<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998 Commission File Number 1-8226
[GREY WOLF LOGO]
GREY WOLF, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
TEXAS 74-2144774
(State or 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>
Registrant's telephone number, including area code: (713) 435-6100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at May 12, 1998, was 164,950,591
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GREY WOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
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<PAGE> 3
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,105 $ 53,626
Restricted cash - insurance deposits 450 450
Accounts receivable, net of allowance of $630
and $1,053, respectively 59,327 56,499
Inventory and supplies 443 555
Assets held for sale -- 80
Prepaids and other current assets 6,097 6,471
--------- ---------
Total current assets 67,422 117,681
--------- ---------
Property and equipment:
Land, buildings and improvements 4,991 5,293
Drilling equipment 536,470 430,524
Furniture and fixtures 1,366 1,573
--------- ---------
542,827 437,390
Less: accumulated depreciation and amortization (36,384) (28,302)
--------- ---------
Net property and equipment 506,443 409,088
--------- ---------
Other noncurrent assets 6,494 6,983
--------- ---------
$ 580,359 $ 533,752
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,139 $ 1,148
Accounts payable - trade 24,470 29,434
Accrued workers' compensation 3,997 2,678
Payroll and related employee costs 5,522 8,103
Accrued interest payable 3,890 7,938
Customer advances 140 523
Other accrued liabilities 1,917 1,213
--------- ---------
Total current liabilities 41,075 51,037
--------- ---------
Senior notes 174,204 174,182
Long-term debt net of current maturities 31,839 2,043
Other long-term liabilities 3,863 3,863
Deferred income taxes 76,376 53,106
Series A preferred stock - mandatorily redeemable 305 305
Commitments and contingent liabilities (note 6)
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 and 164,746,291 issued
and outstanding, respectively 16,489 16,474
Additional paid-in capital 270,090 269,733
Cumulative translation adjustments (454) (454)
Accumulated deficit (33,428) (36,537)
--------- ---------
Total shareholders' equity 252,697 249,216
--------- ---------
$ 580,359 $ 533,752
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amount in thousands, except per share data)
(Unaudited)
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<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
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<S> <C> <C>
Revenues:
Contract drilling $ 74,015 $ 35,975
Costs and expenses:
Drilling operations 54,877 28,792
Depreciation and amortization 8,587 2,207
General and administrative 2,485 1,654
--------- ---------
Total costs and expenses 65,949 32,653
--------- ---------
Operating income 8,066 3,322
Other income (expense):
Interest income 337 92
Gain on sale of assets 1,770 30
Interest expense (4,074) (672)
Other, net (67) 204
--------- ---------
Other income (expense), net (2,034) (346)
--------- ---------
Income before income taxes 6,032 2,976
Income taxes 2,923 662
--------- ---------
Net income 3,109 2,314
Series A preferred stock redemption premium -- (22)
--------- ---------
Net income applicable to common stock $ 3,109 $ 2,292
========= =========
Basic net income per common share $ .02 $ .02
========= =========
Basic weighted average shares outstanding 164,761 133,334
========= =========
Diluted net income per common share $ .02 $ .02
========= =========
Diluted weighted average shares outstanding 168,191 137,106
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock Additional Cumulative
Common $.10 par Paid-in Translation
Shares Value Capital Deficit Adjustments Total
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 55 5 33 -- -- 38
Redemption of Series A
preferred stock -- -- (22) -- -- (22)
Net income -- -- -- 2,314 -- 2,314
--------- --------- --------- --------- --------- ---------
Balance, March 31, 1997 137,524 $ 13,752 $ 129,135 $ (44,441) $ (404) $ 98,042
========= ========= ========= ========= ========= =========
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 164,895 $ 16,489 $ 270,090 $ (33,428) $ (454) $ 252,697
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,109 $ 2,314
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 8,587 2,207
Gain on sale of assets (1,770) (30)
Deferred income taxes 2,298 424
Translation loss 67 -
Provision for doubtful accounts 100 -
Net effect of changes in assets and liabilities
related to operating accounts (11,726) (6,766)
----------- -----------
Cash provided by (used in) operating activities 665 (1,851)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (85,784) (7,247)
Proceeds from sale of property and equipment 2,418 42
----------- -----------
Cash used in investing activities (83,366) (7,205)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 30,210 6,910
Repayments of long-term debt (402) (301)
Proceeds from exercise of stock options 372 38
Redemption of Series A Preferred Stock - (60)
----------- -----------
Cash provided by financing activities 30,180 6,587
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (52,521) (2,469)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 53,626 6,162
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,105 $ 3,693
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 8,969 $ 672
=========== ===========
CASH PAID FOR TAXES: $ - $ -
=========== ===========
NON CASH TRANSACTIONS:
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
Murco Acquisition
Change in property and equipment additions $ 20,972
Change in deferred tax liability 20,972
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
The accompanying unaudited consolidated financial statements have been
prepared by Grey Wolf, Inc. (the "Company" or "Grey Wolf") in accordance with
the rules and regulations of the Securities and Exchange Commission and include
the accounts of the Company and its majority-owned subsidiaries. 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 the
results of operations and cash flows for the periods indicated. All significant
intercompany transactions have been eliminated. The results of operations for
the three months ended March 31, 1998 and 1997 are not necessarily indicative of
the results for any other period or for the year as a whole. These consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
(2) SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Accounting Standards ("SFAS") No. 128, Earnings per Share
which specifies new measurement, presentation and disclosure requirements for
earnings per share and is required to be applied retroactively upon initial
adoption. The Company adopted SFAS No. 128 effective December 31, 1997, 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>
Three Months Ended
March 31,
-------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Weighted average common shares
outstanding - Basic 164,761 133,334
Effect of dilutive securities:
Options - Treasury Stock Method 2,696 2,028
Redeemable preferred stock 245 581
Warrants 489 1,163
------- -------
3,430 3,772
------- -------
Weighted average common shares
outstanding - Diluted 168,191 137,106
======= =======
</TABLE>
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided
using the straightline method over the estimated useful lives of the assets.
Effective January 1, 1998, the Company changed the depreciable
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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Foreign Currency
Venezuela has a highly inflationary economy as defined by Statement of
Financial Accounting Standards Board 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 remeasurement 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.
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
affect the financial reporting in the accompanying consolidated financial
statements as the Company had no components of comprehensive income other than
net income.
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.
(3) ACCOUNTING FOR INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal
income tax return. The Company's foreign subsidiaries file tax returns in the
country where they are domiciled. The Company records current income taxes based
on its estimated tax liability in the United States and foreign countries for
the period. 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.
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," which requires the balance
sheet approach to income tax accounting, whereby deferred income taxes are
provided at the balance sheet date for (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.
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<PAGE> 9
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) SIGNIFICANT TRANSACTIONS
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco Drilling Corporation ("Murco") for $59.6 million in cash. At
closing, Murco had net financial liabilities of approximately $5.4 million. The
consideration is subject to a final accounting adjustment for the actual net
financial liabilities of Murco. The Company funded this stock purchase out of
working capital and $30.0 million of borrowings under its bank credit facility
(see note 5).
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 Company recorded a gain of $1.8 million on the
sale. The Eastern division rig fleet consisted of six 450 horsepower mechanical
rigs.
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 acquisition
of Murco and related borrowings under the bank credit facility, as if they had
occurred on January 1, 1998. The following unaudited pro forma consolidated
financial data for the three months ended March 31, 1997 includes the historical
results of the Company for the three months ended March 31, 1997, and gives
effect to the acquisition of Murco and related borrowings under the bank credit
facility as well as the previously disclosed merger, acquisitions and sale
transactions which occurred before December 31, 1997, as if they occurred on
January 1, 1997. The May, June, July 1997, and Kaiser-Francis rig purchases had
no historical operations as the rigs had 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 Three For the Three
Months Ended Months Ended
March 31, March 31,
1998 1997
----------- -----------
(Amounts in thousands, except per share amounts)
<S> <C> <C>
Total revenues $ 76,088 $ 68,409
Net income applicable
to common stock 3,180 125
Basic net income per
common share .02 .00
Diluted net income per
common share .02 .00
</TABLE>
(5) LONG-TERM DEBT
The Company has a $50.0 million amended and restated senior secured
revolving line of credit ("the Facility") with a syndicate of commercial banks.
The Facility bears 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%
and matures on
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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
April 30, 2000. The Facility is secured by substantially all the Company's
assets and calls for quarterly interest payments on the outstanding balance. At
March 31, 1998 and December 31, 1997, $30.0 million and $0, respectively, were
outstanding under the Facility. The Facility contains customary affirmative and
negative covenants with which the Company was in compliance at March 31, 1998
and December 31, 1997.
On June 27, 1997, the Company issued $175.0 million of senior notes
(the "Notes") receiving gross proceeds of $174.1 million. The Notes bear
interest at 87/8% per annum payable semiannually and mature on July 1, 2007. The
Notes are general unsecured senior obligations of the Company and are guaranteed
by the Company's domestic subsidiaries. Proceeds from the Notes were used to
fund the cash portion of the June 1997 merger, to repay the 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 101.4792% and beginning July 1, 2005 and thereafter at
100.0000% together with any interest accrued and unpaid to the redemption date.
However, 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.
(6) COMMITMENTS AND CONTINGENT LIABILITIES
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.
Substantially all of the Company's contract drilling activities are
conducted with independent and major oil and gas companies in the United States
or with national petroleum companies in Venezuela. Historically, the Company has
not required collateral or other security to support 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 property and filing suit against the customer.
The June 1997 Grey Wolf Drilling Company ("GWDC") merger 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 merger. Thus, under present Internal Revenue Service
("IRS") guidelines, dispositions of common stock by GWDC shareholders during the
five years following the GWDC merger could cause the IRS to assert that the GWDC
merger 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 merger 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
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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
stock will be taxable to the GWDC shareholders at the time of the GWDC merger,
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 merger,
would be liable for any such corporate tax which, if imposed, would have a
material adverse effect on the financial condition of the Company.
(7) SUBSEQUENT EVENT
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.
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GREY WOLF, INC. AND SUBSIDIARIES
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 Grey Wolf, Inc. ("Grey
Wolf" or the "Company") included elsewhere herein and the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
GENERAL
Grey Wolf is a leading provider of contract land drilling services in
the United States 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, 112 of which are actively marketed. The Company
believes that it has the largest fleet of land drilling rigs in its Gulf Coast
and South Texas markets and the second largest fleet in its Ark-La-Tex and
Mississippi/Alabama markets. The Company has an inventory of 14 non-marketed
rigs, two of which are currently being refurbished for return to marketable
status in the second quarter of 1998, and the remaining 12 are held for
refurbishment as demand for drilling services warrants.
The Company is a Texas corporation formed in 1980. Beginning in
mid-1996, 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 and
increasing day rates has significantly improved the Company's revenues and
operating income during the first quarter of 1998 compared to the same period in
the prior year.
However, for the three months ended March 31, 1998 and for the month of
April 1998, the Company experienced decreases in average rig utilization rates
in its core domestic markets to approximately 81% and 71%, 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 the uncertainty of 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 "Facility"), and the remaining
proceeds from the November 1997 issuance of common stock.
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<PAGE> 13
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
---------------------- ---------------------
(unaudited)
(In thousands)
Amount % Amount %
-------- -------- -------- --------
<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 Drilling Corporation ("Murco") discussed below.
On January 30, 1998, the Company acquired all of the outstanding common
stock of Murco for $59.6 million in cash. At closing, Murco had net liabilities
of approximately $5.4 million. The consideration is subject to a final
accounting adjustment for the actual net liabilities of Murco. The Company
funded this stock purchase out of working capital and $30.0 million of
borrowings under the Facility. Murco operated ten land drilling rigs in the
Ark-La-Tex and Mississippi/Alabama markets.
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 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.
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<PAGE> 14
Subsequent Event and Future Activities
On May 8, 1998 the Company completed an offering of $75 million of
senior notes due June 2007 (the "Series B Notes") with interest at 8 7/8% per
annum. The net proceeds from the offering were $71.5 million, after deducting
commissions, fees and expenses. 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. 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. Substantially all
indebtedness outstanding under the Facility was repaid from the net proceeds of
the 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 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 Series B Notes discussed above, and to the extent required, further
borrowings under the Facility, will be sufficient to fund the Company's
refurbishment program and meet its other anticipated capital expenditures for
the remainder of 1998.
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.
- 14 -
<PAGE> 15
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 exchange losses
of $67,000. (See Note 2 "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 Facility prohibits the payment of
dividends without the consent of the participating banks.
- 15 -
<PAGE> 16
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 revenue 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 revenue $ 9,351 $ 11,826 $ 9,407 $ 8,205 $ 7,500 $ 8,134
Operating expenses 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.
- 16 -
<PAGE> 17
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 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.
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.
- 17 -
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in aggregate,
material to the Company's consolidated financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1998, the annual meeting of the holders of common stock of
Grey Wolf, Inc. was held. The only action taken by the shareholders was the
election of the following eight directors to serve until the next annual meeting
or until his successor is elected and qualified.
William T. Donovan
Peter M. Holt
James K. Nelson
Roy T. Oliver, Jr.
Thomas P. Richards
Ivar Siem
Steven A. Webster
William R. Ziegler
ITEM 5. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, capital expenditures and beliefs of management for
future operations, are forward-looking statements. Although the company believes
the expectations and beliefs reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
discussed in Item 1 "Business" and Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A current report on form 8-K (Item 5) was filed with the Securities and
Exchange Commission on ("SEC") January 30, 1998. This current report reported
the closing of the acquisition of Murco.
A current report of Form 8-K (Item 5) was filed with the Securities and
Exchange Commission on May 6, 1998. This current report reported the offering of
$75 million of senior notes pursuant to Rule 144A and Regulation S under the
Securities Act of 1933, as amended.
Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
- 18 -
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREY WOLF, INC.
Date: May 13, 1998 By: /s/ David W. Wehlmann
---------------------
David W. Wehlmann
Senior Vice President and Chief
Financial Officer
Date: May 13, 1998 By: /s/ Merrie S. Costley
---------------------
Merrie S. Costley
Vice President and Controller
- 20 -
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,555
<SECURITIES> 0
<RECEIVABLES> 59,957
<ALLOWANCES> 630
<INVENTORY> 443
<CURRENT-ASSETS> 67,422
<PP&E> 542,827
<DEPRECIATION> 36,384
<TOTAL-ASSETS> 580,359
<CURRENT-LIABILITIES> 41,075
<BONDS> 174,204
305
0
<COMMON> 16,489
<OTHER-SE> 236,208
<TOTAL-LIABILITY-AND-EQUITY> 580,359
<SALES> 74,015
<TOTAL-REVENUES> 74,015
<CGS> 54,877
<TOTAL-COSTS> 65,949
<OTHER-EXPENSES> 2,034
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 4,074
<INCOME-PRETAX> 6,032
<INCOME-TAX> 2,923
<INCOME-CONTINUING> 3,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,109
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
