<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, 1999 Commission File Number 1-8226
[GREY WOLF, INC. LOGO]
GREY WOLF, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2144774
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
10370 RICHMOND AVENUE, SUITE 600
HOUSTON, TEXAS 77042
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 435-6100
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 7,1999, was 165,079,791
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Page 1 of 23
<PAGE> 2
GREY WOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity
and Comprehensive Income 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
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</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,
1999 1998
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,570 $ 45,895
Restricted cash - insurance deposits 762 762
Accounts receivable, net of allowance of $1,197
and $1,106, respectively 27,413 30,598
Prepaids and other current assets 2,810 3,426
------------ ------------
Total current assets 64,555 80,681
------------ ------------
Property and equipment:
Land, buildings and improvements 5,520 5,538
Drilling equipment 561,709 561,850
Furniture and fixtures 1,916 1,920
------------ ------------
Total property and equipment 569,145 569,308
Less: accumulated depreciation and amortization (165,492) (157,992)
------------ ------------
Net property and equipment 403,653 411,316
Other noncurrent assets 9,120 9,306
------------ ------------
$ 477,328 $ 501,303
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,165 $ 1,162
Accounts payable 11,052 13,761
Accrued workers' compensation 4,505 4,503
Payroll and related employee costs 2,938 3,672
Accrued interest payable 5,595 11,096
Other accrued liabilities 1,585 1,998
------------ ------------
Total current liabilities 26,840 36,192
------------ ------------
Senior notes 249,290 249,268
Long-term debt net of current maturities 1,003 1,259
Other long-term liabilities 928 1,460
Deferred income taxes 41,760 46,128
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 shares authorized;
165,065,391 issued and outstanding 16,506 16,506
Additional paid-in capital 270,389 270,389
Cumulative comprehensive income adjustments (454) (454)
Accumulated deficit (129,239) (119,750)
------------ ------------
Total shareholders' equity 157,202 166,691
------------ ------------
$ 477,328 $ 501,303
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amount in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Contract drilling $ 37,680 $ 74,015
Costs and expenses:
Drilling operations 35,825 54,777
Depreciation and amortization 7,735 8,587
General and administrative 1,611 2,485
Provision for doubtful accounts 91 100
Unusual charges 320 --
---------- ----------
Total costs and expenses 45,582 65,949
---------- ----------
Operating income (loss) (7,902) 8,066
Other income (expense):
Interest income 423 337
Gain on sale of assets 65 1,770
Interest expense (5,992) (4,074)
Other, net (52) (67)
---------- ----------
Other income (expense), net (5,556) (2,034)
---------- ----------
Income (loss) before income taxes (13,458) 6,032
Income tax expense (benefit) (4,389) 2,923
---------- ----------
Income (loss)before extraordinary item (9,069) 3,109
Extraordinary item, net of tax of $203 (420) --
---------- ----------
Net Income (loss) $ (9,489) $ 3,109
========== ==========
Basic and diluted net income (loss) per common share:
Before extraordinary item $ (0.06) $ .02
Extraordinary item, net of tax (0.00) --
---------- ----------
Basic and diluted net income (loss) per common share $ (0.06) $ 0.02
========== ==========
Basic weighted average shares outstanding 165,065 164,761
========== ==========
Diluted weighted average shares outstanding 165,065 168,191
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Cumulative
Stock Additional Comprehensive
Common $.10 par Paid-in Income
Shares Value Capital Deficit Adjustments Total
--------- -------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 164,746 $ 16,474 $ 269,733 $ (36,537) $ (454) $ 249,216
Exercise of stock options 149 15 357 - - 372
Comprehensive income -
net income - - - 3,109 - $ 3,109
--------- -------- ----------- ----------- ----------- ---------
Balance, March 31, 1998 164,895 $ 16,489 $ 270,090 $ (33,428) $ (454) $ 252,697
========= ======== =========== =========== =========== =========
Balance, December 31, 1998 165,065 $ 16,506 $ 270,389 $ (119,750) $ (454) $ 166,691
Comprehensive income -
net loss - - - (9,489) - (9,489)
--------- -------- ----------- ----------- ----------- ---------
Balance, March 31, 1999 165,065 $ 16,506 $ 270,389 $ (129,239) $ (454) $ 157,202
========= ======== =========== =========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
See accompanying notes to consolidated financial statements.
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,489) $ 3,109
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 7,735 8,587
Gain on sale of assets (65) (1,770)
Deferred income taxes (4,165) 2,298
Foreign exchange loss 52 67
Provision for doubtful accounts 91 100
Extraordinary item, net of taxes 420 --
Net effect of changes in assets and liabilities
related to operating accounts (5,906) (11,726)
---------- ----------
Cash provided by (used in) operating activities (11,327) 665
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (161) (85,784)
Proceeds from sale of property and equipment 150 2,418
---------- ----------
Cash used in investing activities (11) (83,366)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 62 30,210
Repayments of long-term debt (293) (402)
Credit line financing costs (756) --
Proceeds from exercise of stock options -- 372
---------- ----------
Cash provided by (used in) financing activities (987) 30,180
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (12,325) (52,521)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,895 53,626
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,570 $ 1,105
========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 11,493 $ 8,969
========== ==========
CASH PAID FOR TAXES: $ -- $ --
========== ==========
NON CASH TRANSACTIONS:
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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<PAGE> 7
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, 1999 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, 1999 and 1998 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, 1998.
(2) SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share," basic earnings per share is based on weighted
average shares outstanding without any dilutive effects considered and 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,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Weighted average common shares
outstanding - Basic 165,065 164,761
Effect of dilutive securities:
Options - Treasury Stock Method -- 2,696
Redeemable preferred stock -- 245
Warrants -- 489
---------- ----------
-- 3,430
Weighted average common shares
outstanding - Diluted 165,065 168,191
========== ==========
</TABLE>
Securities excluded from the computation of diluted EPS for the period
ended March 31, 1999 that could potentially dilute basic EPS in the future were
options to purchase 5.6 million shares and warrants to issue 734,000 shares.
Since the Company incurred a loss for the three months ended March 31, 1999,
such dilutive securities were excluded as they would be anti-dilutive to basic
EPS.
Securities excluded from the computation of diluted EPS for the period
ended March 31, 1998 that could potentially dilute basic EPS in the future were
options to purchase 10,000 shares due to the exercise price being greater than
the average market price during the period.
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<PAGE> 8
Foreign Currency
Venezuela has a highly inflationary economy as defined by SFAS 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, 1999 the
Company recognized foreign exchange losses of $52,000.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 ("SFAS No. 133") , "Accounting for Derivative Instruments and Hedging
Activities," with an effective date for fiscal years beginning after June 15,
1999. SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities that require an entity to recognize all
derivatives as an asset or liability measured at its fair value. The Company
believes that the adoption of the provisions of SFAS 133 will not have a
material impact on the Company's financial position or results of operations.
(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, 1999, the Company recorded a
deferred tax benefit of $4.6 million.
The Company follows 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.
(4) LONG-TERM DEBT
On January 14, 1999, the Company entered into a senior secured
revolving credit facility with the CIT Group/Business Credit, Inc. (the "CIT
Facility"), replacing its previous $50.0 million facility. The CIT Facility
provides the Company with the ability to borrow up to the lesser of $50.0
million or 50% of the orderly liquidation value (as defined in the agreement) of
marketable drilling rig equipment located in the 48 contiguous United States.
The CIT Facility is a four year revolving facility with periodic interest
payments at a floating rate based upon the Company's debt service coverage ratio
within a range of either LIBOR plus 1.75% to 3.5% or prime plus .25% to 1.5%.
During the first year of the CIT Facility the interest rate is fixed at LIBOR
plus 2.5% or prime plus 1%. The Company is required to pay a commitment fee of
0.375% per annum on the unused portion of the CIT Facility. In addition, the CIT
Facility contains certain affirmative and negative covenants including a minimum
appraisal value of the drilling rigs and related equipment plus certain
financial covenants which take effect if the Company's cash on hand and
borrowing capacity under the CIT Facility falls below $25 million. Substantially
all of the Company's assets, including its drilling equipment, are pledged as
collateral under the CIT Facility. The Company, however, retains the option,
subject to a minimum appraisal value, under the CIT Facility to extract $75
million of the equipment
-8-
<PAGE> 9
out of the collateral pool for other purposes. The Company currently has no
borrowings outstanding under the CIT Facility.
With the closing of the CIT Facility, the Company recognized a non-cash
extraordinary loss of $420,000, net of applicable tax of $203,000, related to
the write-off of deferred financing costs associated with the Company's previous
facility.
The Company has $175 million and $75 million in principal amount of
senior notes ("Notes") outstanding at March 31, 1999. The Notes were issued June
1997 and May 1998, respectively, bear interest at 8f% per annum and mature July
1, 2007. The Notes are general unsecured senior obligations of the Company and
are guaranteed, on a joint and several basis, by all domestic wholly-owned
subsidiaries of the Company. All fees and expenses incurred at the time of
issuance are being 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
$170.0 million aggregate principal amount shall remain outstanding immediately
after the occurrence of any such redemption. Upon a Change of Control as defined
in the Indentures, each holder of the Notes will have the right to require the
Company to repurchase all or any part of such holder's Notes at a purchase price
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of purchase.
(5) SEGMENT AND GEOGRAPHIC INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes new standards for segment reporting based on the way management
organizes segments within a company for making operating decisions and assessing
performance. The Company manages its business as two reportable segments;
domestic operations and foreign operations. Although the Company provides
contract drilling services in several markets domestically, these operations
have been aggregated into one reportable segment based on the similarity of
economic characteristics among all markets including the nature of the services
provided and the type of customers of such services.
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<PAGE> 10
The following table sets forth the Company's operations based on the
geographic areas in which it operates.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Revenues:
Domestic $ 36,244 $ 71,910
Mexico -- --
South America 1,436 2,105
---------- ----------
37,680 74,015
========== ==========
Operating income (loss):
Domestic $ (7,528) $ 8,479
Mexico -- --
South America (374) (413)
---------- ----------
$ (7,902) $ (8,066)
========== ==========
Total assets:
Domestic $ 465,556 $ 561,690
Mexico -- 2
South America 11,772 18,667
---------- ----------
$ 477,328 $ 580,359
========== ==========
</TABLE>
For the three months ended March 31, 1999, operating (loss) above
includes unusual charges and provision for doubtful accounts from domestic
operations of $320,000 and $91,000, respectively. There were no such items
recorded in foreign operations.
For the three months ended March 31, 1998, operating income above
includes provision for doubtful accounts from domestic operations of $100,000.
(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 independent oil and gas companies and 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.
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<PAGE> 11
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 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
Holdings Company, 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) UNUSUAL CHARGES
During the quarter ended March 31, 1999, the Company recorded unusual
charges of $320,000. These unusual charges consist entirely of severance costs
incurred due to reductions in personnel at both the division and corporate
levels.
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<PAGE> 12
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 audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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 maintains a fleet of five rigs in Venezuela, giving the
Company a total of 125 rigs, 113 of which are marketable. Of the 113 marketable
rigs, 54 are cold stacked (49 domestically and five in Venezuela) as of May 10,
1999. A cold stacked rig is one which is not currently being marketed, has no
personnel assigned to it and has virtually no ongoing direct costs. Each cold
stacked rig can however, be reactivated in a very short period of time, with
little cost other than the cost of mobilization, provided that no equipment has
been removed from the rig during the cold stacked period. The Company has an
inventory of 12 non-marketed rigs that are being held for refurbishment as
demand for the Company's 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 and added drilling rigs to its existing
fleet. Since the first quarter of 1998, however, demand for the Company's
drilling services in the markets served by the Company has been deteriorating.
Average rig utilization in its core domestic markets has decreased from
81% for the three months ended March 31, 1998, to 39% for the three months ended
March 31, 1999, and 37% year to date through April 30, 1999. In addition, the
bid rates for new drilling contracts in the Company's core domestic markets for
the first quarter of 1999 were approximately 37% lower than the highest bid
rates achieved during the first quarter of 1998.
The lower utilization and erosion of dayrates for the Company's land
drilling rigs is a function of the overall decline in demand for land drilling
services. The Company's customers are faced with lower revenues and cash flows
due to lower commodity prices which has led many to reduce their actual and
planned drilling expenditures. To successfully weather the current adverse
business conditions, the Company has taken numerous steps to minimize cost and
conserve cash. Through May 10, 1999, the Company has "cold stacked" 54 rigs,
reduced overhead at both the division and corporate level and has begun a
program whereby components are used from spare equipment or cold-stacked rigs
instead of buying new parts. If the current trends of lower utilization and
declining dayrates persist or worsen, they could have a material adverse effect
on the Company's financial condition and results of operations and may in the
future affect its ability to meet its debt service requirements.
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<PAGE> 13
FINANCIAL CONDITION AND LIQUIDITY
The following table summarizes the Company's financial position at
March 31, 1999 and as of December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------------ ----------------------
(UNAUDITED)
(IN THOUSANDS)
Amount % Amount %
------------- ------ ------------ -----
<S> <C> <C> <C> <C>
Working capital $ 37,715 8 $ 44,489 10
Property and equipment, net 403,653 90 411,316 88
Other noncurrent assets 9,120 2 9,306 2
------------- ------ ------------ -----
Total $ 450,488 100 $ 465,111 100
============= ====== ============ =====
Long-term debt $ 250,293 56 $ 250,527 54
Other long-term liabilities 42,993 9 47,893 10
Shareholders' equity 157,202 35 166,691 36
------------- ------ ------------ -----
Total $ 450,488 100 $ 465,111 100
============= ====== ============ =====
</TABLE>
The significant changes in the Company's financial position from
December 31, 1998 to March 31, 1999 are the decreases in working capital and
shareholders' equity of $6.8 million and $9.5 million, respectively, which are
primarily due to the overall decline in the Company's operating activity along
with a decline in the price received for the Company's services.
Throughout 1998, the Company maintained a senior secured revolving
credit facility with a syndicate of commercial banks (the "Former Credit
Facility"). The Former Credit Facility provided the Company with the ability to
borrow up to $50.0 million from time to time prior to April 30, 2000, subject to
certain reductions. Effective January 14, 1999, the Company terminated the
Former Credit Facility and entered into a more flexible agreement with The CIT
Group/Business Credit, Inc. As such, in January, the Company recorded an
extraordinary item of $420,000, net of tax of $203,000, to write off deferred
loan costs associated with the termination of the Former Credit Facility.
Effective January 14, 1999, the Company entered into a new senior
secured revolving credit facility with the CIT Group/Business Credit, Inc. (the
"CIT Facility"). The CIT Facility provides the Company with the ability to
borrow up to the lessor of $50 million of 50% of the orderly liquidation value
("OLV"), as defined in the CIT Facility, of marketable drilling rig equipment
located in the 48 contiguous states of the United States. The initial term of
the CIT Facility is for four years through January 14, 2003, with automatic
annual renewals thereafter unless terminated by the lender on any subsequent
anniversary date and then only upon 60 days prior notice. The CIT Facility
provides the borrower with up to $10,000,000 available for letters of credit.
The amounts used for letters of credit decrease the borrowing base of the CIT
Facility by the amounts of such letters of credit. Interest under the CIT
Facility accrues at a variable rate, using (at the borrower's election) either
prime plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.50%, depending upon the
Company's debt service coverage ratio for the trailing 12 month period. During
the first year of the CIT Facility, the interest rate is fixed at LIBOR plus
2.50% or prime plus 1.00%. Letters of credit accrue a fee of 1.25% per annum and
the borrower pays a commitment fee of 0.375% per annum on the average unused
portion of the lender's commitments. Indebtedness under the CIT Facility is
secured by an exclusive lien security interest in substantially all of the
Company's and its domestic subsidiaries' assets and by guarantees of the Company
and certain of its wholly-owned subsidiaries. The Company, however, retains the
option, subject to a minimum appraisal value, to extract $75.0 million of the
equipment out of the collateral pool for other purposes. To date, there have
been no borrowings under the CIT Facility.
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<PAGE> 14
Among the various covenants that must be satisfied by the Company under
the CIT Facility are the following two covenants which shall apply whenever the
Company's liquidity, defined as the sum of cash, cash equivalents and
availability under the CIT Facility, falls below $25,000,000: (i) 1 to 1 EBITDA
coverage of debt service, tested monthly on a trailing 12 month basis and (ii)
minimum tangible net worth at the end of each quarter will be the prior year
tangible net worth less $30,000,000 adjusted for quarterly tests. Additionally,
it will be a default if the OLV of the domestic drilling equipment (including
inventoried rigs) falls below $150,000,000. Also, if the two month average rig
utilization falls below 45%, the lender will have the option to request one
additional apprisal per year to aid in determining the current OLV of the
drilling equipment. While rig utilization thus far during 1999 is below 45%, the
lender has not requested an additional appraisal.
During the first three months of 1999, the Company used cash on hand
and cash generated from operations to fund its activities. The net cash provided
by or used in the operating, investing and financing activities of the Company
is summarized below:
<TABLE>
<CAPTION>
Period Ended
March 31,
-----------------------------
1999 1998
----------- ------------
(In thousands)
<S> <C> <C>
Net cash provided by (used in):
Operating activities $ (11,327) $ 665
Investing activities (11) (83,366)
Financing activities (987) 30,180
----------- ------------
Net decrease in cash: $ (12,325) $ (52,521)
=========== ============
</TABLE>
The Company's cash flows from operating activities are affected by a
number of factors including the number of rigs under contract and whether the
contracts are daywork, footage or turnkey, an increasing amount of which have
been turnkey. The Company's cash flow used in operating activities during the
first quarter of 1999 was $5.4 million compared to cash generated from operating
activities during the first quarter of 1998 of $12.4 million. This change is due
to 50% fewer operating days and a decrease in average revenue per day between
the two periods. Cash used to fund working capital requirements during the first
quarter of 1999 was $5.9 million compared to $11.7 million for the first quarter
of 1998.
During the three months ended March 31, 1999, the Company's cash used
in investing activities was negligible as a result of cost cutting measures
employed to conserve cash. Investing activities during the months ended March
31, 1998 consisted primarily of the cash portion of the Murco acquisition of
$66.2 million and capital expenditures for rig refurbishments and capital
maintenance of approximately $19.6 million.
Cash flow used in financing activities for the three months ended March
31, 1999 consisted principally of capital lease payments, while the cash
provided by financing activities for the period ended March 31, 1998 consisted
of net proceeds from borrowings of $30.0 million under the Company's Former
Credit Facility which were primarily used to fund the acquisition of Murco.
Current Outlook
Lower revenues reflect the steep decline in oil and gas commodity
prices and the corresponding reduction in exploration and drilling activity over
the past fifteen months. While oil and gas commodity prices have increased
recently, the U.S. land drilling rig count, as reported by Baker Hughes,
declined from 500 in December 30, 1998 to a historic low of 380 on April 23,
1999 and remains near that level today. In an effort to continue to minimize the
cost of operations and conserve cash, the Company cold stacked 16 additional
rigs during the first quarter and again reduced overhead at the corporate and
division levels. As
-14-
<PAGE> 15
a result, during the first quarter of 1999, the Company incurred unusual charges
of $320,000 for severance costs as well as approximately $600,000 in costs
incurred to cold stack rigs. The cold stacking costs are included in drilling
operations expenses. Capital expenditures for the first quarter of 1999 were
approximately $300,000 and second quarter 1999 capital expenditures are
estimated to be approximately $700,000.
During the second quarter of 1999, the Company continues to experience
downward pressure on both utilizations and dayrates. The Company's utilization
during the beginning of May is in the low 30% range and current leading edge bid
rates for the Company's rigs are between $5,500 and $6,500 per day. If these
utilization and dayrate levels continue throughout the remainder of the second
quarter of 1999, the Company expects the second quarter of 1999 loss to be
greater than the loss reported in the first quarter. If cash flow generated from
operating activities continues at the level discussed previously or further
deteriorates, the Company will utilize a portion of its existing cash balance in
order to meet debt service requirements of approximately $5.5 million per
quarter.
The Company believes that the cash flow from operations, current cash
balances, and to the extent required, borrowings under the CIT Facility, will be
sufficient to fund the Company's anticipated capital expenditures for the
remainder of 1999.
The Company continues to 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
Although the Company has suspended its operations in Venezuela,
historically, operations have been performed by the Company pursuant to drilling
contracts under which payments to the Company were denominated in United States
Dollars but 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
has typically been 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 have been
comprised of goods and services procured in the respective foreign countries and
paid for in the respective countries' currencies. As such, the Company's
subsidiaries operating in Venezuela have historically been required to maintain
cash balances in Venezuelan currency. The Company has not, during the three
months ended March 31, 1999, entered into any currency hedges to protect it from
foreign currency losses. During the three months ended March 31, 1999, the
Company recognized foreign exchange losses of $52,000. (See Note 2 "Significant
Accounting Policies - Foreign Currency" to the Consolidated Financial
Statements).
-15-
<PAGE> 16
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 CIT Facility prohibits the payment
of cash dividends without the consent of the participating lenders.
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 of the Company's 8f%
Senior Notes due 2007 (the "Senior Notes"). As a holding company, the Company's
liquidity is dependent on the operations of its subsidiaries. Certain financing
arrangements that the Company and its subsidiaries are party to may restrict the
Company's ability to access funds from its subsidiaries.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1999 and 1998
The following tables highlight rig days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the three months
ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------------------------ -----------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
--------- -------- --------- --------- --------- --------
(In thousands, except rig days worked and averages per day)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked 3,816 145 3,961 7,690 178 7,868
Drilling revenues $ 36,244 $ 1,436 $ 37,680 $ 71,910 $ 2,105 $ 74,015
Operating expenses(1) 34,212 1,613 35,825 52,599 2,178 54,777
--------- -------- --------- --------- --------- --------
Gross profit (loss) $ 2,032 $ (177) $ 1,855 $ 19,311 $ (73) $ 19,238
========= ======== ========= ========= ========= ========
Average per rig day worked
Drilling revenue $ 9,498 $ 9,903 $ 9,513 $ 9,351 $ 11,826 $ 9,407
Operating expenses 8,965 11,124 9,044 6,840 12,236 6,962
--------- -------- --------- --------- --------- --------
Gross profit (loss) $ 533 $ (1,221) $ 469 $ 2,511 $ (410) $ 2,445
========= ======== ========= ========= ========= ========
</TABLE>
- -----------------------------
(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts and unusual charges.
Revenues decreased approximately $36.3 million, or 49%, to $37.7
million for the three months ended March 31, 1999, from $74.0 million for the
three months ended March 31, 1998. This decrease is primarily due to a decrease
in revenue from domestic operations of $35.7 million due to a decrease in rig
days worked of 3,874 or 50%, partially offset by an increase in the average
revenue per day of $147. The decrease in rig days worked is a direct result of
deterioration of the drilling industry's market conditions while the increase in
average revenue per day of $147 is due to an increase in the percentage of
turnkey days worked, which provide significantly higher revenue per day than
daywork contracts. During the first quarter of 1999, 23% of the rig days worked
were under turnkey contracts compared to only 8% for the same period of 1998.
Revenue per day from turnkey contracts is impacted by a number of variables
including depth and geological complexities. The remaining decrease in revenue
is due to a $669,000 decrease in revenue from foreign operations where rig days
worked decreased by 33 days and the average revenue per day worked decreased by
$1,923. The decrease in rig days worked is a direct result of the Company
completing its contracts in Venezuela late in the first quarter of 1999.
Drilling operating expenses decreased by approximately $19.0 million,
or 35%, to $35.8 million for the three months ended March 31, 1999, as compared
to $54.8 million for the three months ended March 31,
-16-
<PAGE> 17
1998. The decrease is primarily due to an $18.4 million decrease in drilling
operating expenses from domestic operations due to the decreased level of
activity discussed above. The decrease in domestic drilling operating expenses
is a direct result of the decrease in the number of rig days worked of 3,874,
partially offset by an increase in operating expense per day of $2,125. The
increase in operating expense per day is a direct result of the increase in the
percentage of turnkey days worked discussed above and additional costs incurred
to cold stack rigs. The remaining decrease in operating expenses of $565,000 is
due to a decrease in operating expenses from foreign operations resulting from
the shut down of Venezuelan operations discussed above.
Depreciation and amortization expense decreased by $852,000, or 10%, to
$7.7 million for the three months ended March 31, 1999, compared to $8.6 million
for the three months ended March 31, 1998. The decrease is primarily due to the
SFAS 121 write-down of assets of $93.2 million that the Company recorded in the
fourth quarter of 1998.
General and administrative expenses decreased by $874,000 or 35%, to
$1.6 million for the three months ended March 31, 1999, from $2.5 million for
the same period of 1998 due primarily to the Company's cost cutting measures and
the decreased activity of the Company's operations.
Interest expense increased by $1.9 million, or 47%, to $6.0 million for
the three months ended March 31, 1999, compared to $4.1 million for the three
months ended March 31, 1998. The increase is due to a $59.3 million increase in
the average outstanding debt balance to $251.6 million for the three months
ended March 31, 1999 from $192.3 million for the three months ended March 31,
1998. This increase in the outstanding debt balance is primarily due to the
issuance of $75.0 million of Senior Notes during May 1998 of which $30.0 million
was used to repay the indebtedness incurred under the Former Credit Facility.
During the three months ended March 31, 1999 the Company wrote off
$623,000 in deferred loan costs related to the Former Credit Facility. This
amount net of the $203,000 in related taxes is classified as an extraordinary
item.
Other income, net decreased by $1.6 million to $436,000 for the three
months ended March 31, 1999, as compared to $2.0 million for the three months
ended March 31, 1998. The decrease is primarily due to the 1998 gain of $1.8
million on the sale of the rigs and drilling related equipment of the Company's
Eastern division.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
equipment, software and other devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure causing disruptions of
administrative operations, including, among other things, temporary inability to
process data.
The Company has undertaken various initiatives intended to ensure that
its computer equipment and software will function properly with respect to dates
in the year 2000 and thereafter. For this purpose, the term "computer equipment
and software" includes systems that are commonly thought of as information
technology ("IT") systems, including accounting, data processing, telephone
systems and other miscellaneous systems, as well as systems that are not
commonly thought of as IT systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. Both IT and non-IT systems may contain
imbedded technology, which complicates the Company's Year 2000 identification,
assessment, remediation, and testing efforts. Based upon its identification and
assessment efforts to date, the Company believes that certain of the computer
equipment and software it currently uses will require replacement or
modification. In addition, in the ordinary course of replacing computer
equipment and software, the Company attempts to obtain
-17-
<PAGE> 18
replacements that it believes are Year 2000 compliant. Utilizing both internal
and external resources to identify and assess needed Year 2000 remediation, the
Company currently anticipates that its Year 2000 identification, assessment,
remediation, and testing efforts, which began in June 1998, will be completed by
June 30, 1999, and that such efforts will be completed prior to any currently
anticipated impact on its computer equipment and software.
The Company has mailed letters to its significant vendors and is in the
process of mailing letters to its significant customers. In addition, the
Company has verbally communicated with many strategic vendors and customers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether the products purchased from or by such entities are
Year 2000 compliant.
The Company believes that as of April 30, 1999, it had completed
approximately 80% of the initiatives necessary to fully address potential Year
2000 issues relating to its computer equipment and software. The projects
comprising the remaining 20% of the initiatives are in process and expected to
be completed on or about June 30, 1999. As of March 31, 1999, the Company had
incurred costs of approximately $75,000 related to its Year 2000 identification,
assessment, remediation, and testing efforts consisting of upgrades to existing
software. The Company estimates that the future costs associated with the Year
2000 issue will not be material, and as such will not have a significant impact
on the Company's financial position or operating results.
The Company presently believes that the Year 2000 issues will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not properly identified, or assessment, remediation, and testing are
not effected timely with respect to Year 2000 problems that are identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
In the event the Company's key vendors do not achieve Year 2000
compliance, the Company could experience delays in delivery of supplies or
services to its drilling rigs resulting in less efficient operations, temporary
work stoppages or the loss of potential future contracts. If the Company's
customers do not achieve Year 2000 compliance the Company's cash flow could be
negatively impacted due to customers' inability to process invoices and issue
checks. While the Company believes its accounting systems will be Year 2000
compliant on a timely basis, in the event that they are not, significant
increase in manpower may be required to generate financial reports and process
invoices for payment.
The Company has begun, but not yet completed, a comprehensive analysis
of operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts to achieve Year 2000 compliance on a timely basis. A
contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. The Company currently plans to complete such analysis and
contingency planning by June 30, 1999. The contingency plan will be continually
refined as the Company obtains additional information regarding its Year 2000
condition. However, it is unlikely that any contingency plan will fully address
all events that may arise.
-18-
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. The Company is subject to market risk exposure
related to changes in interest rates on the CIT Facility. Interest on borrowings
under the CIT Facility accrues at a variable rate, using either the prime rate
plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon the Company's
debt service coverage ratio for the trailing 12 month period. At March 31, 1999
and as of May 10, 1999 the Company had no outstanding balance under the CIT
Facility and as such has no exposure at this time to a change in the interest
rate.
Foreign Currency Exchange Rate Risk. The Company currently conducts
business in Venezuela and is sensitive to fluctuations in foreign currency
exchange rates. See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Foreign Exchange.
-19-
<PAGE> 20
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.
The Grey Wolf Drilling Company ("GWDC") merger is intended to qualify
as a tax free organization 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 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
Holdings Company, 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Amendments to the Company's Articles of Incorporation were adopted by
the shareholders at the annual meeting on May 4, 1999. The rights of the holders
of Company's common stock, par value $.10 per share (the "Common Stock") were
modified by the amendments to the Company's Articles of Incorporation. For a
brief description of the general effect of these amendments upon the rights of
the holders of Common Stock see "Item 4. Submission of Matters to a Vote of
Security Holders."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 4, 1999, the annual meeting of shareholders of Grey Wolf was
held. At such meeting the holders of Common Stock voted upon the following
matters:
(i) The following seven directors were elected to three classes to
serve until their respective terms expire or until their
successors are elected and qualified:
<TABLE>
<CAPTION>
Director Class Term
-------- ----- ----
<S> <C> <C>
William T. Donovan I Expires 2000
Thomas P. Richards I Expires 2000
Ivar Siem I Expires 2000
James K. B. Nelson II Expires 2001
Roy T. Oliver, Jr. II Expires 2001
Steven A. Webster III Expires 2002
William R. Ziegler III Expires 2002
</TABLE>
-20-
<PAGE> 21
(ii) A proposal to amend the Company's Articles of Incorporation
eliminating shareholder action by less than unanimous written
consent was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
86,687,849 18,872,216 371,159 48,630,522
</TABLE>
(iii) A proposal to amend the Company's Articles of Incorporation
providing that special meetings of shareholders may be called
by shareholders only upon request of holders of at least 50%
of the shares entitled to vote at such meeting was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
87,481,540 18,173,929 275,755 48,630,522
</TABLE>
(iv) A proposal to amend the Company's Articles of Incorporation
granting the Board of Directors the exclusive authority to
adopt, amend or repeal the Company's Bylaws was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
84,876,897 20,657,171 397,156 48,630,522
</TABLE>
(v) A proposal to amend the Company's Articles of Incorporation
limiting the personal liability of directors to the Company
and its shareholders was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
146,573,174 7,597,391 391,181 0
</TABLE>
(vi) A proposal to amend the Company's Articles of Incorporation
deleting a provision limiting the Company's ability to redeem
or repurchase shares of its own capital stock was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
102,875,430 2,720,624 335,170 48,630,522
</TABLE>
(vii) A proposal to amend the Company's 1996 Employee Stock Option
Plan increasing the amount of shares available for grant under
the plan was approved.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
----------- --------- ------- --------
<S> <C> <C> <C> <C>
148,303,449 5,899,113 359,184 0
</TABLE>
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
-21-
<PAGE> 22
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, 1998.
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 March 23, 1999. This current filing reported the
amendment and restatement of the Company's Articles of Incorporation.
Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Grey Wolf,
Inc.
27.0 Financial Data Schedule
</TABLE>
-22-
<PAGE> 23
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.
<TABLE>
<S> <C>
GREY WOLF, INC.
Date: May 12, 1999 By: /s/ David W. Wehlmann
-----------------------------------
David W. Wehlmann
Senior Vice President and
Chief Financial Officer
Date: May 12, 1999 By: /s/ Merrie S. Costley
-----------------------------------
Merrie S. Costley
Vice President and Controller
</TABLE>
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Grey Wolf,
Inc.
27.0 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GREY WOLF, INC.
ARTICLE 1
NAME
The name of the corporation is Grey Wolf, Inc. (the "Corporation").
ARTICLE 2
DURATION
The period of the Corporation's duration is perpetual.
ARTICLE 3
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful business for which corporations may be organized under the laws of the
State of Texas.
ARTICLE 4
AUTHORIZED CAPITAL STOCK
The Corporation shall have the authority to issue an aggregate of
301,000,000 shares, consisting of 1,000,000 shares of Preferred Stock, par value
$1.00 per share ("Preferred Stock") and 300,000,000 shares of Common Stock, par
value $0.10 per share ("Common Stock").
The following is a statement of the voting powers, designations,
preferences, and relative, participating, optional or other special rights and
qualifications, limitations or restrictions thereof, of the classes of stock of
the Corporation and of the authority with respect thereto expressly vested in
the Board of Directors of the Corporation.
A. PREFERRED STOCK
(a) The Preferred Stock may be issued from time to time in one
or more series and in such amounts as may be determined by the Board of
Directors. The voting powers, designations, preferences and relative,
participating, optional or other special rights, if any, or the
qualifications, limitations or restrictions thereof, if any, of the
Preferred Stock of each series shall be such as are fixed by the Board
of Directors, authority so to do being hereby expressly granted, and as
are stated and expressed in a resolution or resolutions adopted by
I-1
<PAGE> 2
the Board of Directors providing for the issue of such series of
Preferred Stock (herein called "Directors' Resolution"). The Directors'
Resolution as to any series shall (i) designate the series, (ii) fix
the dividend rate, if any, of such series, the payment dates for
dividends on shares of such series and the date or dates, or the method
of determining the date or dates, if any, from which dividends on
shares of such series shall be cumulative, (iii) fix the amount or
amounts payable on shares of such series upon voluntary or involuntary
liquidation, dissolution or winding up and (iv) state the price or
prices or rate or rates, and adjustments, if any, at which, the time or
times, and the terms and conditions on which, the shares of such series
may be redeemed at the option of the Corporation; and such Directors'
Resolution may (i) limit the number of shares of such series that may
be issued, (ii) provide for a sinking fund for the purchase or
redemption of shares of such series and determine the terms and
conditions governing the operations of any such fund, (iii) grant
voting rights to the holders of shares of such series, (iv) impose
conditions or restrictions upon the creation of indebtedness of the
Corporation or upon the issuance of additional Preferred Stock or other
capital stock ranking on a parity therewith, or prior thereto, with
respect to dividends or distribution of assets upon liquidation, (v)
impose conditions or restrictions upon the payment of dividends upon,
or the making of other distributions to, or the acquisition of, shares
ranking junior to the Preferred Stock or to any series thereof with
respect to dividends or distributions of assets upon liquidation, (vi)
state the price or prices or the rate or rates of exchange and other
terms, conditions and adjustments upon which shares of any such series
may be made convertible into, or exchangeable for shares of any other
class or classes or of any other series of Preferred Stock or any other
class or classes of stock and (vii) grant such other special rights and
impose such qualifications, limitations or restrictions thereon as
shall be fixed by the Board of Directors.
(b) Except as by law expressly provided, or except as may be
provided in any Directors' Resolution, the Preferred Stock shall have
no right or power to vote on any question or in any proceeding or to be
represented at, or to receive notice of, any meeting of shareholders.
(c) Preferred Stock redeemed, purchased or retired by the
Corporation assumes the status of authorized but unissued Preferred
Stock and may thereafter, subject to the provisions of any Directors'
Resolution providing for the issue of any particular series of
Preferred Stock, be reissued in the same manner as authorized but
unissued Preferred Stock.
B. COMMON STOCK
(a) The Common Stock is junior to the Preferred Stock and is
subject to all the powers, rights, privileges, preferences and
priorities of the Preferred Stock as herein set forth and as may be
stated in any Directors' Resolution or Resolutions.
(b) Subject to all rights of the Preferred Stock, dividends
may be paid on the Common Stock as and when declared by the Board of
Directors of the Corporation out of any funds of the Corporation
legally available for the payment thereof.
I-2
<PAGE> 3
(c) After payment shall have been made in full to the holders
of the Preferred Stock in the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, the remaining assets and
funds of the Corporation shall be distributed to the holders of Common
Stock according to their respective shares.
(d) Except as otherwise provided by law and subject to the
voting rights conferred on the Preferred Stock or any series thereof by
any Directors' Resolution, the holders of shares of Common Stock shall
possess exclusive voting rights for the election of directors and for
all other purposes, each holder of Common Stock on the date fixed for
determining the shareholders entitled to vote being entitled to one
vote for each share of Common Stock held of record by such holder.
C. CONVERTIBLE REDEEMABLE PREFERRED STOCK
I. Designation. This series of Preferred Stock shall consist of
200,000 shares and is designated and shall be issued as "Convertible
Redeemable Preferred Stock" (the "Series A Preferred")
II. Redemption.
A. Mandatory Redemption.
1. Quarterly Redemption. Commencing with the date
which is the 75th day after the end of the first full
fiscal quarter of the Company after the issuance of
the Series A Preferred (and on the 75th day after
the end of each fiscal quarter of the Company
thereafter) and ending on the date which is the 75th
day after the end of the tenth full fiscal quarter
of the Company, the Company shall redeem in cash at
the Redemption Price the number of Series A
Preferred shares determined by dividing (x) by (y),
where (x) is equal to 50% of the Available Cumulative
Venezuelan Net Cash Flow for such fiscal quarter,
and where (y) is the Redemption Price; provided,
that in no event shall the amount of shares of
Series A Preferred redeemed pursuant to this II.A.1
exceed the amount of the Unredeemed Shares).
2. Put Right. The Company shall redeem the number of
shares of Series A Preferred specified in a written
notice given by the holder thereof, provided that
such notice is given during the period commencing on
the date which is five years after the original
issuance of the Series A Preferred and ending ten
days thereafter.
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B. Optional Redemption.
1. General. Subject to III.A.2 below, the Company, at
the option of the Board of Directors, may, at any
time, redeem up to 50% of the Series A Preferred or,
with the consent of the holders of the Series A
Preferred up to 100% of the Series A Preferred,
outstanding by paying in cash therefor the sum of the
Redemption Price per share.
2. Upon Election to Convert. If a holder of Series A
Preferred has given written notice pursuant to III.A
hereof of its election to convert all or a portion of
such Series A Preferred into Common Stock, the
Company, at the option of the Board of Directors, may
redeem up to 50% of the Series A Preferred
outstanding by paying in cash therefor the sum of the
Redemption Price.
C. Notice of Redemption. Notice of each redemption of Series A
Preferred pursuant to II.A or II.B above, specifying the
date and place of redemption and the number of shares and
the certificate numbers thereof which are to be redeemed,
shall be mailed to each holder of record of shares to be
redeemed at its address as shown by the records of the
Company not more than 60 days nor less than 20 days prior to
the date on which such redemption is to be made (and, in the
instance of a redemption pursuant to II.B.2, within ten days
after receipt by the Company of written notice of a holder
of Series A Preferred of its election to convert). Should
only a part of the outstanding Series A Preferred be
redeemed, such redemption shall be affected pro rata. On or
after the date fixed for redemption, each holder of shares
called for redemption shall, subject to III.A.2 below,
surrender its certificate for such shares to the Company at
the place designated in the redemption notice and shall
thereupon be entitled to receive payment of the redemptive
price. Should less than all of the shares represented by any
surrendered certificate be redeemed, a new certificate for
the unredeemed shares shall be issued. If the redemption
notice is duly given and if sufficient funds are available
therefor on the date fixed for redemption, then, whether or
not the certificates evidencing the shares to be redeemed
are surrendered, all right with respect to such shares shall
terminate on the date fixed for redemption, except for the
right of the holders to receive the redemptive price,
without interest, on surrender of their certificates
therefor. If, on or prior to any date fixed for redemption
of the Series A Preferred, the Company deposits with any
bank or trust company in the United States duly appointed
and acting as transfer agent for the Company, as a trust
fund, a sum sufficient to redeem, on the date fixed for
redemption, the shares called for redemption, with
irrevocable instructions and authority to the bank or trust
company to publish the notice of redemption, or to complete
such publication if already commenced, and to pay, on and
after the date fixed for redemption or prior to such date,
the
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redemptive price of the shares to their respective holders on
surrender of their share certificates, then from and after the
date of the deposit, even though such date may be prior to the
date fixed for redemption, the shares so called shall be
deemed to be redeemed. The deposit shall be deemed to
constitute full payment of the shares to their holders and
from and after the date of the deposit the shares shall be
deemed to be no longer outstanding, and the holders of the
shares shall cease to be shareholders with respect to such
shares and shall have no rights with respect to such shares,
except the right to receive from the bank or trust company
payment of the redemption price of the shares, without
interest, on surrender of the certificates, or the right to
convert such shares to Common Stock as provided in III.A.2
below. Any money so deposited on account of the redemptive
price of Series A Preferred converted after the making of the
deposit shall be repaid immediately to the Company on the
conversion of such shares. All shares of the Series A
Preferred redeemed by the Company shall be cancelled and none
of such shares shall thereafter be reissued.
III. Conversion.
A. Conversion Rights and Rate.
1. General. At any time after the expiration of the
period commencing on the date of which the Series A
Preferred is originally issued and ending 12 months
thereafter, the holder of any Series A Preferred
shall, at its option on delivery to the Company of
its written notice electing to convert all or, with
the consent of the Company, a portion of such shares
into shares of Common Stock and therein stating the
name or names in which he wishes the certificate of
certificates for the Common Stock to be issued and
the address and social security or tax
identification number for such person, and on
surrender at the office of the Company or office of
the transfer agent for such shares of the
certificate or certificates for such shares of
Series A Preferred, duly endorsed to the Company,
be entitled to convert its shares of Series A
Preferred into fully paid and nonassessable shares
of Common Stock, at the rate of eight shares of
Common Stock for each share of Series A Preferred
so surrendered for conversion.
2. Upon Optional Election to Redeem. If the Company
gives a notice of redemption pursuant to II.B.1
above, the recipient of such notice shall have the
right, exercisable within 10 days after receipt of
such redemption notice, to give written notice to the
Company of its election to convert up to 50% of the
Series A Preferred outstanding held by such recipient
into shares of Common Stock, which notice shall
therein state the name or names in which it wishes
the certificate
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or certificates for the Common Stock to be issued and
the address and social security or tax identification
number for such person. On surrender at the office of
the Company or office of the transfer agent for such
shares of the certificate or certificates for such
shares of Series A Preferred, duly endorsed to the
Company, the holder shall be entitled to convert its
shares of Series A Preferred into fully paid and
non-assessable shares of Common Stock, at the rate of
eight shares of Common Stock for each share of Series
A Preferred so surrendered for conversion.
Notwithstanding the foregoing, or anything else
herein to the contrary, the conversion rights
described in this III.A.2 shall be null and void
during the period of time in which an Indemnification
Claim is outstanding.
3. Effective Date of Conversion. A conversion affected
pursuant hereto shall be deemed to have been made as
of the date the shares of Series A Preferred are
surrendered for conversion, and the person or persons
entitled to receive the shares of Common Stock
issuable on such conversion shall be deemed to be
record holder or holders of such shares of Common
Stock from and after such date.
B. Adjustment of Conversion Rate. The number of shares of Common
Stock to which shares of Series A Preferred may be converted
shall be subject to adjustment from time to time as follows:
1. Recapitalization. On any recapitalization of the
Company through the subdivision or combination of its
outstanding shares of Common Stock into a greater or
smaller number of shares, the number of shares of
Common Stock into which the shares of Series A
Preferred may be converted shall be increased or
reduced in the same proportion.
2. Dividends or Distributions Payable With Common Stock.
If the Company takes a record of the holders of its
shares of Common Stock for the purpose of entitling
them to receive a dividend or other distribution
payable in shares of Common Stock, or in securities
convertible into or exchangeable for shares of
Common Stock, the maximum number of shares of Common
Stock issuable in payment of such dividend or
distribution, or on conversion of or in exchange
for the securities convertible into or exchangeable
for shares of Common Stock, shall be deemed to have
been issued and to be outstanding as of such record
date, and the number of shares of Common Stock into
which the shares of Series A Preferred may be
converted shall be increased in proportion to the
increase of the number of outstanding shares of
Common Stock resulting therefrom.
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3. Reorganization. On any capital reorganization,
reclassification of the capital stock, consolidation,
merger, or sale or conveyance of all or substantially
all of the assets of the Company to another
corporation or other entity, each share of Series A
Preferred shall be convertible into the same kind
and amounts of securities, including shares or other
assets, or both, to which the number of shares of
Common Stock of the Company which would have been
deliverable on conversion of such shares of Series
A Preferred immediately prior to such reorganization,
reclassification, consolidation, merger, sale or
conveyance would have been entitled. Appropriate
adjustments, as determined by the Board of Directors
of the Company, shall be made in the application of
the provisions herein set forth with respect to the
rights and interests thereafter of holders of the
Series A Preferred so that such provisions,
including the provisions with respect to changes in,
and other adjustments of, the conversion rate, shall
thereafter be applicable, as nearly as reasonably
may be, in relation to any securities or other
assets thereafter deliverable on conversion of the
Series A Preferred.
C. Statement of Adjusted Amount. Whenever the amount of shares
of Common Stock deliverable on the conversion of Series A
Preferred shall be adjusted pursuant to the provisions
hereof, the Company shall maintain at its office and file
with the transfer agent or agents for the Series A Preferred
and for the shares of Common Stock, a statement signed by
the President or a Vice President of the Company and by its
Treasurer or an Assistant Treasurer, stating the adjusted
amount of the shares of Common Stock, calculated to the
nearest 1/100 share, and setting forth in reasonable detail
the method of calculation and the facts requiring such
adjustment and on which the calculation is based. Each
adjustment shall remain in effect until a subsequent
adjustment hereunder is required.
D. Reservation of Shares of Common Stock. The Company shall at
all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purposes of
effecting conversion of its shares of Series A Preferred a
full number of shares of Common Stock deliverable on
conversion of all shares of Series A Preferred from time to
time outstanding.
E. Fractional Shares. No fractional shares shall be issued upon
conversion of any Series A Preferred, and the number of shares
of Common Stock to be issued upon such conversion shall be
only the whole shares resulting from application of the then
applicable conversion rate. The Company shall remit to the
holder of Series A Preferred converted the fair market value
on the conversion date of the fractional shares not issued.
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IV. Voting Rights. Except as otherwise required by law and the
Articles, the holders of the Series A Preferred shall have no
right to vote on any matter to be voted on by the stockholders of
the Company.
V. Liquidation. On any voluntary or involuntary liquidation,
dissolution or winding up of the Company, each holder of the
Series A Preferred shall be entitled to receive an amount equal
to the product of (x) and (y) where (x) is the number of
Unredeemed Shares owned by such holder and where (y) is the
Redemption Price, before any payment to the holders of the Common
Stock. A consolidation or merger of the Company with or into any
other corporation or other entity, or a sale of all or
substantially all of the assets of the Company shall not be
deemed a liquidation, dissolution or winding up of the Company
within the meaning of this Paragraph.
VI. Certain Definitions. As used herein, the following terms shall
have the respective meanings assigned to them below:
"Acquisition Agreement" shall mean that certain Acquisition
Agreement dated as of September 1994, among (i) DI Industries,
Inc., (ii) An-Son Drilling Co. of Columbia S.A., (iii)
Perforaciones Andinas S.A., and (iv) P.A.P. Tratamiento Y
Perforaciones De Pozos S.A.
"Available Cumulative Venezuelan Net Cash Flow" for any fiscal
quarter shall mean (a) the net income of the Company for the
period commencing on September 1, 1994 and ending on the last day
of such fiscal quarter attributable to the Contract Drilling
Operations calculated in accordance with GAAP plus, the Company's
expenses attributable to the Contract Drilling Operations for
such period that were taken into account in determining such net
income but which did not involve the current expenditure of funds
(e.g., depreciation), plus up to $300,000 of the Company's
exchange losses attributable to the Contract Drilling Operations
for such period that were taken into account in determining such
net income, minus the Company's capital expenditures for such
period attributable to the Contract Drilling Operations, minus
all revenues of the Company attributable to the Contract Drilling
Operations for such period that were taken into account in
determining such net income which did not involve the current
receipt of cash minus (b) the sum of all amounts theretofore paid
to redeem any shares of the Series A Preferred.
"Buyer" shall have the meaning assigned to it in the Acquisition
Agreement.
"Contract Drilling Operations" shall mean the operations of
P.A.P. Tratamiento Y Perforaciones De Pozos S.A. in existence on
September 1, 1994.
"GAAP" shall mean generally accepted accounting principles as in
effect from time to time in the United States of America.
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"Indemnification Claim" shall mean a claim made by the Buyer
pursuant to the Acquisition Agreement for matters for which Buyer
is entitled to be indemnified under Section 10.1 of the
Acquisition Agreement.
"Redemption Price" shall mean $10.00 per share; provided,
however, that if an Indemnification Claim is made and
outstanding, the Redemption Price for such number of outstanding
shares of Series A Preferred shall be reduced to $0.01 per share
as shall be necessary so that the amount of reduction of the
Redemption Price is equal to the Indemnification Claim. For
purposes of the foregoing, an Indemnification Claim shall be
deemed satisfied at that point in time when either (a) the
Company has received a cash payment or payments pursuant to the
Acquisition Agreement in the amount of such Indemnification
Claim, (b) the Company has redeemed Series A Preferred in an
amount such that the difference (a "Redemption Difference")
between what the holder of such Series A Preferred would have
received upon redemption at the original Redemption Price (i.e.,
$10 per share) and the amount the holder of such Series A
Preferred actually receives upon redemption at the reduced
Redemption Price (i.e., $0.01 per share) is equal to the amount
of such Indemnification Claim, (c) upon voluntary or involuntary
liquidation, dissolution or winding up of the Company, the
difference (a "Liquidation Difference") between what the holder
of such Series A Preferred would have received upon redemption at
the original Redemption Price (i.e., $10 per share) and the
amount the holder of such Series A Preferred actually receives
upon such liquidation, dissolution or winding up at the reduced
Redemption Price (i.e., $0.01 per share) is equal to the amount
of such Indemnification Claim, or (d) cash payments as
contemplated under clause (a) above, Redemption Differences as
contemplated under clause (b) above and/or Liquidation
Differences as contemplated under clause (c) above equal the
amount of such Indemnification Claim.
"Unredeemed Shares" shall mean the shares of Series A Preferred
issued and outstanding that have not otherwise been previously
redeemed or converted into shares of Common Stock.
D. SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
Section 1. Designation and Amount. The shares of this series
shall be designated as "Series B Junior Participating Preferred Stock" (the
"Series B Preferred Stock") and the number of shares constituting the
Series B Preferred Stock shall be two hundred fifty thousand (250,000).
Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number of
shares of Series B Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for issuance
upon the exercise of outstanding options, rights or warrants or upon the
conversion of any outstanding securities issued by the Corporation
convertible into Series B Preferred Stock.
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Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any other stock) ranking prior and
superior to the Series B Preferred Stock with respect to dividends, the
holders of shares of Series B Preferred Stock, in preference to the
holders of Common Stock, par value $.10 per share (the "Common Stock"),
of the Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in
cash on the last day of March, June, September and December in each
year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series B
Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1 or (b) subject to the provision for
adjustment hereinafter set forth, 1,000 times the aggregate per share
amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series B Preferred Stock. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series B Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares
of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series B Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been
declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend
Payment Date, a dividend of $1 per share on the Series B Preferred
Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Preferred Stock from the Quarterly
Dividend Payment Date next
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preceding the date of issue of such shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series B
Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series B Preferred Stock in
an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series B Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series B
Preferred Stock shall have the following voting rights:
(A) Each share of Series B Preferred Stock shall entitle the
holder thereof to one thousand votes on all matters submitted to a vote
of the shareholders of the Corporation.
(B) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred Stock or any
similar stock, in the Certificate of Incorporation of the Corporation
or by law, the holders of shares of Series B Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one
class on all matters submitted to a vote of shareholders of the
Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series B Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series B Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series B Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
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(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series B Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series B Preferred Stock, except
dividends paid ratably on the Series B Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series B Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (as to dividends and upon
dissolution, liquidation or winding up) to the Series B
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series B Preferred Stock, or any
shares of stock ranking on a parity with the Series B
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series B Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders
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of shares of stock ranking junior (upon liquidation, dissolution or winding up)
to the Series B Preferred Stock unless, prior thereto, the holders of shares of
Series B Preferred Stock shall have received $100 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment, provided that the holders of shares of
Series B Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
1,000 times the aggregate amount to be distributed per share to holders of
shares of Common Stock, or (2) to the holders of shares of stock ranking on a
parity (upon liquidation, dissolution or winding up) with the Series B Preferred
Stock, except distributions made ratably on the Series B Preferred Stock and all
such parity stock in proportion to the total amounts to which the holders of all
such shares are entitled upon such liquidation, dissolution or winding up. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series B Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series B Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series B Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series B Preferred Stock
shall not be redeemable.
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Section 9. Rank. The Series B Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all other series of Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series B Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series B Preferred Stock, voting
together as a single class.
ARTICLE 5
INITIAL CONSIDERATION FOR ISSUANCE OF SHARES
The Corporation will not commence business until it has received for
the issuance of its shares consideration of the value of One Thousand Dollars
($1,000.00), consisting of money, labor done or property actually received.
ARTICLE 6
NO PREEMPTIVE RIGHTS
No shareholder shall be entitled as a matter of right to subscribe for,
purchase or receive additional unissued or treasury shares of any class of the
Corporation, whether now or later authorized, or any bonds, debentures,
warrants, options or other securities convertible into or entitling the holder
to purchase shares. Such additional shares, bonds, debentures, warrants, options
or other securities convertible into or entitling the holder to purchase shares
may be issued or disposed of as the Board of Directors in its absolute
discretion deems advisable.
ARTICLE 7
NO CUMULATIVE VOTING
At each election for directors of the Corporation, every shareholder
entitled to vote at such election shall have the right to vote, in person or by
proxy, only the number of shares owned by him for as many persons as there are
directors to be elected, and no shareholder shall have the right or be permitted
to cumulate his votes on any basis, any and all rights of cumulative voting
being hereby expressly denied.
ARTICLE 8
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation is 10370
Richmond Avenue, Suite 600, Houston, Texas 77042-4136 and the name of its
registered agent at such office is David W. Wehlmann.
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ARTICLE 9
INITIAL BOARD OF DIRECTORS
The number of directors constituting the initial Board of Directors is
one (1), and the name and address of the person who is to serve as director
until the first annual meeting of shareholders or until his successor is elected
and qualified is:
NAME ADDRESS
---- -------
Max Dillard 5629 FM 1960 W.
Suite 202
Houston, Texas 77069
The Bylaws of the Corporation shall provide for the number,
classification and election of directors and other matters pertaining to the
Board of Directors.
ARTICLE 10
LIMITATION OF LIABILITY
No director of the Corporation shall be liable to the Corporation or to
its shareholders for monetary damages for an act or omission in the director's
capacity as a director, provided, however, that this Article shall not eliminate
or limit the liability of a director to the extent the director is found liable
for:
(i) a breach of the director's duty of loyalty to the Corporation or
its shareholders;
(ii) an act or omission not in good faith that constitutes 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) a transaction from which the director received an improper
benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; or
(iv) an act or omission for which the liability of a director is
expressly provided by an applicable statute.
If the Texas Miscellaneous Corporation Laws Act or any other applicable
law is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
such laws, as so amended. No amendment to or repeal of this Article will apply
to, or have any effect on, the liability or alleged liability of any director of
the Corporation for or with respect to any acts or omissions of the director
occurring prior to such amendment or repeal.
ARTICLE 11
SPECIAL MEETINGS
Special meetings of the shareholders may be called only by the Chairman
of the Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President, the Board of Directors by
I-15
<PAGE> 16
the written order of a majority of the entire Board of Directors or by the
holders of at least fifty percent of all the shares entitled to vote at the
proposed special meeting.
ARTICLE 12
BYLAWS
The Board of Directors is expressly and exclusively authorized to
adopt, amend or repeal the Bylaws, or adopt new bylaws, without any action on
the part of the shareholders, and the shareholders of the Corporation may not
adopt, amend or repeal the Bylaws, or adopt new bylaws. Notwithstanding any
other provision of these Articles, no amendment to these Articles shall amend,
alter, change or repeal any of the provisions of this Article, unless such
amendment, alteration, change or repeal shall receive the affirmative vote of
the holders of not less than seventy-five percent of all shares of stock of the
Corporation entitled to vote at a meeting of shareholders, voting together as a
single class.
ARTICLE 13
VOTE REQUIRED
If, with respect to any action to be taken by the shareholders of the
Corporation, any provisions of the Texas Business Corporation Act would, but for
this Article 13, require the vote or concurrence of the holders of shares having
more than a majority of the votes entitled to be voted thereon, or of any class
or series thereof, the vote or concurrence of the holders of shares having only
a majority of the votes entitled to be cast thereon, or of any class or series
thereof, shall be required with respect to any such action.
I-16
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