock as if such Redeemable Stock or subsidiary Preferred
Stock were repurchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture; provided, however, that if such Redeemable
Stock or subsidiary Preferred Stock is not then permitted to be repurchased,
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the repurchase price shall be the book value of such Redeemable Stock or
subsidiary Preferred Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability of any guarantees at such date;
provided that for purposes of calculating the amount of any non-interest bearing
or other discount security, such Indebtedness shall be deemed to be the
principal amount thereof that would be shown on the balance sheet of the issuer
dated such date prepared in accordance with GAAP but that such security shall be
deemed to have been incurred only on the date of the original issuance thereof.
"Interest Swap Obligation" means, with respect to any Person, the
obligation of such Person pursuant to any interest rate swap agreement, interest
rate cap, collar or floor agreement or other similar agreement or arrangement
designed to protect against or manage such Person's or any of its subsidiaries'
exposure to fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct, indirect or
contingent investment in another Person, whether by means of a share purchase,
capital contribution, loan, advance (other than advances to employees for moving
and travel expenses, drawing accounts and similar expenditures in the ordinary
course of business) or similar credit extension constituting Indebtedness of
such other Person, and any guarantee of Indebtedness of any other Person;
provided that the term "Investment" shall not include any transaction involving
the purchase or other acquisition (including by way of merger) of Property
(including Capital Stock) by the Company or any Subsidiary in exchange for
Capital Stock (other than Redeemable Stock) of the Company. The amount of any
Person's Investment shall be the original cost of such Investment to such
Person, plus the cost of all additions thereto paid by such Person, and minus
the amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
writedowns, or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property or assets other
than cash, such Property or assets shall be valued at its Fair Value at the time
of such transfer as determined in good faith by the board of directors (or
comparable body) of the Person making such transfer. The Company shall be deemed
to make an "Investment" in the amount of the Fair Value of the Assets of a
Subsidiary at the time such Subsidiary is designated an Unrestricted Subsidiary.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under the Indenture.
"Joint Venture" means any Person (other than a Guarantor) designated as
such by a resolution of the Board of Directors of the Company and as to which
(i) the Company, any Guarantor or any Joint Venture owns less than 50% of the
Capital Stock of such Person; (ii) no more than ten unaffiliated Persons own of
record any Capital Stock of such Person; (iii) at all times, each such Person
owns the same proportion of each class of Capital Stock of such Person
outstanding at such time; (iv) no Indebtedness of such Person is or becomes
outstanding other than Non-Recourse Indebtedness; (v) there exist no consensual
encumbrances or restrictions on the ability of such Person to (x) pay, directly
or indirectly, dividends or make any other distributions in respect of its
Capital Stock to the holders of its Capital Stock or (y) pay any Indebtedness or
other obligation owed to the holders of its Capital Stock or (z) make any
Investment in the holders of its Capital Stock, in each case other than the
types of consensual encumbrances or restrictions that would be permitted by the
"Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries"
covenant if such Person were a Subsidiary; and (vi) the business engaged in by
such Person is a Related Business.
"Lien" means any mortgage, pledge, hypothecation, charge, assignment,
deposit arrangement, encumbrance, security interest, lien (statutory or other),
or preference, priority or other security or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
agreement to give or grant a Lien or any lease, conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Maturity" means the date on which the principal of a Note becomes due and
payable as provided therein or in the Indenture, whether at the Stated Maturity
or the Change of Control Payment Date or purchase date established pursuant to
the terms of the Indenture for an Asset Sale Offer or by declaration of
acceleration, call for redemption or otherwise.
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"Net Available Proceeds" means, (a) as to any Asset Sale (other than a
Bargain Purchase Contract), the Cash Proceeds therefrom, net of all legal and
title expenses, commissions and other fees and expenses incurred, and all
Federal, state, foreign, recording and local taxes payable as a consequence of
such Asset Sale, net of all payments made to any Person other than the Company
or a Subsidiary on any Indebtedness which is secured by such assets, in
accordance with the terms of any Lien upon or with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such Asset
Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale
and, as for any Asset Sale by a Subsidiary, net of the equity interest in such
Cash Proceeds of any holder of Capital Stock of such Subsidiary (other than the
Company, any other Subsidiary or any Affiliate of the Company or any such other
Subsidiary) and (b) as to any Bargain Purchase Contract, an amount equal to (i)
that portion of the rental or other payment stream arising under a Bargain
Purchase Contract that represents an amount in excess of the Fair Market Value
of the rental or other payments with respect to the pertinent Property or other
asset and (ii) the Cash Proceeds from the sale of such Property or other asset,
net of the amount set forth in clause (a) above, in each case as and when
received.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of an Unrestricted Subsidiary or a foreign Subsidiary not
constituting a Guarantor as to which (a) neither the Company nor any other
Subsidiary (other than an Unrestricted Subsidiary or a Subsidiary of such
foreign Subsidiary) (i) provides credit support including any undertaking,
agreement or instrument which would constitute Indebtedness or (ii) is directly
or indirectly liable for such Indebtedness and (b) no default with respect to
such Indebtedness (including any rights which the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary or such foreign
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Company or its other Subsidiaries to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity.
"Obligations" means, with respect to any Indebtedness, any obligation
thereunder, including, without limitation, principal, premium and interest
(including post petition interest thereon), penalties, fees, costs, expenses,
indemnifications, reimbursements, damages and other liabilities.
"Obligors" means the Company and the Guarantors, collectively; "Obligor"
means the Company or any Guarantor.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive Officer,
the Chief Operating Officer or a Vice President, and by the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company or a Subsidiary and
delivered to the Trustee, which shall comply with the Indenture.
"Permitted Holders" means Norex Industries, Inc., Somerset Capital
Partners, Mike L. Mullen and Roy T. Oliver, Jr. and their respective Affiliates.
"Permitted Indebtedness" means (a) Indebtedness of the Company under the
Notes and the Series A Notes; (b) Indebtedness (and any guarantee thereof) under
one or more credit or revolving credit facilities with a bank or syndicate of
banks or financial institutions or other lenders, including the Bank Credit
Facility, as such may be amended, modified, revised, extended, replaced, or
refunded from time to time, in an aggregate principal amount at any one time
outstanding not to exceed $100.0 million, less any amounts derived from Asset
Sales and applied to the required permanent reduction of Senior Debt (and a
permanent reduction of the related commitment to lend or amount available to be
reborrowed in the case of a revolving credit facility) under such credit
facilities as contemplated by the "Limitation on Asset Sales" covenant (provided
that the aggregate principal amount of Indebtedness deemed to be incurred under
this clause (b) shall be the same amount as is deemed incurred under clause (b)
of the definition of the term "Permitted Indebtedness" in the Series A
Indenture); (c) Indebtedness of the Company or any Subsidiary under Interest
Swap Obligations, provided that (i) such Interest Swap Obligations are related
to payment obligations on Indebtedness otherwise permitted under the covenants
described in "-- Certain Covenants -- Limitation on Indebtedness" and (ii) the
notional principal amount of such Interest Swap Obligations does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligations
relate; (d) Indebtedness of the
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Company or any Subsidiary under Currency Hedge Obligations, provided that (i)
such Currency Hedge Obligations are related to payment obligations on
Indebtedness otherwise permitted under the covenants described in "-- Certain
Covenants -- Limitation on Indebtedness" or to the foreign currency cash flows
reasonably expected to be generated by the Company and the Subsidiaries and (ii)
the notional principal amount of such Currency Hedge Obligations does not exceed
the principal amount of the Indebtedness and the amount of the foreign currency
cash flows to which such Currency Hedge Obligations relate; (e) Indebtedness of
the Company or any Subsidiary outstanding on the Series A Issue Date; (f) (i)
the Guarantees of the Notes and the Series A Notes (and any assumption of the
Obligations guaranteed thereby) and (ii) Indebtedness of a Guarantor
constituting a guarantee of Indebtedness of the Company incurred in compliance
with the paragraph above entitled "Certain Covenants -- Limitation on
Indebtedness" (and any assumption of the Obligations guaranteed thereby); (g)
Indebtedness of the Company or any Subsidiary in respect of bid performance
bonds, surety bonds, appeal bonds and letters of credit or similar arrangements
issued for the account of the Company or any Subsidiary, in each case in the
ordinary course of business and other than for an obligation for money borrowed;
(h) Indebtedness of the Company to a Guarantor or other Wholly Owned Subsidiary
and Indebtedness of a Guarantor or other Wholly Owned Subsidiary to the Company
or another Guarantor or other Wholly Owned Subsidiary; provided that upon any
subsequent issuance or transfer of any Capital Stock or any other event which
results in any such Guarantor ceasing to be a Guarantor or such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary, as the case may be, or any
other subsequent transfer of any such Indebtedness (except to the Company or a
Guarantor or other Wholly Owned Subsidiary), such Indebtedness shall be deemed,
in each case, to be incurred and shall be treated as an incurrence for purposes
of the "Limitation on Indebtedness" covenants at the time the Guarantor in
question ceased to be a Guarantor or the Wholly Owned Subsidiary in question
ceased to be a Wholly Owned Subsidiary; (i) Subordinated Indebtedness of the
Company to an Unrestricted Subsidiary for money borrowed; (j) Indebtedness of
the Company in connection with a purchase of the Notes and the Series A Notes
pursuant to a Change of Control Offer under the Indenture and the Series A
Indenture, provided that the aggregate principal amount of such Indebtedness
does not exceed 101% of the aggregate principal amount at Stated Maturity of the
Notes and the Series A Notes purchased pursuant to such Change of Control offer;
provided, further, that such Indebtedness (A) has an Average Life equal to or
greater than the remaining Average Life of the Notes and the Series A Notes and
(B) does not mature prior to one year following the Stated Maturity of the Notes
and the Series A Notes; (k) Permitted Refinancing Indebtedness; (l) Permitted
Subsidiary Refinancing Indebtedness; and (m) additional Indebtedness incurred
after the Series A Issue Date in an aggregate principal amount not in excess of
$2.5 million at any one time outstanding (provided that the aggregate principal
amount of Indebtedness deemed to be incurred under this clause (m) shall be the
same amount as is deemed incurred under clause (m) of the definition of the term
"Permitted Indebtedness" in the Series A Indenture). So as to avoid duplication
in determining the amount of Permitted Indebtedness under any clause of this
definition, guarantees permitted to be incurred pursuant to the Indenture of, or
obligations permitted to be incurred pursuant to the Indenture in respect of
letters of credit supporting, Indebtedness otherwise included in the
determination of such amount shall not also be included.
"Permitted Investments" means (a) certificates of deposit, bankers
acceptances, time deposits, Eurocurrency deposits and similar types of
Investments routinely offered by commercial banks with final maturities of one
year or less issued by commercial banks organized in the United States having
capital and surplus in excess of $300.0 million; (b) commercial paper issued by
any corporation, if such commercial paper has credit ratings of at least "A-1"
or its equivalent by S&P and at least "P-I" or its equivalent by Moody's; (c)
U.S. Government Obligations with a maturity of four years or less; (d)
repurchase obligations for instruments of the type described in clause (c) with
any bank meeting the qualifications specified in clause (a) above; (e) shares of
money market mutual or similar funds having assets in excess of $100.0 million;
(f) payroll advances in the ordinary course of business; (g) other advances and
loans to officers and employees of the Company or any Subsidiary, so long as the
aggregate principal amount of such advances and loans does not exceed $500,000
at any one time outstanding; (h) Investments represented by that portion of the
proceeds from Asset Sales that is not required to be Cash Proceeds by the
covenant described in "-- Certain Covenants -- Limitation on Asset Sales"; (i)
Investments made by the Company in Guarantors or in its other Wholly Owned
Subsidiaries (or any Person that will be a Wholly Owned Subsidiary as a result
of such
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Investment) or by a Subsidiary in the Company or in one or more Guarantors or
other Wholly Owned Subsidiaries (or any Person that will be a Wholly Owned
Subsidiary as a result of such Investment); (j) Investments in stock,
obligations or securities received in settlement of debts owing to the Company
or any Subsidiary as a result of bankruptcy or insolvency proceedings or upon
the foreclosure, perfection or enforcement of any Lien in favor of the Company
or any Subsidiary, in each case as to debt owing to the Company or any
Subsidiary that arose in the ordinary course of business of the Company or any
such Subsidiary; (k) certificates of deposit, bankers acceptances, time
deposits, Eurocurrency deposits and similar types of Investments routinely
offered by commercial banks organized in the United States with final maturities
of one year or less and in an aggregate amount not to exceed $5.0 million at any
one time outstanding with a commercial bank organized in the United States
having capital and surplus in excess of $75.0 million; (l) Venezuelan and other
foreign bank deposits and cash equivalents in jurisdictions where the Company or
its Subsidiaries are then actively conducting business; (m) Investment in Grey
Wolf pursuant to the Grey Wolf Acquisition agreement; (n) Interest Swap
Obligations with respect to any floating rate Indebtedness that is permitted by
the terms of the Indenture to be outstanding; (o) Currency Hedge Obligations,
provided that such Currency Hedge Obligations constitute Permitted Indebtedness
permitted by clause (d) of the definition thereof; (p) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility,
worker's compensation and performance and other similar deposits in the ordinary
course of business; and (q) Investments pursuant to any agreement or obligation
of the Company or any Subsidiary in effect on the Series A Issue Date and listed
on a schedule attached to the Series A Indenture.
"Permitted Liens" means (a) Liens in existence on the Series A Issue Date;
(b) Liens created for the benefit of the Notes, the Guarantees, the Series A
Notes and/or any guarantees thereof; (c) Liens on Property of a Person existing
at the time such Person is merged or consolidated with or into the Company or a
Subsidiary (and not incurred as a result of, or in anticipation of, such
transaction), provided that any such Lien relates solely to such Property; (d)
Liens on Property existing at the time of the acquisition thereof (and not
incurred as a result of, or in anticipation of such transaction), provided that
any such Lien relates solely to such Property; (e) Liens incurred or pledges and
deposits made in connection with worker's compensation, unemployment insurance
and other social security benefits, statutory obligations, bid, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (f) Liens imposed by law or arising by operation of
law, including, without limitation, landlords', mechanics', carriers',
warehousemen's, materialmen's, suppliers' and vendors' Liens and Liens for
master's and crew's wages and other similar maritime Liens, and incurred in the
ordinary course of business for sums not delinquent or being contested in good
faith, if such reserves or other appropriate provisions, if any, as shall be
required by GAAP shall have been made with respect thereof; (g) zoning
restrictions, easements, licenses, covenants, reservations, restrictions on the
use of real property and defects, irregularities and deficiencies in title to
real property that do not, individually or in the aggregate, materially affect
the ability of the Company or any Subsidiary to conduct its business presently
conducted; (h) Liens for taxes or assessments or other governmental charges or
levies not yet due and payable, or the validity of which is being contested by
the Company or a Subsidiary in good faith and by appropriate proceedings upon
stay of execution or the enforcement thereof and for which adequate reserves in
accordance with GAAP or other appropriate provision has been made; (i) Liens to
secure Indebtedness incurred for the purpose of financing all or a part of the
purchase price or construction cost of Property acquired or constructed after
the Series A Issue Date, provided that (1) the principal amount of Indebtedness
secured by such Liens shall not exceed 100% of the lesser of cost or Fair Market
Value of the Property so acquired or constructed plus transaction costs related
thereto, (2) such Liens shall not encumber any other assets or Property of the
Company or any Subsidiary (other than the proceeds thereof and accessions and
upgrades thereto) and (3) such Liens shall attach to such Property within 120
days of the date of the completion of the construction or acquisition of such
Property; (j) Liens securing Capital Lease Obligations, provided, further, that
such Liens secure Capital Lease Obligations which, when combined with (1) the
outstanding secured Indebtedness of the Company and its Subsidiaries (other than
Indebtedness secured by Liens described under clauses (b) and (i) hereof) and
(2) the aggregate principal amount of all other Capital Lease Obligations of the
Company and Subsidiaries, does not exceed $5.0 million at any one time
outstanding; (k) Liens to secure any extension, renewal, refinancing or
refunding (or successive extensions, renewals, refinancings or refundings), in
whole or in part, of any Indebtedness secured by Liens
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referred to in the foregoing clauses (a), (c) and (d), provided, further, that
such Lien does not extend to any other Property of the Company or any Subsidiary
and the principal amount of the Indebtedness secured by such Lien is not
increased; (l) any charter or lease; (m) leases or subleases of real property to
other Persons; (n) Liens securing Permitted Indebtedness described in clause (b)
of the definition thereof; (o) judgment liens not giving rise to an Event of
Default so long as any appropriate legal proceedings which may have been
initiated for the review of such judgment shall not have been finally terminated
or the period within which such proceeding may be initiated shall not have
expired; (p) rights of off-set of banks and other Persons; and (q) liens in
favor of the Company.
"Permitted Refinancing Indebtedness" means Indebtedness of the Company,
incurred in exchange for, or the net proceeds of which are used to renew,
extend, refinance, refund or repurchase, outstanding Indebtedness of the Company
which outstanding Indebtedness was incurred in accordance with, or is otherwise
permitted by, the terms of clauses (a) and (e) of the definition of "Permitted
Indebtedness", provided that (i) if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased is pari passu with or subordinated in right
of payment (without regard to its being secured) to the Notes, then such new
Indebtedness is pari passu with or subordinated in right of payment (without
regard to its being secured) to, as the case may be, the Notes at least to the
same extent as the Indebtedness being renewed, extended, refinanced, refunded or
repurchased, (ii) such new Indebtedness is scheduled to mature later than the
Indebtedness being renewed, extended, refinanced, refunded or repurchased, (iii)
such new Indebtedness has an Average Life at the time such Indebtedness is
incurred that is greater than the Average Life of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, and (iv) such new
Indebtedness is in aggregate principal amount (or, if such Indebtedness is
issued at a price less than the principal amount thereof, the aggregate amount
of gross proceeds therefrom is) not in excess of the aggregate principal amount
then outstanding of the Indebtedness being renewed, extended, refinanced,
refunded or repurchased (or if the Indebtedness being renewed, extended,
refinanced, refunded or repurchased was issued at a price less than the
principal amount thereof, then not in excess of the amount of liability in
respect thereof determined in accordance with GAAP) plus the amount of
reasonable fees, expenses, and premium, if any, incurred by the Company or such
Subsidiary in connection therewith.
"Permitted Subsidiary Refinancing Indebtedness" means Indebtedness of any
Subsidiary, incurred in exchange for, or the net proceeds of which are used to
renew, extend, refinance, refund or repurchase, outstanding Indebtedness of such
Subsidiary which outstanding Indebtedness was incurred in accordance with, or is
otherwise permitted by, the terms of clauses (e) and (f) of the definition of
Permitted Indebtedness, provided that (i) if the Indebtedness being renewed,
extended, refinanced, refunded or repurchased is pari passu with or subordinated
in right of payment (without regard to its being secured) to the Guarantee of
such Subsidiary, then such new Indebtedness is pari passu with or subordinated
in right of payment (without regard to its being secured) to, as the case may
be, the Guarantee of such Subsidiary at least to the same extent as the
Indebtedness being renewed, extended, refinanced refunded or repurchased, (ii)
such new Indebtedness is scheduled to mature later than the Indebtedness being
renewed, extended, refinanced, refunded or repurchased, (iii) such new
Indebtedness has an Average Life at the time such Indebtedness is incurred that
is greater than the Average Life of the Indebtedness being renewed, extended,
refinanced, refunded or repurchased, and (iv) such new Indebtedness is in an
aggregate principal amount (or, if such Indebtedness is issued at a price less
than the principal amount thereof, the aggregate amount of gross proceeds
therefrom is) not in excess of the aggregate principal amount then outstanding
of the Indebtedness being renewed, extended, refinanced, refunded or repurchased
(or if the Indebtedness being renewed, extended, refinanced, refunded or
repurchased was issued at a price less than the principal amount thereof, then
not in excess of the amount of liability in respect thereof determined in
accordance with GAAP) plus the amount of reasonable fees, expenses, and premium,
if any, incurred by the Company or such Subsidiary in connection therewith.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
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"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends and/or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares of
Capital Stock of at least one other class of such Person.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Qualified Equity Offering" means an offering made after the Series A Issue
Date of Capital Stock (other than Redeemable Stock) of the Company for cash,
whether pursuant to an effective registration statement under the Securities Act
or pursuant to an exemption from registration under the Securities Act.
"Redeemable Stock" means, with respect to any Person, any equity security
that by its terms or otherwise is required to be redeemed, or is redeemable at
the option of the holder thereof, at any time prior to one year following the
Stated Maturity of the Notes or is exchangeable into Indebtedness of such Person
or any of its subsidiaries.
"Related Business" means the land drilling business and activities
incidental thereto and any business related or ancillary thereto.
"Replacement Asset" means a Property or asset that, as determined by the
Board of Directors of the Company as evidenced by a Board Resolution, is used or
is useful in a Related Business.
"Restricted Investment" means any Investment in any Person, including an
Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted
Subsidiary, other than a Permitted Investment.
"Restricted Payment" means to (i) declare or pay any dividend on, or make
any distribution in respect of, or purchase, redeem, retire or otherwise acquire
for value, any Capital Stock of the Company or any Affiliate of the Company, or
warrants, rights or options to acquire such Capital Stock, other than (x)
dividends payable solely in the Capital Stock (other than Redeemable Stock) of
the Company or such Affiliate, as the case may be, or in warrants, rights or
options to acquire such Capital Stock and (y) dividends or distributions by a
Subsidiary to the Company or to a Wholly Owned Subsidiary; (ii) make any
principal payment on, or redeem, repurchase, defease (including an in-substance
or legal defeasance) or otherwise acquire or retire for value (including
pursuant to mandatory repurchase covenants), prior to any scheduled principal
payment, scheduled sinking fund payment or other stated maturity, Indebtedness
of the Company or any Subsidiary which is subordinated (whether pursuant to its
terms or by operation of law) in right of payment to the Notes or the
Guarantees, as applicable; or (iii) make any Restricted Investment in any
Person.
"Sale and Lease-Back Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a subsidiary of such Person and is thereafter leased back from
the purchaser or transferee thereof by such Person or one of its subsidiaries.
"Senior Debt" means any Indebtedness incurred by the Company, unless the
instrument under which such Indebtedness is incurred expressly provides that it
is subordinated in right of payment to the Notes, provided that Senior Debt will
not include (a) any liability for federal, state, local or other taxes owed or
owing, (b) any Indebtedness owing to any Subsidiaries of the Company, (c) any
trade payables or (d) any Indebtedness that is incurred in violation of the
Indenture.
"Series A Indenture" means the Indenture dated as of June 27, 1997 among
the Company, the subsidiary guarantors parties thereto, and Chase Bank of Texas,
National Association (formerly known as Texas Commerce Bank National
Association), as Trustee, providing for the issuance of the Series A Notes in
the aggregate principal amount of $175,000,000, as such may be amended and
supplemented from time to time.
"Series A Issue Date" means the date on which the Series A Notes were
originally issued under the Series A Indenture.
"Series A Notes" means the Company's 8 7/8% Senior Notes due July 1, 2007
issued pursuant to the Series A Indenture, as such may be amended or
supplemented from time to time.
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<PAGE> 91
"Significant Subsidiary" means a Subsidiary that is a "significant
subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities
Act and the Exchange Act.
"Stated Maturity" when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Guarantor that is subordinated in right of payment to the Notes or the
Guarantees, as the case may be, and does not mature prior to one year following
the Stated Maturity of the Notes.
"subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding Voting Stock of which is owned, directly or
indirectly, by such Person, or by one or more other subsidiaries of such Person,
or by such Person and one or more other subsidiaries of such Person, (ii) any
general partnership, joint venture or similar entity, more than 50% of the
outstanding partnership or similar interest of which is owned, directly or
indirectly, by such Person, or by one or more other subsidiaries of such Person,
or by such Person and one or more other subsidiaries of such Person and (iii)
any limited partnership of which such Person or any subsidiary of such Person is
a general partner.
"Subsidiary" means a subsidiary of the Company other than an Unrestricted
Subsidiary; provided that Indrillers shall not be considered a Subsidiary for
purposes of the Indenture.
"Transaction Date" has the meaning specified within the definition of
Consolidated Interest Coverage Ratio.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged; (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case under
clauses (i) or (ii) above, are not callable or redeemable at the option of the
issuers thereof; or (iii) depository receipts issued by a bank or trust company
as custodian with respect to any such U.S. Government Obligations or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian for the account of the holder of a Depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such Depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation evidenced by such Depository receipt.
"Unrestricted Subsidiary" means any subsidiary of the Company that the
Company has classified as an Unrestricted Subsidiary and that has not been
reclassified as a Subsidiary pursuant to the terms of the Indenture.
"Voting Stock" means with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holder thereof (whether at
all times or at the times that such class of Capital Stock has voting power by
reason of the happening of any contingency) to vote in the election of members
of the board of directors or comparable body of such Person.
"Wholly Owned Subsidiary" means any Subsidiary to the extent (i) all of the
Capital Stock or other ownership interests in such Subsidiary, other than any
directors' qualifying shares mandated by applicable law, is owned directly or
indirectly by the Company or (ii) such Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction in
order for such Subsidiary to transact business in such foreign jurisdiction,
provided that the Company, directly or indirectly, owns the remaining Capital
Stock or ownership interest in such Subsidiary and, by contract or otherwise,
controls the management and business of such Subsidiary and derives the economic
benefits of ownership of such Subsidiary to substantially the same extent as if
such Subsidiary were a wholly owned Subsidiary.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company's principal credit arrangements (other than customary trade
credit and capital leases) consist of the Bank Credit Facility, the Series A
Notes and the Exchange Notes to be issued hereby in exchange for the Old Notes.
See "Description of the Notes."
BANK CREDIT FACILITY
On December 31, 1996, Grey Wolf and GW Drilling entered into a senior
secured reducing revolving credit facility as co -borrowers. This facility was
amended and restated on April 30, 1997, as the Bank Credit Facility.
International and Murco have guaranteed the obligations of the borrowers under
the Bank Credit Facility. The Bank Credit Facility provides the Company and GW
Drilling with the ability to borrow up to $50.0 million from time to time prior
to April 30, 2000, subject to the reductions described below, with up to $5.0
million of such amount available for letters of credit. Interest under the Bank
Credit Facility accrues at a variable rate, using (at the borrowers' election)
either the agent's base rate plus a margin ranging from 0.75% to 1.50%,
depending upon the Company's trailing 12-month debt to EBITDA ratio, or a rate
based on the interbank Eurodollar market plus a margin ranging from 1.75% to
2.50%, depending upon the Company's trailing 12-month debt to EBITDA ratio.
Letters of credit accrue a letter of credit fee equal to the margin described
above for the interbank Eurodollar market interest rate plus a facing fee of
0.25% per annum. The borrowers pay a commitment fee of 0.5% per annum on the
average unused portion of the lenders' commitments. The borrowers' indebtedness
under the Bank Credit Facility is secured by a security interest in (i) all
domestic drilling rigs and related equipment owned by the Company or the
Guarantors, (ii) the stock of the Guarantors, and (iii) substantially all other
assets of the Company and the Guarantors, wherever located (other than stock of
other 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 12-month
period. In addition, mandatory prepayments would be required upon (i) the
receipt of net proceeds received by the Company or its subsidiaries from the
incurrence of certain other debt or sales of debt or equity securities in a
public offering or private placement, or (ii) the receipt of net cash proceeds
received by the Company or its subsidiaries from asset sales (other than
proceeds from dispositions of inventory in the ordinary course of business,
certain licenses of intellectual property, certain inter-company transfers, and
sales of rigs identified in the credit agreement as equipment held for resale)
or the receipt of insurance proceeds on assets of the borrowers, in each case to
the extent that such proceeds are in excess of $500,000 individually or $1.0
million in the aggregate in any 12-month period. The final maturity date of the
Bank Credit Facility is April 30, 2000.
Borrowings under the Bank Credit Facility may be used to make land rig
acquisitions and for general corporate purposes.
Among the various covenants that must be satisfied by the Company under the
Bank Credit Facility are the following five financial covenants under which the
Company will 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 $60.0 million
plus (a) 50% of the Company's consolidated net income, if positive, for the
period from January 1, 1997, to the final day of the most recent period for
which consolidated financial information of the Company is available and
(b) 50% of the increase to shareholders' equity of the Company attributable
to the issuance of Common Stock;
(iii) the ratio of (a) the appraised fair market value of rigs and
related equipment to (b) the lenders' commitments to be less than 2 to 1;
(iv) the ratio of consolidated debt to total capitalization to exceed
0.6 to 1; and
(v) the ratio of consolidated EBITDA to consolidated interest expense
for the most recent quarter to be less than 3 to 1.
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<PAGE> 93
The Bank Credit Facility also contains provisions restricting the ability
of the Company and its subsidiaries to (i) engage in new lines of business
unrelated to their current activities, (ii) enter into mergers or consolidations
or asset sales or purchases (with specified exceptions), (iii) incur liens or
debts or make advances, investments or loans (in each case, with specified
exceptions), (iv) pay dividends or redeem stock (except for certain
inter-company transfers), (v) enter into transactions with affiliates other than
on an arm's-length basis in the ordinary course of business (with specified
exceptions), (vi) prepay or materially amend any other indebtedness, (vii)
modify any certificate of incorporation or by-laws in a manner adverse to the
lenders, (viii) issue any stock (other than common stock), (ix) agree to or
incur any restriction on the rights of the Company's subsidiaries to pay
dividends, make loans, transfer assets or take similar actions (with certain
exceptions) or (x) form new subsidiaries (with certain exceptions).
Events of default under the Bank Credit Facility include (i) non-payment of
amounts owing under the Bank Credit Facility, (ii) misrepresentation, (iii)
breach of covenants, (iv) default with respect to other indebtedness in excess
of $350,000, (v) bankruptcy, (vi) certain ERISA events, (vii) default under, or
noneffectiveness of, the security documents covering the collateral, (viii)
default under, or noneffectiveness of, the guaranty by International or Murco
(or any other future guaranty), (ix) judgments in excess of $350,000, and (x) a
change of control event (meaning that (a) the Company ceases to own 100% of GW
Drilling and International, (b) some person or group (other than persons named
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., SDA and SCP cease to own or control at least 25% of the Company).
SERIES A NOTES
Concurrently with the closing of the GWDC Acquisition, the Company
concluded a public offering of $175.0 million in principal amount of the Series
A Notes. The net proceeds from the sale of the Series A 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
Notes will be general unsecured senior obligations of the Company ranking pari
passu in right of payment with the Series A Notes and with all other
indebtedness and liabilities of the Company that are not subordinated by their
terms to other Indebtedness (as defined in the Indenture) of the Company and
senior in right of payment to all indebtedness of the Company that by its terms
is so subordinated. The terms of the Series A Notes are substantially identical
to the Notes, except for certain restrictions or transfer applicable to the
Notes. Among other things, the Series A Indenture provides that upon a Change of
Control, as defined in the Series A Indenture, each holder of Series A Notes
will have the right to require the Company to repurchase all or any part of such
holder's Series A 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 Series A Indenture permits (and the Indenture will permit) 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.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary is based on the tax laws of the United States in
effect on the date of this Prospectus, as well as judicial and administrative
interpretations thereof (in final or proposed form) available on or before such
date. There can be no assurance that the Internal Revenue Service will not take
a contrary view, and no ruling from the service has been or will be sought. The
foregoing laws and interpretations thereof are subject to change, which may or
may not be retroactive and could affect the tax consequences to holders.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will be treated as a continuation of the Old
Notes and will not be a taxable event for federal income tax purposes.
Consequently, a holder's holding period for Exchange Notes will include the
holding period for Old Notes. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF EXCHANGING
OLD NOTES FOR EXCHANGE NOTES.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Company or any
affiliate of the Company) may exchange such old Notes for Exchange Notes
pursuant to the Exchange Offer; provided, that each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making activities or
other trading activities. The Company has agreed that for a period of one year
after the Expiration Date it will make this Prospectus, as it may be amended or
supplemented from time to time, available to any broker-dealer for use in
connection with any such resale. In addition, until , 1998,
all dealers affecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over the counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of one year after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions to any brokers or dealers) and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Notes being offered hereby will be passed upon for the
Company by Porter & Hedges, L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for the years then ended have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The financial statements and financial statement schedule for the year
ended December 31, 1995 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission. The Company has filed
with the Commission a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the Commission. For further information with respect to the Company, and the
Exchange Notes offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of certain documents
filed as exhibits to the Registration Statement are not necessarily complete
and, in each case, are qualified by reference to the copy of the document so
filed. The Registration Statement, reports, proxy statements and other
information filed by the Company can be inspected and copied, at prescribed
rates, at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, 13th Floor, New York, New York 10048. Such material
also can be reviewed through the Commission's Electronic Data Gathering,
Analysis, and Retrieval System, which is publicly available through the
Commission's Web site (http://www.sec.gov).
The Company intends to furnish to each holder of the Exchange Notes annual
reports containing audited financial statements, quarterly reports containing
unaudited financial statements and other documents filed with the Commission by
the Company. The Company also will furnish to each holder of the Exchange Notes
such other reports as may be required by applicable law.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE UPON
WRITTEN OR ORAL REQUEST DIRECTED TO SECRETARY, GREY WOLF, INC., AT THE COMPANY'S
PRINCIPAL EXECUTIVE OFFICES LOCATED AT 10370 RICHMOND AVENUE, SUITE 600,
HOUSTON, TEXAS 77042; TELEPHONE (713) 435-6100. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE FIVE DAYS BEFORE THE
EXPIRATION DATE.
The Company's (i) Annual Report on Form 10-K for the year ended December
31, 1997, (ii) Definitive Proxy statement for the 1998 Annual Meeting of
Shareholders, (iii) Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 and (iv) Current Reports on Form 8-K filed January 30, 1998, May 6,
1998
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<PAGE> 96
and May 21, 1998, which have been filed by the Company with the Commission
pursuant to the Exchange Act, (Commission File No. 18226), are incorporated in
and made a part of this Prospectus.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of the Exchange Offer shall be deemed to be incorporated by
reference into this Prospectus and to be a part hereof from the respective dates
of filing of such documents.
Any statement contained in a document or information incorporated or deemed
to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that also is, or is
deemed to be, incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of March 31, 1998
(unaudited), December 31, 1997 and 1996................... F-4
Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and 1997 (unaudited) and the Years
Ended December 31, 1997, 1996, and 1995................... F-5
Consolidated Statements of Shareholders' Equity for the
Three Months ended March 31, 1998 (unaudited) and the
Years Ended December 31, 1997, 1996 and 1995.............. F-6
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and 1997 (unaudited) and the Years
Ended December 31, 1997, 1996, and 1995................... F-7
Notes to Consolidated Financial Statements.................. F-9
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts............ F-24
</TABLE>
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.
F-1
<PAGE> 98
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
F-2
<PAGE> 99
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
F-3
<PAGE> 100
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,105 $ 53,626 $ 6,162
Restricted cash -- insurance deposits..................... 450 450 1,000
Accounts receivable, net of allowance of $630, $1,053 and
$1,333, respectively................................... 59,327 56,499 15,866
Inventory and supplies.................................... 443 555 936
Assets held for sale...................................... -- 80 557
Prepaids and other current assets......................... 6,097 6,471 3,690
-------- -------- --------
Total current assets.............................. 67,422 117,681 28,211
-------- -------- --------
Property and equipment:
Land, buildings and improvements.......................... 4,991 5,293 4,312
Drilling equipment........................................ 536,470 430,524 95,059
Furniture and fixtures.................................... 1,366 1,573 1,088
Less: accumulated depreciation and amortization........... (36,384) (28,302) (11,983)
-------- -------- --------
Net property and equipment............................. 506,443 409,088 88,476
-------- -------- --------
Other noncurrent assets................................... 6,494 6,983 1,132
-------- -------- --------
$580,359 $533,752 $117,819
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................ $ 1,139 $ 1,148 $ 613
Accounts payable -- trade................................. 24,470 29,434 11,826
Accrued workers' compensation............................. 3,997 2,678 1,502
Payroll and related employee costs........................ 5,522 8,103 3,340
Accrued interest payable.................................. 3,890 7,938 --
Customer advances......................................... 140 523 2,466
Income taxes payable...................................... -- -- 845
Other accrued liabilities................................. 1,917 1,213 1,424
-------- -------- --------
Total current liabilities......................... 41,075 51,037 22,016
-------- -------- --------
Senior Notes................................................ 174,204 174,182 --
Long-term debt net of current maturities.................... 31,839 2,043 26,846
Other long-term liabilities and minority interest........... 3,863 3,863 3,299
Deferred income taxes....................................... 76,376 53,106 248
Series A preferred stock -- mandatory redeemable............ 305 305 764
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; 164,894,991, 164,746,291 and
125,043,234 issued and outstanding, respectively....... 16,489 16,474 12,504
Additional paid-in capital................................ 270,090 269,733 99,301
Cumulative translation adjustments........................ (454) (454) (404)
Accumulated deficit....................................... (33,428) (36,537) (46,755)
-------- -------- --------
Total shareholders' equity........................ 252,697 249,216 64,646
-------- -------- --------
$580,359 $533,752 $117,819
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 101
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract drilling......................... $ 74,015 $ 35,975 $215,923 $ 81,767 $ 94,709
Costs and expenses:
Drilling operations....................... 54,877 28,792 162,552 80,388 93,825
Depreciation and amortization............. 8,587 2,207 20,957 4,689 4,832
General and administrative................ 2,485 1,654 8,081 4,274 3,555
Provision for asset impairment............ -- -- -- -- 5,290
Non-recurring charges..................... -- -- -- 6,131 --
-------- -------- -------- -------- --------
Total costs and expenses.......... 65,949 32,653 191,590 95,482 107,502
-------- -------- -------- -------- --------
Operating income (loss)..................... 8,066 3,322 24,333 (13,715) (12,793)
Other income (expense):
Interest income........................... 337 92 1,248 505 292
Gain on sale of assets.................... 1,770 30 1,692 3,078 466
Interest expense.......................... (4,074) (672) (8,748) (1,220) (1,472)
Minority interest......................... -- 204 324 475 (56)
Foreign currency gains (losses)........... (67) -- -- -- 888
-------- -------- -------- -------- --------
Other income (expense), net....... (2,034) (346) (5,484) 2,838 118
-------- -------- -------- -------- --------
Income (loss) from continuing operations.... 6,032 2,976 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........... 6,032 2,976 18,849 (10,877) (13,447)
Income taxes................................ 2,923 662 8,631 845 --
-------- -------- -------- -------- --------
Net Income (loss)........................... 3,109 2,314 10,218 (11,722) (13,447)
Series A preferred stock redemption
premium................................... -- (22) (240) (13) --
Series B preferred stock subscription
dividend requirement...................... -- -- -- (402) --
-------- -------- -------- -------- --------
Net income (loss) applicable to common
stock..................................... $ 3,109 $ 2,292 $ 9,978 $(12,137) $(13,447)
======== ======== ======== ======== ========
Basic net income (loss) per common share
from continuing operations................ $ .02 $ .02 $ .07 $ (.18) $ (.33)
Basic net loss per common share from
discontinued operations................... -- -- -- -- (.02)
-------- -------- -------- -------- --------
Basic net income (loss) per common share.... .02 .02 $ .07 $ (.18) $ (.35)
======== ======== ======== ======== ========
Basic weighted average shares outstanding... 164,761 133,334 145,854 67,495 38,669
======== ======== ======== ======== ========
Diluted net income (loss) per common share
from continuing operations................ $ .02 $ .02 $ .07 $ (.18) $ (.33)
Diluted net loss per common share from
discontinued operations................... -- -- -- -- (.02)
-------- -------- -------- -------- --------
Diluted net income (loss) per common
share..................................... $ .02 $ .02 $ .07 $ (.18) $ (.35)
======== ======== ======== ======== ========
Diluted weighted average shares
outstanding............................... 168,191 137,106 149,724 67,495 38,669
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 102
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
Exercise of stock options................ -- 149 15 357 -- -- 372
Net income............................... -- -- -- -- 3,109 -- 3,109
------- ------- ------- -------- -------- ----- --------
Balance, March 31, 1998 (unaudited)........ $ -- 164,895 $16,489 $270,090 $(33,428) $(454) $252,697
======= ======= ======= ======== ======== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 103
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ -------------------------------
1998 1997 1997 1996 1995
-------- ------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ 3,109 $ 2,314 $ 10,218 $(11,722) $(13,447)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 8,587 2,207 20,957 4,689 4,832
Provision for asset impairment.................... -- -- -- -- 5,290
Non-recurring charges............................. -- -- -- 2,497 --
Gain on sale of assets............................ (1,770) (30) (1,692) (3,078) (466)
Deferred income taxes............................. 2,298 424 -- -- --
Translation loss.................................. 67 -- -- -- --
Discontinued operations -- loss from sale of oil
and gas properties.............................. -- -- -- -- 768
Deferred income taxes............................. -- -- 7,864 -- --
Provision for doubtful accounts................... 100 -- (200) 302 291
(Increase) decrease in restricted cash............... -- 750 550 612 (1,612)
(Increase) decrease in accounts and notes
receivable........................................ (2,828) (9,529) (28,336) 3,255 (3,558)
(Increase) decrease in inventory..................... 112 508 381 1,190 1,152
(Increase) decrease in assets held for sale.......... 80 -- 477 1,841 118
(Increase) decrease in other current assets.......... 374 (364) (1,922) 116 274
Increase (decrease) in accounts payable.............. (4,964) 2,224 8,783 (703) 5,289
Increase (decrease) in accrued workers'
compensation...................................... 1,319 662 201 (1,855) 394
Increase (decrease) in customer advances............. (383) (1,689) (2,841) 2,350 (1,233)
Increase (decrease) in other current liabilities..... (3,344) (376) 7,208 (1,167) 4,288
Increase (decrease) in minority interest............. -- (201) (1,197) 1,047 (131)
Increase (decrease) in other......................... (2,092) 1,249 1,332 (813) (179)
(Increase) decrease in discontinued operations....... -- -- -- -- 419
-------- ------- --------- -------- --------
Cash provided by (used in) operating
activities................................... 665 (1,851) 21,783 (1,439) 2,489
-------- ------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions..................... (85,784) (7,247) (218,723) (38,436) (5,657)
Proceeds from sales of equipment..................... 2,418 42 5,382 4,917 737
Proceeds from sale of discontinued operations........ -- -- -- -- 4,200
-------- ------- --------- -------- --------
Cash used in investing activities................. (83,366) (7,205) (213,341) (33,519) (720)
-------- ------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes........................... -- -- 174,161 -- --
Proceeds from long-term debt......................... 30,210 6,910 52,811 31,542 2,066
Repayments of long-term debt......................... (402) (301) (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.............. 372 38 1,702 280 --
Redemption of Series A Preferred Stock............... -- (60) (699) (149) --
Sale (recession) of preferred stock subscriptions.... -- -- -- (4,402) 4,000
-------- ------- --------- -------- --------
Cash provided by (used in) financing activities... 30,180 6,587 239,022 39,405 (1,538)
-------- ------- --------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ -- -- -- (144) --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (52,521) (2,469) 47,464 4,303 231
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 53,626 6,162 6,162 1,859 1,628
-------- ------- --------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 1,105 $ 3,693 $ 53,626 $ 6,162 $ 1,859
======== ======= ========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 104
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -------------------------
1998 1997 1997 1996 1995
-------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 8,969 $ 672 $2,572 $ 1,220 $1,472
======= ======= ====== ======= ======
CASH PAID FOR TAXES: $ -- $ -- $1,999 $ -- $ --
======= ======= ====== ======= ======
NON CASH TRANSACTIONS:
Murco Acquisition
Change in property and equipment
additions............................... $20,972 $ -- $ -- $ -- $ --
Change in deferred tax liability.......... 20,972 -- -- -- --
Issuance of common stock in Flournoy
transaction
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 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 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 105
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(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, 1997.
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"). In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, which are
of a normal recurring nature, necessary to present fairly the Company's
financial position as of March 31, 1998 and 1997 and the results of operations
and cash flows for the periods indicated. 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. Effective January 1, 1998, the Company changed the
depreciable lives of the majority of its drilling rigs from 12 to 15 years to
better reflect the useful lives of the Company's refurbished and upgraded rig
fleet. The effect of this change reduced depreciation expense and increased net
income for the three months ended March 31, 1998 by $1.5 million and $800,000,
respectively. 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.
F-9
<PAGE> 106
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
Foreign Currency Translation. Venezuela has a highly inflationary economy
as defined by Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation." As such the Company's functional currency is the U.S.
dollar. Accordingly, monetary assets and liabilities denominated in foreign
currency are re-measured to U.S. dollars at the rate of exchange in effect at
the end of the period, items of income and expense and other non-monetary
amounts are re-measured at historical rates. Gains or losses on foreign currency
re-measurement are included in other income (expense), net in the consolidated
statement of operations. During the three months ended March 31, 1998 the
Company recognized foreign exchange losses of $67,000. Prior to 1998, 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 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>
MARCH 31, DECEMBER 31,
----------------- -------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Weighed average common shares outstanding --
Basic........................................ 164,761 133,334 145,854 67,495 38,669
Effect of dilutive securities:
Options -- treasury stock method............. 2,696 2,028 2,883 -- --
Redeemable preferred stock................... 245 581 329 -- --
Warrants..................................... 489 1,163 658 -- --
------- ------- ------- ------ ------
3,430 3,772 3,870 -- --
------- ------- ------- ------ ------
Weighted average common shares outstanding --
Diluted...................................... 168,191 137,106 149,724 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
F-10
<PAGE> 107
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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, $450,000 and $1.0 million at
March 31, 1998, 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.
Comprehensive Income. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income with an effective date for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. The adoption of SFAS No. 130, effective
January 1, 1998 did not result in any adjustments to net income for the three
months ended March 31, 1998.
Segment Reporting. In June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" with an effective date
for fiscal years beginning after December 15, 1997. The statement specifies
revised guidelines for determining an entity's operating and geographic segments
and the type or level of financial information about those segments. Under the
standard, consistent with the geographic segments disclosure in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, the Company has
two segments; domestic and foreign operations. These two segments are managed
separately as each requires different operating and marketing strategies.
(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.
F-11
<PAGE> 108
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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.
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
F-12
<PAGE> 109
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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 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.
F-13
<PAGE> 110
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $60.5 million in cash. At
closing, Murco had net liabilities of approximately $4.5 million. 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 March 31, 1998 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, the
Company's common stock offering and the Murco Acquisition. The following
unaudited pro forma consolidated financial data for the three months ended March
31, 1998 includes the historical results of the Company for the three months
ended March 31, 1998 and gives effect to the Murco Acquisition and related
borrowings under the bank credit facility as if they had occurred on January 1,
1996. 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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
FOR THE THREE DECEMBER 31,
MONTHS ENDED ---------------------
MARCH 31, 1998 1997 1996
--------------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Total revenues.................................... $76,088 $298,426 $240,614
Net income (loss) applicable to common stock...... 3,180 6,872 (33,226)
Net income (loss) per basic and diluted share..... .02 .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 the three months ended March 31, 1998, the
Company recorded a current tax provision of $625,000 and a deferred tax
provision of $2.3 million. 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.
F-14
<PAGE> 111
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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
workman's 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.
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>
F-15
<PAGE> 112
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(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>
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
8 7/8% 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
F-16
<PAGE> 113
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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.
(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.
F-17
<PAGE> 114
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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):
<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) $0.69 - $1.00
(670) $1.13 - $1.75
Canceled.................................................. (13) $2.50 - $2.88
(4) $0.69 - $1.75
(20) $2.50 - $2.88
Outstanding December 31, 1997............................... 156 $0.69 - $1.00
3,084 $1.13 - $1.75
1,255 $2.50 - $2.88
630 $3.13 - $4.06
10 $8.25
</TABLE>
F-18
<PAGE> 115
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
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).
<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.
F-19
<PAGE> 116
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(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.
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.
F-20
<PAGE> 117
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(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 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.
F-21
<PAGE> 118
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(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) SUBSEQUENT EVENT (UNAUDITED)
On May 8, 1998 the Company completed an offering of $75.0 million of senior
notes under Rule 144A due June 2007 (the "Series B Notes") with interest at
8 7/8% per annum. The terms and conditions of the Series B Notes are
substantially consistent with the Notes. The net proceeds from the offering were
$71.5 million after deducting commissions, fees and expenses. A portion of the
net proceeds from the offering was used to repay approximately $30.0 million of
indebtedness incurred under the Facility to partially finance the acquisition of
Murco. The remaining proceeds will be used for rig refurbishment and for general
corporate purposes. The Series B Notes have not been registered under the
Securities Act of 1933 and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The Company is a holding company with no significant assets or operations
other than its investments in its subsidiaries, and each of its subsidiaries in
wholly owned, directly or indirectly. Grey Wolf's payment obligations under the
Notes are fully, unconditionally and joint and severally guaranteed by all of
the existing domestic subsidiaries of the Company. The assets, equity, and
earnings of non-guarantor subsidiaries are inconsequential for all periods
presented and management of the Company does not believe separate financial
information of the guaranteeing subsidiaries is material to the understanding of
investors.
F-22
<PAGE> 119
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING NOTES APPLICABLE TO THE UNAUDITED PERIODS)
(13) 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 and
diluted...................................... .02 .01 .02 .03
</TABLE>
<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 and
diluted...................................... (.04) .01 .01 (.09)
</TABLE>
<TABLE>
<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 and
diluted..................................... (.06) (.04) (.03) (.22)
</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).
F-23
<PAGE> 120
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>
F-24
<PAGE> 121
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO BUY THE SECURITIES DESCRIBED HEREIN BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO
CIRCUMSTANCE SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Forward Looking Statements........... 3
Prospectus Summary................... 5
Risk Factors......................... 14
The Exchange Offer................... 22
Use of Proceeds...................... 30
Capitalization....................... 31
Unaudited Pro Forma Consolidated
Financial Data..................... 32
Selected Consolidated Financial
Data............................... 36
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 38
Business............................. 46
Management........................... 58
Description of the Notes............. 61
Description of Certain
Indebtedness....................... 91
Federal Income Tax Considerations.... 93
Plan of Distribution................. 93
Legal Matters........................ 94
Experts.............................. 94
Available Information................ 94
Incorporation of Certain Documents by
Reference.......................... 94
Index to Financial Statements........ F-1
</TABLE>
======================================================
======================================================
$75,000,000
[L O G O]
GREY WOLF, INC.
OFFER TO EXCHANGE ITS
8 7/8% SENIOR NOTES DUE 2007,
SERIES C
FOR ANY AND ALL OF
ITS OUTSTANDING
8 7/8% SENIOR NOTES DUE 2007,
SERIES B
THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M. NEW YORK CITY TIME,
ON , 1998,
UNLESS EXTENDED.
-----------------
PROSPECTUS
-----------------
, 1998
======================================================
<PAGE> 122
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act,
the articles of incorporation of a Texas corporation may provide that a director
of that corporation shall not be liable, or shall be liable only to the extent
provided in the articles of incorporation, to the corporation or its
shareholders for monetary damages for acts or omissions in the director's
capacity as a director, except that the articles of incorporation cannot provide
for the elimination or limitation of liability of a director to the extent that
the director is found liable for (i) a breach of the director's duty of loyalty
to the corporation or its shareholders, (ii) acts or omissions not in good faith
that constitute a breach of duty of the director to the corporation or an act or
omission that involves intentional misconduct or a knowing violation of the law,
(iii) any transaction from which the director received an improper benefit, or
(iv) an act or omission for which the liability of a director is expressly
provided by an applicable statute. Article XII of the Registrant's Articles of
Incorporation, as amended, states that a director of the Registrant shall not be
liable to the Registrant or its shareholders for monetary damages except to the
extent otherwise expressly provided by the statutes of the State of Texas.
In addition, Article 2.02-1 of the Texas Business Corporation Act (the
"TBCA") authorizes a Texas corporation to indemnify a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding, including
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative, or investigative because the person is or
was a director. The TBCA provides that unless a court of competent jurisdiction
determines otherwise, indemnification is permitted only if it is determined that
the person (1) conducted himself in good faith; (2) reasonably believed (a) in
the case of conduct in his official capacity as a director of the corporation,
that his conduct was in the corporation's best interests; and (b) in all other
cases, that his conduct was at least not opposed to the corporation's best
interests; and (3) in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful. A person may be indemnified under
Article 2.02-1 of the TBCA against judgments, penalties (including excise and
similar taxes), fines, settlements, and reasonable expenses actually incurred by
the person (including court costs and attorneys' fees), but if the person is
found liable to the corporation or is found liable on the basis that personal
benefit was improperly received by him, the indemnification is limited to
reasonable expenses actually incurred and shall not be made in respect of any
proceeding in which the person has been found liable for willful or intentional
misconduct in the performance of his duty to the corporation. A corporation is
obligated under Article 2.02-1 of the TBCA to indemnify a director or officer
against reasonable expenses incurred by him in connection with a proceeding in
which he is named defendant or respondent because he is or was a director or
officer if he has been wholly successful, on the merits or otherwise, in the
defense of the proceeding. Under Article 2.02-1 of the TBCA a corporation may
(i) indemnify and advance expenses to an officer, employee, agent or other
persons who are or were serving at the request of the corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another entity to the same extent that it may indemnify and
advance expenses to its directors, (ii) indemnify and advance expenses to
directors and such other persons identified in (i) to such further extent,
consistent with law, as may be provided in the corporation's articles of
incorporation, bylaws, action of its board of directors, or contract or as
permitted by common law and (iii) purchase and maintain insurance or another
arrangement on behalf of directors and such other persons identified in (i)
against any liability asserted against him and incurred by him in such a
capacity or arising out of his status as such a person.
The Bylaws of the Registrant set forth specific provisions for
indemnification of directors, officers, agents and other persons which are
substantially identical to the provisions of Article 2.02-1 of the TBCA
described above.
The Registrant maintains directors' and officers' insurance. The Company
has entered into agreements to indemnify certain of its executive officers
regarding liabilities that may result from such officer's service as an officer
or director of the Company.
II-1
<PAGE> 123
ITEM 21. EXHIBITS
The exhibits listed in the Exhibit Index below are filed as part of the
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Purchase Agreement, dated May 5, 1998, by and among Grey
Wolf, Inc. and the Guarantors, and Donaldson, Lufkin &
Jenrette Securities Corporation, Lehman Brothers Inc.,
and Prudential Securities Incorporated (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated May
21, 1998).
4.2 -- Registration Rights Agreement, dated May 8, 1998, by and
among Grey Wolf, Inc., the Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers
Inc., and Prudential Securities Incorporated
(incorporated herein by reference to Exhibit 4.2 to Form
8-K dated May 21, 1998).
4.3 -- Indenture, dated May 8, 1998, by and among Grey Wolf,
Inc., the Guarantors, and Chase Bank of Texas, National
Association, as Trustee (incorporated herein by reference
to Exhibit 4.3 to Form 8-K dated May 21, 1998).
4.4 -- Global Note, dated May 8, 1998 (incorporated herein by
reference to Exhibit 4.4 to Form 8-K dated May 21, 1998).
4.5 -- Indenture, dated as of June 27, 1997, among Grey Wolf,
Inc. (formerly "DI Industries, Inc."), the Guarantors,
and Chase Bank of Texas, National Association (formerly
"Texas Commerce Bank National Association"), as Trustee,
as amended by Supplemental Indenture, dated March 31,
1998, among Murco Drilling Corporation, Grey Wolf, Inc.,
the Guarantors, and Chase Bank of Texas, National
Association, as Trustee, and as further amended by Second
Supplemental Indenture, dated May 8, 1998, by and among
Grey Wolf, Inc., the Guarantors, and Chase Bank of Texas,
National Association, as Trustee (incorporated herein by
reference to Exhibit 4.5 to Form 8-K dated May 21, 1998).
5.1 -- Opinion of Porter & Hedges L.L.P.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Porter & Hedges L.L.P. (included in Exhibit
5.1)
25.1 -- Statement of Eligibility of Chase Bank of Texas, National
Association.
99.1 -- Form of Letter of Transmittal.
</TABLE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
II-2
<PAGE> 124
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(b) the undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply be means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 125
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of Grey Wolf, Inc., do hereby constitute and appoint Ivar Siem, Thomas
P. Richards and David W. Wehlmann, or any of them, as true and lawful
attorneys-in-fact and agents for the undersigned, with full power of
substitution, to do any and all acts and things in our name and on our behalf in
our capacities as directors and officers, and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Act, and any rules,
regulations and requirements of the Commission, in connection with the filing of
this Registration Statement, including specifically without limitation, power
and authority to sign for any of us, in our names in the capacities indicated
below, any and all pre- and post-effective amendments hereto; and we do each
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on June 24, 1998.
GREY WOLF, INC.
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS P. RICHARDS President and Chief Executive Officer
- -----------------------------------------------------
Thomas P. Richards
/s/ IVAR SIEM Chairman of the Board and Director
- -----------------------------------------------------
Ivar Siem
/s/ WILLIAM R. ZIEGLER Vice Chairman of the Board and Director
- -----------------------------------------------------
William R. Ziegler
/s/ DAVID W. WEHLMANN Senior Vice President and
- ----------------------------------------------------- Chief Financial Officer
David W. Wehlmann
/s/ MERRIE S. COSTLEY Vice President and Controller
- -----------------------------------------------------
Merrie S. Costley
/s/ WILLIAM T. DONOVAN Director
- -----------------------------------------------------
William T. Donovan
/s/ JAMES K. B. NELSON Director
- -----------------------------------------------------
James K. B. Nelson
/s/ ROY T. OLIVER, JR. Director
- -----------------------------------------------------
Roy T. Oliver, Jr.
/s/ STEVEN A. WEBSTER Director
- -----------------------------------------------------
Steven A. Webster
</TABLE>
II-4
<PAGE> 126
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of Grey Wolf Drilling Company, do hereby constitute and appoint Thomas
P. Richards, David W. Wehlmann and Merrie S. Costley, or any of them, as true
and lawful attorneys-in-fact and agents for the undersigned, with full power of
substitution, to do any and all acts and things in our name and on our behalf in
our capacities as directors and officers, and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Act, and any rules,
regulations and requirements of the Commission, in connection with the filing of
this Registration Statement, including specifically without limitation, power
and authority to sign for any of us, in our names in the capacities indicated
below, any and all pre- and post-effective amendments hereto; and we do each
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on June 24, 1998.
GREY WOLF DRILLING COMPANY
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS P. RICHARDS President, Chief Executive Officer and
- ----------------------------------------------------- Director
Thomas P. Richards
/s/ DAVID W. WEHLMANN Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Director
David W. Wehlmann
/s/ MERRIE S. COSTLEY Vice President and Controller
- -----------------------------------------------------
Merrie S. Costley
/s/ TERRELL L. SADLER Director
- -----------------------------------------------------
Terrell L. Sadler
/s/ RONNIE E. MCBRIDE Director
- -----------------------------------------------------
Ronnie E. McBride
</TABLE>
II-5
<PAGE> 127
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of Grey Wolf International, Inc. do hereby constitute and appoint
Thomas P. Richards, David W. Wehlmann and Merrie S. Costley, or any of them, as
true and lawful attorneys-in-fact and agents for the undersigned, with full
power of substitution, to do any and all acts and things in our name and on our
behalf in our capacities as directors and officers, and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys-in-fact and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Act, and any
rules, regulations and requirements of the Commission, in connection with the
filing of this Registration Statement, including specifically without
limitation, power and authority to sign for any of us, in our names in the
capacities indicated below, any and all pre- and post-effective amendments
hereto; and we do each hereby ratify and confirm all that the said
attorneys-in-fact and agents, or either of them, shall do or cause to be done by
virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on June 24, 1998.
GREY WOLF INTERNATIONAL, INC.
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS P. RICHARDS President, Chief Executive Officer and
- ----------------------------------------------------- Director
Thomas P. Richards
/s/ DAVID W. WEHLMANN Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Director
David W. Wehlmann
/s/ MERRIE S. COSTLEY Vice President and Controller
- -----------------------------------------------------
Merrie S. Costley
/s/ FORREST M. CONLEY, JR. Director
- -----------------------------------------------------
Forrest M. Conley, Jr.
</TABLE>
II-6
<PAGE> 128
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of Murco Drilling Corporation, do hereby constitute and appoint Thomas
P. Richards and David W. Wehlmann, or any of them, as true and lawful
attorneys-in-fact and agents for the undersigned, with full power of
substitution, to do any and all acts and things in our name and on our behalf in
our capacities as directors and officers, and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Act, and any rules,
regulations and requirements of the Commission, in connection with the filing of
this Registration Statement, including specifically without limitation, power
and authority to sign for any of us, in our names in the capacities indicated
below, any and all pre- and post-effective amendments hereto; and we do each
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on June 24, 1998.
MURCO DRILLING CORPORATION
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS P. RICHARDS President and Director
- -----------------------------------------------------
Thomas P. Richards
/s/ DAVID W. WEHLMANN Secretary and Director
- -----------------------------------------------------
David W. Wehlmann
/s/ TERRELL L. SADLER Director
- -----------------------------------------------------
Terrell L. Sadler
/s/ RONNIE E. MCBRIDE Director
- -----------------------------------------------------
Ronnie E. McBride
</TABLE>
II-7
<PAGE> 129
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors and
officers of DI Energy, Inc., do hereby constitute and appoint Thomas P.
Richards, David W. Wehlmann and Merrie Costley, or any of them, as true and
lawful attorneys-in-fact and agents for the undersigned, with full power of
substitution, to do any and all acts and things in our name and on our behalf in
our capacities as directors and officers, and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable said corporation to comply with the Securities Act, and any rules,
regulations and requirements of the Commission, in connection with the filing of
this Registration Statement, including specifically without limitation, power
and authority to sign for any of us, in our names in the capacities indicated
below, any and all pre- and post-effective amendments hereto; and we do each
hereby ratify and confirm all that the said attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on June 24, 1998.
DI ENERGY, INC.
By: /s/ THOMAS P. RICHARDS
----------------------------------
Thomas P. Richards,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities indicated
on June 24, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ THOMAS P. RICHARDS President, Chief Executive Officer and
- ----------------------------------------------------- Director
Thomas P. Richards
/s/ DAVID W. WEHLMANN Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Director
David W. Wehlmann
/s/ MERRIE S. COSTLEY Vice President and Controller
- -----------------------------------------------------
Merrie S. Costley
</TABLE>
II-8
<PAGE> 130
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.1 -- Purchase Agreement, dated May 5, 1998, by and among Grey
Wolf, Inc. and the Guarantors, and Donaldson, Lufkin &
Jenrette Securities Corporation, Lehman Brothers Inc.,
and Prudential Securities Incorporated (incorporated
herein by reference to Exhibit 4.1 to Form 8-K dated May
21, 1998).
4.2 -- Registration Rights Agreement, dated May 8, 1998, by and
among Grey Wolf, Inc., the Guarantors, and Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers
Inc., and Prudential Securities Incorporated
(incorporated herein by reference to Exhibit 4.2 to Form
8-K dated May 21, 1998).
4.3 -- Indenture, dated May 8, 1998, by and among Grey Wolf,
Inc., the Guarantors, and Chase Bank of Texas, National
Association, as Trustee (incorporated herein by reference
to Exhibit 4.3 to Form 8-K dated May 21, 1998).
4.4 -- Global Note, dated May 8, 1998 (incorporated herein by
reference to Exhibit 4.4 to Form 8-K dated May 21, 1998).
4.5 -- Indenture, dated as of June 27, 1997, among Grey Wolf,
Inc. (formerly "DI Industries, Inc."), the Guarantors,
and Chase Bank of Texas, National Association (formerly
"Texas Commerce Bank National Association"), as Trustee,
as amended by Supplemental Indenture, dated March 31,
1998, among Murco Drilling Corporation, Grey Wolf, Inc.,
the Guarantors, and Chase Bank of Texas, National
Association, as Trustee, and as further amended by Second
Supplemental Indenture, dated May 8, 1998, by and among
Grey Wolf, Inc., the Guarantors, and Chase Bank of Texas,
National Association, as Trustee (incorporated herein by
reference to Exhibit 4.5 to Form 8-K dated May 21, 1998).
5.1 -- Opinion of Porter & Hedges L.L.P.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Porter & Hedges L.L.P. (included in Exhibit
5.1)
25.1 -- Statement of Eligibility of Chase Bank of Texas, National
Association
99.1 -- Form of Letter of Transmittal
</TABLE>
<PAGE> 1
[PORTER & HEDGES, L.L.P. LETTERHEAD]
EXHIBIT 5.1
June 24, 1998
Grey Wolf, Inc.
10370 Richmond Avenue, Suite 500
Houston, Texas 77042-4136
Re: Opinion as to legality of 8 7/8% Senior Notes due 2007, Series C
Ladies and Gentlemen:
We have examined the articles of incorporation, the bylaws, and the
corporate proceedings of Grey Wolf, Inc., a Texas corporation (the "Company"),
and certain of its subsidiaries relating to the registration under the
Securities Act of 1933, as amended, of $75,000,000 aggregate principal amount
of 8 7/8% Senior Notes due 2007, Series C (the "Exchange Notes") (including
guarantees by certain of the Company's domestic subsidiaries (the
"Guarantees")), to be issued pursuant to an Indenture, dated as of May 8, 1998,
between the Company and Chase Bank of Texas, National Association, as Trustee
(the "Indenture"), and the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended, on behalf of the Company. The Exchange
Notes will be issued in exchange for the Company's outstanding 8 7/8% Senior
Notes due 2007, Series B on the terms set forth in the prospectus contained in
the Registration Statement and the Letter of Transmittal filed as an exhibit
thereto (the "Exchange Offer"). In giving this opinion, we have made such
other examinations as we deem necessary in the premises and from such
examinations we are of the opinion that:
1. Upon execution and delivery, the Indenture was duly authorized
by all necessary corporate action, and it constitutes a legal,
valid, and binding instrument enforceable in accordance with
its terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other laws relating to or affecting
enforcement of creditors' rights generally, and except that
remedies of specific performance and other forms of equitable
relief are subject to certain equitable defenses and to the
discretion of the court.
2. When issued, the Exchange Notes and the Guarantees will have
been duly authorized by all necessary corporate action, and
when authenticated, delivered in accordance with the terms of
the Exchange Offer and the Indenture, will be legal, valid,
and binding obligations of the Company and the affected
subsidiaries, respectively, entitled to the benefits of the
Indenture and enforceable in accordance with its and their
terms, except as enforcement may be limited by bankruptcy,
insolvency, moratorium or other laws relating to or affecting
enforcement of creditors' rights generally, and except that
remedies of specific performance and other forms of equitable
relief are subject to certain equitable defenses and to the
discretion of the court.
We consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus included as a part of the Registration
Statement.
This opinion is conditioned upon the Registration Statement being
declared effective and upon compliance by the Company with all applicable
provisions of the Securities Act of 1933, as amended, and such state securities
rules, regulations and laws as may be applicable.
Very truly yours,
/s/ PORTER & HEDGES, L.L.P.
PORTER & HEDGES, L.L.P.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Grey Wolf, Inc.:
We consent to the inclusion in this Registration Statement of Grey Wolf,
Inc. (formerly DI Industries, Inc.), on Form S-4 of our report dated March 3,
1998, relating to the consolidated balance sheets of Grey Wolf, 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 the
years 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.
and to the reference to our firm under the heading "Experts" in the Prospectus.
KPMG Peat Marwick LLP
Houston, Texas
June 24, 1998
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' REPORT
We consent to the use in this Registration Statement of Grey Wolf, Inc. on
Form S-4 of our report dated March 28, 1996, appearing in the Prospectus, which
is part of the Registration Statement. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
June 24, 1998
<PAGE> 1
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ____
----------------------
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
74-0800980
(I.R.S. Employer Identification Number)
<TABLE>
<S> <C>
712 MAIN STREET, HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip code)
</TABLE>
LEE BOOCKER, 712 MAIN STREET, 26TH FLOOR
HOUSTON, TEXAS 77002 (713) 216-2448
(Name, address and telephone number of agent for service)
GREY WOLF, INC.
(Exact name of obligor as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
8-7/8% SENIOR NOTES DUE 2007, SERIES C
(Title of indenture securities)
================================================================================
<PAGE> 2
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING
AUTHORITY TO WHICH IT IS SUBJECT.
Comptroller of the Currency, Washington, D.C.
Federal Deposit Insurance Corporation, Washington, D.C.
Board of Governors of the Federal Reserve System, Washington,
D.C.
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
The trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH
SUCH AFFILIATION.
The obligor is not an affiliate of the trustee. (See Note on
Page 7.)
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF VOTING
SECURITIES OF THE TRUSTEE.
<TABLE>
<CAPTION>
COL. A COL. B
TITLE OF CLASS AMOUNT OUTSTANDING
-------------- ------------------
<S> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and
response to Item 13.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER
WHICH ANY OTHER SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY
OTHER SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, FURNISH THE FOLLOWING
INFORMATION:
(a) TITLE OF THE SECURITIES OUTSTANDING UNDER EACH SUCH
OTHER INDENTURE.
Not applicable by virtue of Form T-1 General Instruction B and
response to Item 13.
1
<PAGE> 3
ITEM 4. (CONTINUED)
(b) A BRIEF STATEMENT OF THE FACTS RELIED UPON AS A BASIS
FOR THE CLAIM THAT NO CONFLICTING INTEREST WITHIN THE MEANING
OF SECTION 310(b)(1) OF THE ACT ARISES AS A RESULT OF THE
TRUSTEESHIP UNDER ANY SUCH OTHER INDENTURE, INCLUDING A
STATEMENT AS TO HOW THE INDENTURE SECURITIES WILL RANK AS
COMPARED WITH THE SECURITIES ISSUED UNDER SUCH OTHER
INDENTURE.
Not applicable by virtue of Form T-1 General Instruction B and
response to Item 13.
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH
OBLIGOR OR UNDERWRITERS.
IF THE TRUSTEE OR ANY OF THE DIRECTORS OR EXECUTIVE OFFICER OF
THE TRUSTEE IS A DIRECTOR, OFFICER, PARTNER, EMPLOYEE, APPOINTEE, OR
REPRESENTATIVE OF THE OBLIGOR OR OF ANY UNDERWRITER FOR THE OBLIGOR, IDENTIFY
EACH SUCH PERSON HAVING ANY SUCH CONNECTION AND STATE THE NATURE OF EACH SUCH
CONNECTION.
Not applicable by virtue of Form T-1 General Instruction B and
response to Item 13.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS
OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES
OF THE TRUSTEE OWNED BENEFICIALLY BY THE OBLIGOR AND EACH DIRECTOR, PARTNER AND
EXECUTIVE OFFICER OF THE OBLIGOR.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
PERCENTAGE OF
VOTING SECURITIES
REPRESENTED BY
AMOUNT OWNED AMOUNT GIVEN IN
NAME OF OWNER TITLE OF CLASS BENEFICIALLY COL. C
------------- -------------- ------------ -----------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response to
Item 13.
2
<PAGE> 4
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR
THEIR OFFICIALS.
FURNISH THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES
OF THE TRUSTEE OWNED BENEFICIALLY BY EACH UNDERWRITER FOR THE OBLIGOR AND EACH
DIRECTOR, PARTNER AND EXECUTIVE OFFICER OF EACH SUCH UNDERWRITER.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
PERCENTAGE OF
VOTING SECURITIES
REPRESENTED BY
AMOUNT OWNED AMOUNT GIVEN IN
NAME OF OWNER TITLE OF CLASS BENEFICIALLY COL. C
------------- -------------- ------------ -----------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response to
Item 13.
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
FURNISH THE FOLLOWING INFORMATION AS TO THE SECURITIES OF THE
OBLIGOR OWNED BENEFICIALLY OR HELD AS COLLATERAL SECURITY FOR OBLIGATIONS IN
DEFAULT BY THE TRUSTEE.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
AMOUNT OWNED
BENEFICIALLY OR PERCENT OF
HELD AS COLLATERAL CLASS
NAME OF ISSUER SECURITY FOR REPRESENTED BY
AND AMOUNT OBLIGATIONS IN AMOUNT GIVEN
TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE IN COL. C
-------------- ----------- -------------------- --------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response
to Item 13.
3
<PAGE> 5
ITEM 9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL
SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF AN UNDERWRITER FOR THE
OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OF
SUCH UNDERWRITER ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
AMOUNT OWNED
BENEFICIALLY OR PERCENT OF
HELD AS COLLATERAL CLASS
NAME OF ISSUER SECURITY FOR REPRESENTED BY
AND AMOUNT OBLIGATIONS IN AMOUNT GIVEN
TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE IN COL. C
-------------- ----------- -------------------- --------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response to
Item 13.
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES
OF CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL
SECURITY FOR OBLIGATIONS IN DEFAULT VOTING SECURITIES OF A PERSON WHO, TO THE
KNOWLEDGE OF THE TRUSTEE (1) OWNS 10% OR MORE OF THE VOTING SECURITIES OF THE
OBLIGOR OR (2) IS AN AFFILIATE, OTHER THAN A SUBSIDIARY, OF THE OBLIGOR, FURNISH
THE FOLLOWING INFORMATION AS TO THE VOTING SECURITIES OF SUCH PERSON.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
AMOUNT OWNED
BENEFICIALLY OR PERCENT OF
HELD AS COLLATERAL CLASS
NAME OF ISSUER SECURITY FOR REPRESENTED BY
AND AMOUNT OBLIGATIONS IN AMOUNT GIVEN
TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE IN COL. C
-------------- ----------- -------------------- --------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response to
Item 13.
4
<PAGE> 6
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF
A PERSON OWNING 50% OR MORE OF THE VOTING SECURITIES OF THE
OBLIGOR.
IF THE TRUSTEE OWNS BENEFICIALLY OR HOLDS AS COLLATERAL
SECURITY FOR OBLIGATIONS IN DEFAULT ANY SECURITIES OF A PERSON WHO, TO THE
KNOWLEDGE OF THE TRUSTEE, OWNS 50% OR MORE OF THE VOTING SECURITIES OF THE
OBLIGOR, FURNISH THE FOLLOWING INFORMATION AS TO EACH CLASS OF SECURITIES OR
SUCH PERSON ANY OF WHICH ARE SO OWNED OR HELD BY THE TRUSTEE.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D
AMOUNT OWNED
BENEFICIALLY OR PERCENT OF
HELD AS COLLATERAL CLASS
NAME OF ISSUER SECURITY FOR REPRESENTED BY
AND AMOUNT OBLIGATIONS IN AMOUNT GIVEN
TITLE OF CLASS OUTSTANDING DEFAULT BY TRUSTEE IN COL. C
-------------- ----------- -------------------- --------------
<S> <C> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response to
Item 13.
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
EXCEPT AS NOTED IN THE INSTRUCTIONS, IF THE OBLIGOR IS
INDEBTED TO THE TRUSTEE, FURNISH THE FOLLOWING INFORMATION:
<TABLE>
<CAPTION>
COL. A COL. B COL. C
NATURE OF AMOUNT
INDEBTEDNESS OUTSTANDING DATE DUE
------------ ----------- --------
<S> <C> <C>
</TABLE>
Not applicable by virtue of Form T-1 General Instruction B and response
to Item 13.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) STATE WHETHER THERE IS OR HAS BEEN A DEFAULT WITH RESPECT TO
THE SECURITIES UNDER THIS INDENTURE. EXPLAIN THE NATURE OF ANY SUCH DEFAULT.
There is not, nor has there been, a default with respect to the
securities under this indenture. (See Note on Page 7.)
5
<PAGE> 7
ITEM 13. (CONTINUED)
(b) IF THE TRUSTEE IS A TRUSTEE UNDER ANOTHER INDENTURE UNDER
WHICH ANY SECURITIES, OR CERTIFICATES OF INTEREST OR PARTICIPATION IN ANY OTHER
SECURITIES, OF THE OBLIGOR ARE OUTSTANDING, OR IS TRUSTEE FOR MORE THAN ONE
OUTSTANDING SERIES OF SECURITIES UNDER THE INDENTURE, STATE WHETHER THERE HAS
BEEN A DEFAULT UNDER ANY SUCH INDENTURE OR SERIES, IDENTIFY THE INDENTURE OR
SERIES AFFECTED, AND EXPLAIN THE NATURE OF ANY SUCH DEFAULT.
There has not been a default under any such indenture or series. (See
Note on Page 7.)
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
IF ANY UNDERWRITER IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE
EACH SUCH AFFILIATION.
Not applicable by virtue of Form T-1 General Instruction B and response
to Item 13.
ITEM 15. FOREIGN TRUSTEE.
IDENTIFY THE ORDER OR RULE PURSUANT TO WHICH THE FOREIGN
TRUSTEE IS AUTHORIZED TO ACT AS SOLE TRUSTEE UNDER INDENTURES QUALIFIED OR TO BE
QUALIFIED UNDER THE ACT.
Not applicable.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF
ELIGIBILITY.
o 1. A copy of the articles of association of the trustee now
in effect.
# 2. A copy of the certificate of authority of the trustee to
commence business.
* 3. A copy of the certificate of authorization of the trustee
to exercise corporate trust powers issued by the Board of
Governors of the Federal Reserve System under date of January
21, 1948.
+ 4. A copy of the existing bylaws of the trustee.
5. Not applicable.
6
<PAGE> 8
6. The consent of the United States institutional trustees
required by Section 321(b) of the Act.
[]7. A copy of the latest report of condition of the
trustee published pursuant to law or the requirements of its
supervising or examining authority.
8. Not applicable.
9. Not applicable.
NOTE REGARDING INCORPORATED EXHIBITS
Effective January 20, 1998, the name of the Trustee was changed from
Texas Commerce Bank National Association to Chase Bank of Texas, National
Association. The exhibits incorporated herein by reference, except for Exhibit
7, were filed under the former name of the Trustee.
o Incorporated by reference to exhibit bearing the same
designation and previously filed with the Securities and Exchange Commission as
exhibits to the Form S-3 File No. 33-56195.
# Incorporated by reference to exhibit bearing the same
designation and previously filed with the Securities and Exchange Commission as
exhibits to the Form S-3 File No. 33-42814.
* Incorporated by reference to exhibit bearing the same
designation and previously filed with the Securities and Exchange Commission as
exhibits to the Form S-11 File No. 33-25132.
+ Incorporated by reference to exhibit bearing the same
designation and previously filed with the Securities and Exchange Commission as
exhibits to the Form S-3 File No. 33-65055.
[] Incorporated by reference to exhibit bearing the same
designation and previously filed with the Securities and Exchange Commission as
exhibits to the Form S-3 File No. 333-52197.
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment
by the trustee of all facts on which to base responsive answers to Items 2 and
13, the answers to said Items are based on incomplete information. Such Items
may, however, be considered as correct unless amended by an amendment to this
Form T-1.
7
<PAGE> 9
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE TRUST INDENTURE ACT OF 1939 THE
TRUSTEE, CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, FORMERLY KNOWN AS TEXAS
COMMERCE BANK NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION ORGANIZED AND
EXISTING UNDER THE LAWS OF THE UNITED STATES OF AMERICA, HAS DULY CAUSED THIS
STATEMENT OF ELIGIBILITY TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO AUTHORIZED, ALL IN THE CITY OF HOUSTON, AND STATE OF TEXAS, ON THE ___
DAY OF JUNE, 1998.
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, AS TRUSTEE
By: /s/ MAURI J. COWEN
------------------------------------
Mauri J. Cowen
Vice President and Trust Officer
8
<PAGE> 10
EXHIBIT 6
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
The undersigned is trustee under an Indenture between Grey Wolf, Inc.,
a Texas Corporation (the "Company"), and Chase Bank of Texas, National
Association, as Trustee, entered into in connection with the issuance of the
Company's 8-7/8% Senior Notes Due 2007, Series C.
In accordance with Section 321(b) of the Trust Indenture Act of 1939,
the undersigned hereby consents that reports of examinations of the undersigned,
made by Federal or State authorities authorized to make such examinations, may
be furnished by such authorities to the Securities and Exchange Commission upon
its request therefor.
Very truly yours,
CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION, as Trustee
By: /s/ MAURI J. COWEN
------------------------------------
Mauri J. Cowen
Vice President and Trust Officer
<PAGE> 1
LETTER OF TRANSMITTAL
GREY WOLF, INC.
OFFER TO EXCHANGE ITS
8 7/8% SENIOR NOTES DUE 2007, SERIES C
FOR ANY AND ALL OUTSTANDING
8 7/8% SENIOR NOTES DUE 2007, SERIES B
PURSUANT TO THE PROSPECTUS, DATED JUNE , 1998
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON JULY ,
1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
Delivery To:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
<TABLE>
<S> <C> <C>
By Hand/Overnight Delivery: By Registered or Certified Mail Facsimile Transmission Number:
Chase Bank of Texas, Chase Bank of Texas, National
National Association Association (214) 672-5932
1201 Main Street, 18th Floor P.O. Box 2320 (For Eligible Institutions Only)
Dallas, Texas 75202 Dallas, Texas 75221-2320
Attn: Frank Ivins, Attn: Frank Ivins, Confirm by Telephone:
Corporate Trust Services Corporate Trust Services
(214) 672-5678
For Information Call:
Mauri Cowen, Vice President
(713) 216-6686
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE, WILL
NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed the
Prospectus, dated June , 1998 (the "Prospectus") of Grey Wolf, Inc., a Texas
corporation (the "Company"), and this Letter of Transmittal (the "Letter"),
which together constitute the Company's offer (the "Exchange Offer") to exchange
an aggregate principal amount of up to $75,000,000 of 8 7/8% Senior Notes Due
2007, Series C (the "Exchange Notes") of the Company for a like principal amount
of the issued and outstanding $75,000,000 of 8 7/8% Senior Notes Due 2007,
Series B (the "Old Notes") of the Company.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Old Note. Interest on the Exchange Notes is payable semi-annually on
January 1 and July 1 of each year (each an "Interest Payment Date"), commencing
on January 1, 1999 at the rate of 8 7/8% per annum. Interest on each Exchange
Note will accrue from the last Interest Payment Date. Holders whose Old Notes
are accepted for exchange will be deemed to have waived the right to receive any
payment in respect of interest on the Old Notes accrued from the last Interest
Payment Date to the date of issuance of the Exchange Notes. The Company reserves
the right, at any time or from time to time, to extend the Exchange Offer at its
discretion, in which event the term "Expiration Date" shall mean the latest time
and date to which the Exchange Offer is extended. The Company shall notify the
holders of the Old Notes of any extension by means of a public announcement
prior to 9:00 A.M., New York City time, on the next business day after the
previously scheduled Expiration Date.
This Letter is to be completed by a Holder of Old Notes and delivered to
the Exchange Agent if certificates are to be forwarded herewith to the
Depositary Trust Company ("DTC"). DELIVERY OF DOCUMENTS TO DTC DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. If a tender of Old Notes is to be
made by book entry transfer to an account maintained by the Exchange Agent at
DTC pursuant to the procedure set forth in "The Exchange Offer -- Book-Entry
Transfer" section of the Prospectus. Holders tendering Old Notes will
acknowledge receipt and agree to be bound by terms of the Letter by tendering
the Old Notes via ATOP. Holders of Old Notes whose certificates are not
immediately available, or who are unable to deliver their certificates and all
other documents required by this Letter, or confirmation of the book-entry
tender of their Old Notes into the Exchange Agent's account at DTC (a
"Book-Entry Confirmation"), to the Exchange Agent on or prior to the Expiration
Date, must tender their Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures"
section of the Prospectus. See Instruction 1.
The undersigned has completed the appropriate boxes below and signed this
Letter to indicate the action the undersigned desires to take with respect to
the Exchange Offer.
<PAGE> 2
List below the Old Notes to which this Letter relates. If a space provided below
is inadequate, the certificate numbers and principal amount of Old Notes should
be listed on a separate signed schedule affixed hereto.
DESCRIPTION OF NOTES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(1) (2) (3)
- --------------------------------------------------------------------------------------------------------------------------
AGGREGATE
PRINCIPAL PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE AMOUNT OF AMOUNT
(PLEASE FILL IN, IF BLANK) NUMBER(S)* OLD NOTE(S) TENDERED**
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL
- --------------------------------------------------------------------------------------------------------------------------
* NEED NOT BE COMPLETED IF OLD NOTES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER.
** UNLESS OTHERWISE INDICATED IN THIS COLUMN, A HOLDER WILL BE DEEMED TO HAVE TENDERED ALL OF THE OLD NOTES REPRESENTED
BY THE OLD NOTES INDICATED IN COLUMN 2. SEE INSTRUCTION 2. OLD NOTES TENDERED HEREBY MUST BE IN DENOMINATIONS OF
PRINCIPAL AMOUNT AT MATURITY OF $1,000 OR ANY INTEGRAL MULTIPLE THEREOF. SEE INSTRUCTION 1.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Registered Holder(s)
----------------------------------------------------------------------------
Window Ticket Number (if any)
----------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-------------------------------------------------------------------
Name of Institution which guaranteed delivery
-------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:
----------------------------------------------------------------------------
Address:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns
and transfers to, or upon the order of, the Company all right, title and
interest in and to such Old Notes as are being tendered hereby.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any Old Notes tendered in exchange
for Exchange Notes hereby were acquired in the ordinary course of business of
the person receiving such Exchange Notes and, if the undersigned is a
broker-dealer, were not acquired in the Initial Offering, whether or not such
person is the undersigned, that neither the Holder of such Old Notes nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that neither the
Holder of such Old Notes nor any such other person is an "affiliate," as defined
in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"),
of the Company.
The undersigned also acknowledges that this Exchange Offer is being made in
reliance on an interpretation by the staff of the Securities and Exchange
Commission (the "SEC") that the Exchange Notes issued in exchange for the Old
Notes pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by Holders thereof (other than any such Holder that is (i)
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) a broker-dealer, except as provided below), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such Holders' business and such Holders have no arrangements with any
person to participate in the distribution of such
<PAGE> 3
Exchange Notes. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities, it
acknowledges that it will deliver the Prospectus in connection with any resale
of such Exchange Notes; however, by so acknowledging and by delivering the
Prospectus, the undersigned will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrators, trustees in bankruptcy and legal representatives of
the undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned. This tender may be withdrawn only in accordance
with the procedures set forth in "The Exchange Offer -- Withdrawal Rights"
section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the Holder's account maintained at DTC. Similarly, unless
otherwise indicated under the box entitled "Special Delivery Instructions"
below, please send the Exchange Notes (and, if applicable, substitute
certificates representing Old Notes for any Old Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES"
ABOVE AND SIGNING THIS LETTER, OR BY COMPLETING A BOOK-ENTRY TRANSFER TO THE
EXCHANGE AGENT'S ACCOUNT VIA ATOP, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES
AS SET FORTH IN SUCH BOX ABOVE.
<PAGE> 4
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
Exchange Notes are to be issued in the name of and sent to someone other than
the person or persons whose signature(s) appear(s) on this Letter above.
Issue: Exchange Notes and/or Old Notes to:
Name(s)
- ---------------------------------------------
(Please Type or Print)
- --------------------------------------------------------
(Please Type or Print)
Address
- ----------------------------------------------
- --------------------------------------------------------
- --------------------------------------------------------
(Zip Code)
- --------------------------------------------------------
(Complete Substitute Form W-9)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for Old Notes not exchanged and/or
Exchange Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter above or to such person or persons at an
address other than shown in the box entitled "Description of Old Notes" on this
Letter above.
Mail: Exchange Notes and/or Old Notes to:
Name(s)
- ---------------------------------------------
(Please Type or Print)
- --------------------------------------------------------
(Please Type or Print)
Address
- ----------------------------------------------
- --------------------------------------------------------
- --------------------------------------------------------
(Zip Code)
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF TOGETHER WITH THE CERTIFICATES FOR
THE OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF
GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE
<PAGE> 5
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
Dated:
- --------------------------------------------------------------------------------
X
==========================================================
X
==========================================================
Signature(s) of Owner Date
Area Code and Telephone Number
------------------------------------------------------------------------------
If a Holder is tendering any Old Notes, this Letter must be signed by the
registered Holder(s) as the name(s) appear(s) on the certificate(s) for the Old
Notes or by any person(s) authorized to become registered Holder(s) by
endorsements and documents transmitted herewith. If signature is by a trustee,
executor, administrator, guardian, officer or other person acting in a fiduciary
or representative capacity, please set forth full title. See Instruction 3.
Name(s):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
SIGNATURE GUARANTEE
(IF REQUESTED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Instruction:
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name and Firm)
Dated:
- --------------------------------------------------------------------------------
<PAGE> 6
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME:
------------------------------------------------------
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE
BOX AT RIGHT AND CERTIFY BY SIGNING AND TIN:
DATING BELOW ----------------------------------
Social Security Number or
Employer Identification Number
--------------------------------------------------------------------------------
PART 2 -- TIN Applied For [ ]
FORM W-9 --------------------------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE (1) the number shown on this form is my correct Taxpayer Identification Number
(or I am waiting for a number to be issued to me);
PAYOR'S REQUEST FOR
TAXPAYER IDENTIFICATION (2) I am not subject to backup withholding either because: (a) I am exempt from
NUMBER ("TIN") AND backup withholding, or (b) I have not been notified by the Internal Revenue
CERTIFICATION Service (the "IRS") that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding; and
(3) any other information provided on this form is true and correct.
SIGNATURE .......................................... DATE..................
----------------------------------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to
backup withholding because of underreporting of interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administrative Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of the
exchange, 31% of all reportable payments to me thereafter will be withheld until
I provide the number.
<TABLE>
<S> <C>
- ----------------------------------------------------- -----------------------------------------------------
Signature Date
</TABLE>
<PAGE> 7
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF
THE EXCHANGE OFFER FOR THE 8 7/8%
SENIOR NOTES DUE 2007, SERIES C IN EXCHANGE
FOR ANY AND ALL
8 7/8% SENIOR NOTES DUE 2007, SERIES C
1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES
This Letter is to be completed by a Holder of Old Notes and delivered to
the Exchange Agent either if certificates are to be forwarded herewith. If
tenders of Old Notes is to be made pursuant to the procedures for delivery by
book entry transfer set forth in "The Exchange Offer -- Book-Entry Transfer"
section of the Prospectus. Holders tendering Old Notes will acknowledge receipt
of, and agree to be bound by the terms of, this Letter by tendering Old Notes
via ATOP. Certificates for all physically tendered Old Notes, as well as a
properly completed and duly executed Letter (or manually signed facsimile
thereof), must be received by the Exchange Agent at the address set forth herein
on or prior to the Expiration Date, or the tendering Holder must comply with the
guaranteed delivery procedures set forth below. Old Notes tendered hereby must
be in denominations of principal amount of maturity of $1,000 or any integral
multiple thereof.
Noteholders whose certificates for Old Notes are not immediately available
or who cannot deliver their certificates and all other required documents to the
Exchange Agent on or prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may tender their Old Notes
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to
such procedures, if a Noteholder desires to tender their Old Notes other than by
book-entry transfer, (i) such tender must be made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent must receive
from such Eligible Institution a properly completed and duly executed Letter (or
a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the
form provided by the Company (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the Holder of Old Notes, the certificate
number or numbers of any Old Notes which will not be tendered by book-entry
transfer, and the amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that within five New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Old Notes, in proper form for
transfer, and any other documents required by the Letter, will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, and all other
documents required by this Letter, are received by the Exchange Agent within
five NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery. In the case of a book-entry transfer, pursuant to the guaranteed
delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery
Procedures," (i) the tender must be made through an Eligible Institution, (ii)
prior to the Expiration Date, the Exchange Agent must receive confirmation from
DTC of receipt by DTC of a Notice of Guaranteed Delivery via ATOP, by which the
tendering Holder will expressly acknowledge the receipt of, and agree to be
bound by, the Notice of Guaranteed Delivery, including a guarantee that
Book-Entry Confirmation will be received by the Exchange Agent within five New
York Stock Exchange trading days after the date of the transmittal of the Notice
of Guaranteed Delivery via ATOP, and (iii) Book-Entry Confirmation must be
received by the Exchange Agent within five New York Stock Exchange trading days
after the date of the transmittal of the Notice of Guaranteed Delivery via ATOP.
THE METHOD OF DELIVERY OF THIS LETTER, THE OLD NOTES AND ALL OTHER REQUIRED
DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE TENDERING
HOLDERS. DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR CONFIRMED
BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IF
OLD NOTES ARE SENT BY MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT THE DELIVERY TO THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY OR DTC. ONLY
HOLDERS OF OLD NOTES MAY TENDER SUCH OLD NOTES IN THE EXCHANGE OFFER. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES, OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH HOLDERS
See "The Exchange Offer" section in the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER)
If less than all of the Old Note evidenced by a submitted certificate is to
be tendered, the tendering Holder(s) should fill in the aggregate principal
amount of Old Notes to be tendered in the box above entitled "Description of Old
Notes -- Principal Amount Tendered." A reissued certificate representing the
balance of untendered Old Notes will be sent to such tendering Holder, unless
otherwise provided in the appropriate box on this Letter, promptly after the
Expiration Date. All of the Old Notes delivered to the Exchange Agent will be
deemed to have been tendered unless otherwise indicated.
3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES
If this Letter is signed by the registered Holder of the Old Notes tendered
hereby, the signature must correspond exactly with the name as written on the
face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint owners,
all such owners must sign this Letter.
<PAGE> 8
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter as there are different registrations of certificates.
When this Letter is signed by the registered Holder(s) of the Old Notes
specified herein and tendered hereby, no endorsements of certificates or
separate bond powers are required. If, however, the Exchange Notes are to be
issued, or any untendered Old Notes are to be reissued, to a person other than
the registered Holder, then endorsements of any certificates transmitted hereby
or separate bond powers are required. Signatures on such certificate(s) must be
guaranteed by an Eligible Institution.
If this Letter is signed by a person other than the registered Holder(s) of
any certificate(s) specified herein, such certificate(s) must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the registered Holder(s) appear(s) on the certificate(s) and
signatures on such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter or any certificates or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES OR BY SUCH OTHER ELIGIBLE
INSTITUTION WITHIN THE MEANING OF RULE 17(A)(d)-15 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (COLLECTIVELY "ELIGIBLE INSTITUTIONS").
SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE
INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (i) BY A REGISTERED HOLDER OF
OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY
PARTICIPANT IN THE DEPOSITORY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION
LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT COMPLETED THE BOX
ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON
THIS LETTER, OR (ii) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
Tendering Holders of Old Notes should indicate in the applicable box the
name and address to which Exchange Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing this
Letter. In the case of issuance in a different name, the employer identification
or social security number of the person named must also be indicated.
Noteholders tendering Old Notes by book-entry transfer may request that Old
Notes not exchanged be credited to such account maintained at DTC as such
noteholder may designate. If no such instructions are given, such Old Notes not
exchanged will be returned to the name and address of the person signing this
Letter.
5. TAX IDENTIFICATION NUMBER
Federal income tax law may require that a tendering Holder whose Old Notes
are accepted for exchange must provide the Company (as payor) with such Holder's
correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 above
which, in the case of a tendering Holder who is an individual, is his or her
social security number. If the Company is not provided with the current TIN or
an adequate basis for an exemption, such tendering Holder may be subject to a
$50 penalty imposed by the Internal Revenue Service. In addition, such tendering
Holder may be subject to backup withholding in an amount equal to 31% of all
reportable payments made after the exchange. If withholding results in an
overpayment of taxes, a refund may be obtained.
Exempt Holders of Old Notes (including, among others, all corporations) are
not subject to these backup withholding requirements. See the Guidelines of
Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9
Guidelines") for additional instructions.
To prevent backup withholding, each tendering Holder of Old Notes should
provide its correct TIN by completing the "Substitute Form W-9" set forth above,
certifying (i) that the TIN provided is correct and (ii) as to certain other
matters. If the tendering Holder of Old Notes is a nonresident alien or foreign
entity not subject to backup withholding, such Holder should provide a completed
Form W-8, Certificate of Foreign Status. These forms may be obtained from the
Exchange Agent. If the Old Notes are in more than one name or are not in the
name of the actual owner, such Holder should consult the W-9 Guidelines for
information on which TIN to report. If such Holder does not have a TIN, such
Holder should consult the W-9 Guidelines for instructions on applying for a TIN,
check the box in Part 2 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN.
6. TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the transfer
of Old Notes in exchange for Exchange Notes pursuant to the Exchange Offer. If,
however, Exchange Notes and/or substitute Old Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered Holder of the Old Notes
<PAGE> 9
tendered hereby, or if tendered Old Notes are registered in the name of any
person other than the person signing this Letter, or if a transfer tax is
imposed for any reason other than the transfer of Old Notes to the Company or
its order pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted herewith, the amount of such transfer taxes
will be billed directly to such tendering Holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER.
7. WAIVER OF CONDITIONS
The Company reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus or this Letter of Transmittal.
8. NO CONDITIONAL TENDERS
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders of Old Notes, by execution of this Letter, or by
tendering the Old Notes via ATOP, as the case may be, shall waive any right to
receive notice of the acceptance of their Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is obligated
to give notice of any defect or irregularity with respect to any tender of Old
Notes nor shall any of them incur any liability for failure to give any such
notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES
Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter, may be directed to the
Exchange Agent, at the address and telephone number indicated above.
