<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 June 30, 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 August 6, 1999, was 165,082,791.
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<PAGE> 2
GREY WOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
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<PAGE> 3
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37,192 $ 45,895
Restricted cash - insurance deposits 762 762
Accounts receivable, net of allowance of $1,206
and $1,106, respectively 17,676 30,598
Prepaids and other current assets 2,649 3,426
--------- ---------
Total current assets 58,279 80,681
--------- ---------
Property and equipment:
Land, buildings and improvements 5,362 5,538
Drilling equipment 562,353 561,850
Furniture and fixtures 1,908 1,920
--------- ---------
Total property and equipment 569,623 569,308
Less: accumulated depreciation and amortization (173,665) (157,992)
--------- ---------
Net property and equipment 395,958 411,316
Other noncurrent assets 8,423 9,306
--------- ---------
$ 462,660 $ 501,303
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,059 $ 1,162
Accounts payable 8,224 13,761
Accrued workers' compensation 4,192 4,503
Payroll and related employee costs 2,877 3,672
Accrued interest payable 11,160 11,096
Other accrued liabilities 1,750 1,998
--------- ---------
Total current liabilities 29,262 36,192
--------- ---------
Senior notes 249,311 249,268
Long-term debt, net of current maturities 859 1,259
Other long-term liabilities 928 1,460
Deferred income taxes 37,322 46,128
Series A preferred stock - mandatorily redeemable -- 305
Commitments and contingent liabilities
Shareholders' equity:
Series B preferred stock, $1 par value; 10,000 shares
authorized; none outstanding -- --
Common stock, $.10 par value; 300,000,000 shares
authorized; 165,082,791 and 165,065,391 issued
and outstanding, respectively 16,508 16,506
Additional paid-in capital 270,400 270,389
Cumulative comprehensive income adjustments (454) (454)
Accumulated deficit (141,476) (119,750)
--------- ---------
Total shareholders' equity 144,978 166,691
--------- ---------
$ 462,660 $ 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
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling $ 23,748 $ 65,458 $ 61,428 $ 139,473
Costs and expenses:
Drilling operations 24,958 49,183 60,783 103,960
Depreciation and amortization 8,474 9,407 16,209 17,994
General and administrative 1,735 2,533 3,346 5,018
Provision for doubtful accounts 59 600 150 700
Unusual charges -- -- 320 --
--------- --------- --------- ---------
Total costs and expenses 35,226 61,723 80,808 127,672
--------- --------- --------- ---------
Operating income (loss) (11,478) 3,735 (19,380) 11,801
Other income (expense):
Interest income 431 447 854 784
Gain (loss) on sale of assets 195 (36) 260 1,734
Interest expense (6,018) (5,471) (12,010) (9,545)
Other, net (31) (26) (83) (93)
--------- --------- --------- ---------
Other income (expense), net (5,423) (5,086) (10,979) (7,120)
--------- --------- --------- ---------
Income (loss) before income taxes (16,901) (1,351) (30,359) 4,681
Income tax expense (benefit) (4,664) -- (9,053) 2,923
--------- --------- --------- ---------
Income (loss) before extraordinary item (12,237) (1,351) (21,306) 1,758
Extraordinary item, net of tax of $203 -- -- (420) --
--------- --------- --------- ---------
Net income (loss) $ (12,237) $ (1,351) $ (21,726) $ 1,758
========= ========= ========= =========
Basic and diluted net income (loss) per
common share:
Before extraordinary item $ (0.07) $ (0.01) $ (0.13) $ 0.01
Extraordinary item, net of tax -- -- -- --
--------- --------- --------- ---------
Basic and diluted net income (loss) per
common share $ (0.07) $ (0.01) $ (0.13) $ 0.01
========= ========= ========= =========
Basic weighted average shares outstanding 165,077 164,934 165,071 164,848
========= ========= ========= =========
Diluted weighted average shares outstanding 165,077 164,934 165,071 168,095
========= ========= ========= =========
</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)
<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 205 21 498 -- -- 519
Comprehensive income -
net income -- -- -- 1,758 -- 1,758
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1998
(unaudited) 164,951 $ 16,495 $ 270,231 $ (34,779) $ (454) $ 251,493
========= ========= ========= ========= ========= =========
Balance, December 31, 1998 165,065 $ 16,506 $ 270,389 $(119,750) $ (454) $ 166,691
Exercise of stock options 18 2 11 -- -- 13
Comprehensive income -
net loss -- -- -- (21,726) -- (21,726)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1999
(unaudited) 165,083 $ 16,508 $ 270,400 $(141,476) $ (454) $ 144,978
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21,726) $ 1,758
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 16,209 17,994
Deferred income taxes (8,603) 2,908
Gain on sale of assets (260) (1,734)
Foreign exchange loss 83 97
Provision for doubtful accounts 150 700
Extraordinary item, net of tax 420 --
Net effect of changes in assets and liabilities
related to operating accounts 6,717 2,775
--------- ---------
Cash provided by (used in) operating activities (7,010) 24,498
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (735) (105,950)
Proceeds from sale of property and equipment 626 2,623
--------- ---------
Cash used in investing activities (109) (103,327)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes -- 75,000
Proceeds from long-term debt 105 30,524
Repayments of long-term debt (565) (30,692)
Financing costs (832) (3,309)
Proceeds from exercise of stock options 13 519
Redemption of Series A preferred stock (305) --
--------- ---------
Cash provided by (used in) financing activities (1,584) 72,042
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,703) (6,787)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,895 53,626
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,192 $ 46,839
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 11,733 $ 8,869
========= =========
CASH PAID FOR TAXES: $ -- $ --
========= =========
NON CASH TRANSACTIONS:
Murco Acquisition
Change in property and equipment additions $ -- $ 20,861
Change in deferred tax liability -- 20,861
</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") 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 June 30, 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 six months ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 165,077 164,934 165,071 164,848
Effective of dilutive securities:
Options - treasury stock method -- -- -- 2,513
Redeemable preferred stock -- -- -- 245
Warrants -- -- -- 489
------- ------- ------- -------
-- -- -- 3,247
------- ------- ------- -------
Weighted average common shares
outstanding - diluted 165,077 164,934 165,071 168,095
======= ======= ======= =======
</TABLE>
Securities excluded from the computation of diluted earnings per share
for the three and six month periods ended June 30, 1999 and for the three month
period ended June 30, 1998 that could potentially dilute basic earnings per
share in the future were options to purchase 5.1 million, 5.1 million and 6.0
million shares, respectively, 490,000 warrants to issue shares and 245,000
shares for conversion of redeemable preferred
-7-
<PAGE> 8
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
stock. Since the Company incurred a loss for each of the three periods, such
dilutive securities were excluded as they would be anti-dilutive to basic
earnings per share.
Securities excluded from the computation of diluted earnings per share
for the six month period ended June 30, 1998 that could potentially dilute basic
earnings per share in the future were options to purchase 1.4 million shares due
to the exercise price being greater than the average market price during the
period.
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 six month periods ended
June 30, 1999 and 1998 the Company recognized foreign exchange losses of $83,000
and $97,000, respectively.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended
by SFAS No. 137, with an effective date for fiscal years beginning after June
15, 2000. 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 No. 133 will
not have a material impact on the Company's financial position or results of
operations.
(3) ACCOUNTING FOR INCOME TAXES
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.
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.
(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
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<PAGE> 9
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
1.0%. 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 $25.0 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 $75.0 million of the
equipment 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 $175.0 million and $75.0 million in principal amount of
senior notes ("Notes") outstanding at June 30, 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 101.000% 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
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<PAGE> 10
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The following table sets forth the Company's operations based on the
geographic areas in which it operates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Revenues:
Domestic $ 23,719 $ 63,231 $ 59,963 $ 135,141
Foreign 29 2,227 1,465 4,332
--------- --------- --------- ---------
$ 23,748 $ 65,458 $ 61,428 $ 139,473
========= ========= ========= =========
Operating income (loss):
Domestic $ (10,996) $ 4,480 $ (18,524) $ 12,959
Foreign (482) (745) (856) (1,158)
--------- --------- --------- ---------
$ (11,478) $ 3,735 $ (19,380) $ 11,801
========= ========= ========= =========
Total assets:
Domestic $ 452,985 $ 606,041 $ 452,985 $ 606,041
Foreign 9,675 18,854 9,675 18,854
--------- --------- --------- ---------
$ 462,660 $ 624,895 $ 462,660 $ 624,895
========= ========= ========= =========
</TABLE>
For the three and six months ended June 30, 1999, operating (loss)
above includes provision for doubtful accounts from domestic operations of
$59,000 and $150,000, respectively. In addition, for the six months ended June
30, 1999, operating loss above includes unusual charges of $320,000. There were
no such items recorded in foreign operations.
For the three and six months ended June 30, 1998, operating income
above includes provision for doubtful accounts from domestic operations of
$600,000 and $700,000, respectively.
(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.
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<PAGE> 11
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.
The June 1997 Grey Wolf Drilling Company ("GWDC") merger was 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 was 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 six months ended June 30, 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). 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. The Company has an
inventory of 12 non-marketed rigs that are being held for refurbishment as
demand for the Company's services warrants.
Since the first quarter of 1998, demand for the Company's drilling
services in the markets served by the Company has been deteriorating. As a
result, utilization and dayrates received by the Company for its services have
declined significantly. 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, faced with lower revenues and
cash flows due to lower commodity prices, reduced their actual and planned
drilling expenditures.
As a result, the Company has taken numerous steps to minimize cost and
conserve cash. To date, 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 this depressed level of utilization and dayrates persists or
worsens, it 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.
Although current industry conditions remain depressed, there has been
an increase in the U.S. land rig count from the historic low of 380 reported by
Baker Hughes on April 23, 1999 to 487 reported on July 23, 1999. Average
utilization in the Company's core domestic markets has also increased from 31%
for the quarter ended June 30, 1999 to 33% for the month of July 1999. See
Current Outlook.
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<PAGE> 13
FINANCIAL CONDITION AND LIQUIDITY
The following table summarizes the Company's financial position at June
30, 1999 and as of December 31, 1998.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------------- ---------------------
(UNAUDITED)
(IN THOUSANDS)
Amount % Amount %
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Working capital $ 29,017 7 44,489 10
Property and equipment, net 395,958 91 411,316 88
Other noncurrent assets 8,423 2 9,306 2
-------- -------- -------- --------
Total $433,398 100 $465,111 100
======== ======== ======== ========
Long-term debt $250,170 58 $250,527 54
Other long-term liabilities 38,250 9 47,893 10
Shareholders' equity 144,978 33 166,691 36
-------- -------- -------- --------
Total $433,398 100 $465,111 100
======== ======== ======== ========
</TABLE>
The significant changes in the Company's financial position from
December 31, 1998 to June 30, 1999 are the decreases in working capital and
shareholders' equity of $15.5 million and $21.7 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, which resulted
in the net loss reported in 1999.
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 1999, 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 $50.0 million or 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 Company'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 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.
-13-
<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 (as defined in the CIT Facility) 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 appraisal per year to aid in determining
the current OLV of the drilling equipment. While rig utilization thus far during
1999 has been below 45%, the lender has not requested an additional appraisal.
The net cash provided by or used in the operating, investing and
financing activities of the Company is summarized below:
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED
------------------------
JUNE 30,
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Net cash provided by (used in):
Operating activities $ (7,010) $ 24,498
Investing activities (109) (103,327)
Financing activities (1,584) 72,042
--------- ---------
Net decrease in cash: $ (8,703) $ (6,787)
========= =========
</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, and the rate received for these
services. The Company's cash flow used in operating activities during the first
six months of 1999 was $13.7 million compared to cash generated from operating
activities during the first six months of 1998 of $21.7 million. This change is
due to 53% fewer operating days and a decrease in per day margins between the
two periods. Cash provided by changes in working capital requirements during the
first six months of 1999 was $6.7 million compared to $2.8 million for the first
six months of 1998.
During the six months ended June 30, 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 six months ended June
30, 1998 consisted primarily of the cash portion of the Murco acquisition of
$64.9 million and capital expenditures for rig refurbishments and capital
maintenance of approximately $41.1 million.
Cash flow used in financing activities for the six months ended June
30, 1999 consisted principally of capital lease payments, credit line financing
costs and the redemption of all remaining Series A preferred stock, while cash
provided by financing activities for the six month period ended June 30, 1998
consisted principally of net proceeds of $72.0 million from the May 1998 $75.0
million senior note offering.
-14-
<PAGE> 15
Current Outlook
Overall demand for land drilling services has been deteriorating since
the first quarter of 1998 and the Company's rig utilization has been negatively
impacted. The Company's utilization in its core domestic markets over the period
is as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------- ----------------
Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 July
--- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic Markets 81% 71% 59% 49% 39% 31% 33%
</TABLE>
Results for the second quarter of 1999 have been impacted by the lower
average utilization and by lower dayrates. In addition to the lower overall
drilling activity in the industry, over the past several months the Company's
results have also been impacted by a loss of market share. This loss of market
share is a result of strategic decisions made by management not to further lower
dayrates or cut employee wages, as certain other land drilling contractors have
done. Management believes these decisions benefit the Company by reducing margin
deterioration, and by retaining the experienced rig personnel necessary to
respond to an increase in demand by quickly returning rigs to work.
Although current industry conditions remain depressed, there has been
an increase in the U.S. land rig count and the Company has had a corresponding
increase in utilization. Gas prices and demand remain strong and coupled with
the recent increase in oil prices, oil and gas company cash flows have improved
and drilling activity is increasing. Several large independent oil and gas
companies have announced budget increases for the remainder of 1999. To date
during the third quarter of 1999, the Company has experienced an increase in bid
activity, as well as a slight increase in rig utilization. The Company's July
1999 average domestic utilization was approximately 33% compared to 31% for the
second quarter of 1999. Current leading edge bid rates for the Company's rigs
remain constant, quarter to quarter, at between $5,500 to $6,500 per day
excluding fuel, and are not expected to improve without a meaningful increase in
utilization. As utilization improves, however, rigs will more frequently move
directly to the next job, decreasing downtime and stacking costs.
In the meantime, however, the Company continues to conserve cash by
using components from spare equipment or cold stacked rigs instead of buying new
parts. Capital expenditures for the six months ended June 30, 1999 were
approximately $ 1.3 million and capital expenditures for the rest of the year
are estimated to be approximately $3.0 million. If demand warrants, the Company
can redeploy 25 of its domestic cold-stacked rigs for an aggregate capital
investment of approximately $2.1 million. The cost to redeploy the remaining 24
domestic cold-stacked rigs will likely, in the aggregate, be substantially
higher than the first 25 and will depend on the extent to which component parts
are used from the cold-stacked rigs and the extent to which the Company chooses
to upgrade the cold-stacked rigs before returning them to service.
The Company believes that current cash balances, and to the extent
required, borrowings under the CIT Facility, will be sufficient to fund the
Company's anticipated cash requirements and capital expenditures for the
remainder of 1999.
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.
-15-
<PAGE> 16
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 six months
ended June 30, 1999, entered into any currency hedges to protect it from foreign
currency losses. During the six months ended June 30, 1999, the Company
recognized foreign exchange losses of $83,000. (See Note 2 "Significant
Accounting Policies - Foreign Currency" to the Consolidated Financial
Statements).
Other
The Company has not paid any cash dividends on the Company's common
stock and does not anticipate paying dividends on the common stock at any time
in the foreseeable future. Furthermore, the 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
interests in, its subsidiaries, including the guarantors of the Company's 8f%
Senior Notes due 2007. 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.
-16-
<PAGE> 17
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 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 June 30, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 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 3,035 -- 3,035 6,869 221 7,090
Drilling revenues $ 23,719 $ 29 $ 23,748 $ 63,231 $ 2,227 $ 65,458
Operating expenses(1) 24,561 397 24,958 46,527 2,656 49,183
-------- -------- -------- -------- -------- --------
Gross profit (loss) $ (842) $ (368) $ (1,210) $ 16,704 $ (429) $ 16,275
======== ======== ======== ======== ======== ========
Average per rig day worked
Drilling revenue $ 7,815 $ -- $ 7,825 $ 9,205 $ 10,077 $ 9,232
Operating expenses 8,093 -- 8,223 6,773 12,018 6,937
-------- -------- -------- -------- -------- --------
Gross profit (loss) $ (278) $ -- $ (398) $ 2,432 $ (1,941) $ 2,295
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts and unusual charges.
Revenues decreased approximately $41.7 million, or 64%, to $23.7
million for the three months ended June 30, 1999, from $65.5 million for the
three months ended June 30, 1998. This decrease is primarily due to a decrease
in revenue from domestic operations of $39.5 million which is the result of a
decrease in rig days worked of 3,834 or 56%, and a decrease in the average
revenue per day of $1,390. The decrease in average revenue per day is due to
lower dayrates partially offset by an increase in the percentage of turnkey days
from 11% of total days worked during the three months ended June 30, 1998 to 16%
for the same period in the current year. 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 $2.2 million
decrease in revenue from foreign operations which is a direct result of the
Company completing its contracts in Venezuela late in the first quarter of 1999
and discontinuing operations in Venezuela thereafter.
Drilling operating expenses decreased by approximately $24.2 million,
or 49%, to $25.0 million for the three months ended June 30, 1999, as compared
to $49.2 million for the three months ended June 30, 1998. The decrease is
primarily due to an $22.0 million decrease in drilling operating expenses from
domestic operations due to the decreased level of activity discussed above,
partially offset by an increase in operating expense per day of $1,320. The
increase in operating expense per day is a result of the increase in the
percentage of turnkey days worked discussed above as well as fixed overhead
costs being spread over fewer days. The remaining decrease in operating expenses
of $2.3 million is due to a decrease in operating expenses from foreign
operations resulting from discontinuing Venezuelan operations as discussed
above.
Depreciation and amortization expense decreased by $933,000, or 10%, to
$8.5 million for the three months ended June 30, 1999, compared to $9.4 million
for the three months ended June 30, 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.
-17-
<PAGE> 18
General and administrative expenses decreased by $798,000 or 32%, to
$1.7 million for the three months ended June 30, 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 $547,000, or 10%, to $6.0 million for the
three months ended June 30, 1999, compared to $5.5 million for the three months
ended June 30, 1998. The increase is due to a $21.7 million increase in the
average outstanding debt balance to $251.4 million for the three months ended
June 30, 1999 from $229.7 million for the three months ended June 30, 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 outstanding under the Former Credit Facility.
Other income, net increased by $210,000 to $595,000 for the three
months ended June 30, 1999, as compared to $385,000 for the three months ended
June 30, 1998. The increase is primarily due to the gain on the sale of
non-strategic excess drilling equipment.
Comparison of the Six Months Ended June 30, 1999 and 1998
The following tables highlight rig days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 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 6,851 145 6,996 14,559 399 14,958
Drilling revenues $ 59,963 $ 1,465 $ 61,428 $ 135,141 $ 4,332 $ 139,473
Operating expenses(1) 58,773 2,010 60,783 99,126 4,834 103,960
---------- ---------- ---------- ---------- ---------- ---------
Gross profit (loss) $ 1,190 $ (545) $ 645 $ 36,015 $ (502) $ 35,513
========== ========== ========== ========== ========== =========
Average per rig day worked
Drilling revenue $ 8,752 $ 10,103 $ 8,780 $ 9,282 $ 10,857 $ 9,324
Operating expenses 8,579 13,862 8,688 6,809 12,115 6,950
---------- ---------- ---------- ---------- ---------- ---------
Gross profit (loss) $ 173 $ (3,759) $ 92 $ 2,473 $ (1,258) $ 2,374
========== ========== ========== ========== ========== =========
</TABLE>
- ----------
(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts and unusual charges.
Revenues decreased approximately $78.0 million, or 56%, to $61.4
million for the six months ended June 30, 1999, from $139.5 million for the six
months ended June 30, 1998. The decrease is due to a reduction in revenue from
domestic operations of $75.2 million and a decrease in revenue from foreign
operations of $2.8 million. Revenues from domestic operations decreased due to a
reduction in rig days worked of 7,708 and a decrease in the average revenue per
day of $530. The decrease in average revenue per day is due to lower dayrates
partially offset by an increase in the percentage of turnkey from 10% of total
days worked during the first half of 1998 to 20% of total days worked for the
first six months of 1999. As discussed previously, revenue per day from turnkey
contracts is impacted by a number of variables including depth and geological
complexities. Revenue from foreign operations decreased due to a decrease in rig
days worked of 254. The decrease in rig days worked is a direct result of the
Company's completing its contracts late in the first quarter and discontinuing
all operations in Venezuela thereafter.
Drilling operating expenses decreased by approximately $43.2 million,
or 42%, to $60.8 million for the six months ended June 30, 1999, as compared to
$104.0 million for the six months ended June 30, 1998. The decrease is primarily
due to a $40.4 million decrease in drilling operating expenses from domestic
-18-
<PAGE> 19
operations. The decrease in domestic drilling operating expenses is a direct
result of the decrease in rig days worked of 7,708 partially offset by an
increase in operating expense per day of $1,770. The increase in operating
expense per day is a result of the greater percentage of turnkey days discussed
previously as well as fixed overhead items being spread over fewer days. The
remaining decrease in operating expenses of $2.8 million is due to a decrease in
operating expense from foreign operations resulting from discontinuing
Venezuelan operations as discussed above.
Depreciation and amortization expense decreased by $1.8 million, or
10%, to $16.2 million for the six months ended June 30, 1999, compared to $18.0
million for the six months ended June 30, 1998. The decrease is primarily due to
the SFAS 121 write-down as discussed previously.
General and administrative expense decreased by $1.7 million, or 33%,
to $3.3 million for the six months ended June 30, 1999, from $5.0 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.
During the six months ended June 30, 1999, the Company wrote off
$623,000 in deferred loan costs related to its Former Credit Facility. This
amount net of the $203,000 in related taxes is classified as an extraordinary
item.
Interest expense increased by $2.5 million or 26%, to $12.0 million for
the six months ended June 30, 1999, compared to $9.5 million for the six months
ended June 30, 1998. The increase is due to an increase in the average
outstanding debt balance of $36.7 million to $251.5 million for the six months
ended June 30, 1999 from $214.8 million for the six months ended June 30, 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 outstanding under the Former Credit Facility.
Other income, net decreased by $1.4 million to $1.0 million for the six
months ended June 30, 1999, as compared to $2.4 million for the six months ended
June 30, 1998. The decrease is primarily due to the $1.8 million gain recognized
during 1998 on the sale of the rigs and drilling related equipment of the
Company's Eastern division located in Ohio to Union Drilling, Inc., an affiliate
of two of the Company's directors.
YEAR 2000 COMPLIANCE
The 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 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
believes
-19-
<PAGE> 20
that its Year 2000 identification, assessment and remediation efforts are
complete and that its testing efforts will be completed by September 30, 1999.
The Company has mailed letters to its significant vendors and
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.
As of June 30, 1999, the Company had incurred costs of approximately
$78,000 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 are Year 2000
compliant, in the event that they are not, a significant increase in manpower
may be required to generate financial reports and process invoices for payment.
A contingency plan has been developed for dealing with the most
reasonably likely worst case scenario. The contingency plan includes an 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.
However, the contingency plan will be continually refined as the Company obtains
additional information regarding the Year 2000 condition of its operations and
the operations of its business partners. It is unlikely that any contingency
plan will fully address all events that may arise.
-20-
<PAGE> 21
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 June 30, 1999
and as of July 29, 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 is sensitive to
fluctuations in foreign currency exchange rates as they relate to its business
in Venezuela. See Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Foreign Exchange.
-21-
<PAGE> 22
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 was 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 was 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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in this report
including, without limitation, statements regarding the Company's business
strategy, plans, objectives, capital expenditures and beliefs of management for
future operations, are forward-looking statements. Although the Company believes
the expectations and beliefs reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
discussed in Item 1 "Business" and Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
-22-
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit
Number Description
27.0 Financial Data Schedule
-23-
<PAGE> 24
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREY WOLF, INC.
Date: August 11, 1999 By: /s/ DAVID W. WEHLMANN
--------------------------------
David W. Wehlmann
Senior Vice President and Chief
Financial Officer
Date: August 11, 1999 By: /s/ MERRIE S. COSTLEY
--------------------------------
Merrie S. Costley
Vice President and Controller
-24-
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,192
<SECURITIES> 0
<RECEIVABLES> 18,882
<ALLOWANCES> 1,206
<INVENTORY> 0
<CURRENT-ASSETS> 58,279
<PP&E> 569,623
<DEPRECIATION> 173,665
<TOTAL-ASSETS> 462,660
<CURRENT-LIABILITIES> 29,262
<BONDS> 249,311
0
0
<COMMON> 16,508
<OTHER-SE> 128,470
<TOTAL-LIABILITY-AND-EQUITY> 462,660
<SALES> 0
<TOTAL-REVENUES> 61,428
<CGS> 0
<TOTAL-COSTS> 77,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 12,010
<INCOME-PRETAX> (30,359)
<INCOME-TAX> (9,053)
<INCOME-CONTINUING> (21,306)
<DISCONTINUED> 0
<EXTRAORDINARY> (420)
<CHANGES> 0
<NET-INCOME> (21,726)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
