<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, 2000 Commission File Number 1-8226
[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 3, 2000, was 178,547,591.
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GREY WOLF, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <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 Loss 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 18
PART II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</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,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,732 $ 20,500
Restricted cash - insurance deposits 762 762
Accounts receivable, net of allowance of $1,753
and $1,708, respectively 37,186 37,002
Prepaids and other current assets 2,658 2,374
------------ ------------
Total current assets 54,338 60,638
------------ ------------
Property and equipment:
Land, buildings and improvements 5,049 5,041
Drilling equipment 570,179 568,012
Furniture and fixtures 2,234 2,227
------------ ------------
Total property and equipment 577,462 575,280
Less: accumulated depreciation and amortization (199,653) (190,919)
------------ ------------
Net property and equipment 377,809 384,361
Other noncurrent assets 7,554 7,847
------------ ------------
$ 439,701 $ 452,846
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 679 $ 831
Accounts payable-trade 20,976 21,231
Accrued workers' compensation 4,390 3,072
Payroll and related employee costs 4,393 3,455
Accrued interest payable 5,613 11,177
Other accrued liabilities 3,279 4,519
------------ ------------
Total current liabilities 39,330 44,285
------------ ------------
Senior notes 249,376 249,354
Long-term debt, net of current maturities 627 608
Other long-term liabilities 1,245 2,252
Deferred income taxes 28,374 30,770
Commitments and contingent liabilities -- --
Shareholders' equity:
Series B Junior Participating Preferred stock, $1 par value;
250,000 shares authorized; none outstanding -- --
Common stock, $.10 par value; 300,000,000 shares
authorized; 165,527,591 and 165,166,891 issued
and outstanding, respectively 16,553 16,516
Additional paid-in capital 271,354 270,527
Cumulative comprehensive loss adjustments (454) (454)
Accumulated deficit (166,704) (161,012)
------------ ------------
Total shareholders' equity 120,749 125,577
------------ ------------
$ 439,701 $ 452,846
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Contract drilling $ 58,709 $ 37,680
Costs and expenses:
Drilling operations 50,035 36,145
Depreciation and amortization 8,889 7,735
General and administrative 1,810 1,611
Provision for doubtful accounts 44 91
------------ ------------
Total costs and expenses 60,778 45,582
------------ ------------
Operating loss (2,069) (7,902)
Other income (expense):
Interest income 184 423
Gain on sale of assets 94 65
Interest expense (5,975) (5,992)
Other, net (22) (52)
------------ ------------
Other income (expense), net (5,719) (5,556)
------------ ------------
Loss before income taxes (7,788) (13,458)
Income tax benefit (2,096) (4,389)
------------ ------------
Loss before extraordinary item (5,692) (9,069)
Extraordinary item, net of tax of $203 -- (420)
------------ ------------
Net loss $ (5,692) $ (9,489)
============ ============
Basic and diluted net loss per common share:
Before extraordinary item $ (0.03) $ (0.06)
Extraordinary item, net of tax -- (0.00)
------------ ------------
Basic and diluted net loss per common share $ (0.03) $ (0.06)
============ ============
Basic and diluted weighted average shares outstanding 165,253 165,065
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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GREY WOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Cumulative
Stock Additional Comprehensive
Common $.10 Par Paid-in Loss
Shares Value Capital Deficit Adjustments Total
----------- ----------- ----------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 165,065 $ 16,506 $ 270,389 $ (119,750) $ (454) $ 166,691
Comprehensive net loss -- -- -- (9,489) -- (9,489)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999
(Unaudited) 165,065 $ 16,506 $ 270,389 $ (129,239) $ (454) $ 157,202
=========== =========== =========== =========== =========== ===========
Balance, December 31, 1999 165,167 $ 16,516 $ 270,527 $ (161,012) $ (454) $ 125,577
Exercise of stock options 361 37 827 -- -- 864
Comprehensive net loss -- -- -- (5,692) -- (5,692)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2000
(Unaudited) 165,528 $ 16,553 $ 271,354 $ (166,704) $ (454) $ 120,749
=========== =========== =========== =========== =========== ===========
</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>
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,692) $ (9,489)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 8,889 7,735
Deferred income taxes (2,096) (4,165)
Gain on sale of assets (94) (65)
Foreign exchange loss 22 52
Provision for doubtful accounts 44 91
Extraordinary item, net of taxes -- 420
Net effect of changes in assets and liabilities
related to operating accounts (6,051) (5,906)
----------- -----------
Cash used in operating activities (4,978) (11,327)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (2,341) (161)
Proceeds from sale of property and equipment 98 150
----------- -----------
Cash used in investing activities (2,243) (11)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 158 62
Repayments of long-term debt (269) (293)
Financing costs -- (756)
Proceeds from exercise of stock options 564 --
----------- -----------
Cash provided by (used in) financing activities 453 (987)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,768) (12,325)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,500 45,895
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,732 $ 33,570
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE
CASH PAID FOR INTEREST: $ 11,539 $ 11,493
=========== ===========
CASH PAID FOR TAXES: $ -- $ --
=========== ===========
</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 March 31, 2000 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, 2000 and 1999 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, 1999.
(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. The Company
incurred net losses for the three months ended March 31, 2000 and 1999 and have,
therefore, excluded certain securities from the computation of diluted earnings
per share as the effect would be anti-dilutive.
Securities excluded from the computation of diluted earnings per share
for the three month periods ended March 31, 2000 and 1999 that could potentially
dilute basic earnings per share in the future were options to purchase 7.7
million shares and 5.6 million shares, respectively. Warrants to issue 734,000
shares are also excluded from the computation of diluted earnings per share for
the three month period ended March 31, 1999.
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 month periods ended
March 31, 2000 and 1999, the Company recognized foreign exchange losses of
$22,000 and $52,000, respectively.
Recent Accounting Pronouncement
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued by the Financial Accounting Standards Board in June 1998.
SFAS No. 133 standardizes the accounting for derivative instruments, including
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e. gains
or losses) of a derivative instrument depends on whether it has been
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<PAGE> 8
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If specified conditions are met entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings and the period of change together with the offsetting loss or gain on
the hedge item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component or other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss, is reported in earnings immediately. Accounting for foreign
currency hedges is similar to the accounting for fair value and cash flow
hedges. If the derivative instrument is not designated as a hedge, the gain or
loss is recognized in earnings in the period of change. We will adopt SFAS No.
133 for our fiscal year beginning January 1, 2001 and 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 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 was fixed at LIBOR
plus 2.5% or prime plus 1.0%. The CIT Facility provides us with up to $10.0
million available for letters of credit. The Company is required to pay a
commitment fee of 0.375% per annum on the unused portion of the CIT Facility and
the letters of credit accrue a fee of 1.25% per annum. 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 and
$3.5 million outstanding under letters of credit. At March 31, 2000, we had
$46.5 million available under the CIT Facility.
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<PAGE> 9
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
With the closing of the CIT Facility in the first quarter of 1999, the
Company recognized a non-cash extraordinary loss of $420,000, net of applicable
tax benefit of $203,000, related to the write-off of deferred financing costs
associated with the Company's previous facility.
The Company has $250.0 million in principal amount of senior notes
("Notes") outstanding at March 31, 2000. The Notes issued in June 1997 and May
1998 bear interest at 8 7/8% 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
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes 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
GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
----------------------------
2000 1999
------------ ------------
(In thousands)
(Unaudited)
<S> <C> <C>
Revenues:
Domestic $ 58,709 $ 36,244
Foreign -- 1,436
------------ ------------
58,709 37,680
============ ============
Operating loss:
Domestic $ (1,907) $ (7,528)
Foreign (162) (374)
------------ ------------
$ (2,069) $ (7,902)
============ ============
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Total assets:
Domestic $ 435,482 $ 448,469
Foreign 4,219 4,377
------------ ------------
$ 439,701 $ 452,846
============ ============
</TABLE>
For the three months ended March 31, 2000 and 1999, operating loss
above includes the provision for doubtful accounts from domestic operations of
$44,000 and $91,000, respectively. There were no such items recorded in foreign
operations.
(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.
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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GREY WOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(7) SUBSEQUENT EVENT
On April 4, 2000, the Company completed an offering of 13,000,000
shares of its common stock which yielded proceeds to the Company of $52.0
million. The shares were purchased by the underwriter for $4.00 per share and
the underwriter advised the Company that the shares were resold to the public at
a price of $4.125 per share. The proceeds from the issuance of the shares of
common stock, net of estimated offering costs of $500,000, are expected to be
used to purchase five top drive units, for capital expenditures to return some
of the Company's rigs to marketed status when market conditions justify their
reactivation and for general corporate purposes, including working capital.
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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 in our audited
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 1999.
GENERAL
We are a leading provider of contract land drilling services in the
United States with a domestic fleet of 120 rigs, of which 108 are marketable. Of
the 108 marketable rigs, 74 rigs are marketed while 34 are cold-stacked. We also
have an inventory of 17 non-marketed rigs held for refurbishment as demand for
drilling services warrants, of which 12 are located in the United States and the
remainder in Venezuela. Our customers are independent oil and gas producers and
major oil companies.
Like the domestic land drilling industry at large, our drilling
activity declined substantially in 1998 and the first half of 1999. However, our
business began improving at the end of the second quarter of 1999 and that trend
has continued into 2000.
Utilization Rates
Beginning in the first quarter of 1998 and continuing through most of
the second quarter of 1999, industry-wide demand for land drilling services
deteriorated and our rig utilization rate declined. During this extended period
of lower utilization rates we took numerous steps to minimize cost and conserve
cash. We cold stacked a total of 49 rigs, reduced overhead at both the division
and corporate levels and used components from spare equipment or cold-stacked
rigs instead of buying new replacement parts.
The table below shows our rig utilization in our core domestic markets
during the periods indicated:
<TABLE>
<CAPTION>
1999 2000
--------------------------------------------------------------------- -----------------
Q-1 Q-2 Q-3 Q-4 Full Year Q-1 April
--- --- --- --- --------- --- -----
<S> <C> <C> <C> <C> <C> <C>
39% 31% 40% 54% 41% 56% 57%
</TABLE>
Our utilization rate has improved from 31% for the second quarter of
1999 to 56% for the three months ended March 31, 2000, and has shown improvement
from 54% in the fourth quarter of 1999 and 40% in the third quarter of 1999. For
the first quarter of 2000, we had an average of 61 rigs working (56%
utilization), and we had 62 rigs working through the first month of the second
quarter of 2000. The recent increase in demand for our rigs has allowed us to
return 39 rigs to work since April 1999, including 15 of the 49 rigs which had
been cold stacked. We have returned seven rigs to work since December 31, 1999.
Drilling Contract Bid Rates
In addition to the increases in rig utilization rates in 1999 and 2000,
there has also been a modest increase in the day rates we receive for our
services. From a low bid range of $5,500 to $6,000 (excluding fuel cost) per day
during the second quarter of 1999, our leading edge bid rates have increased
approximately 26% to a range of $6,800 to $7,750 (excluding fuel cost) per day
in April 2000. These bid rates have increased approximately 5% from the bid
rates for the fourth quarter of 1999.
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<PAGE> 13
Turnkey and Footage Contract Activity
Revenue generated from turnkey and footage contracts was approximately
46% of total revenue in the first quarter of 2000, compared with 40% during the
fourth quarter of 1999 and 44% during the first quarter of 1999. Operating days
worked on turnkey and footage contracts for the quarters ended March 31, 2000,
December 31, 1999, and March 31, 1999 were 973, 786, and 682 days, respectively.
EBITDA margin generated on turnkey and footage contracts for the first quarter
of 2000 and 1999 was 15% and 14% of revenue, respectively. The demand for
drilling services under turnkey and footage contracts is, however, greater
during periods of overall lower demand and there can be no assurance that we
will be able to maintain the current level of turnkey and footage revenue.
Financial Results
The first quarter of 2000 marks the third consecutive quarter of
improvement in operating results from our low in the second quarter of 1999. Net
losses declined from $12.2 million in the second quarter of 1999 to $5.7 million
in the first quarter of 2000. This reflected the improved utilization of our
drilling rigs working under daywork and turnkey contracts as well as increases
in the rates received for our services. The net loss for the first quarter of
2000 declined by $3.8 million as compared to the first quarter of 1999. Based on
the current levels of utilization and day rates, we believe our results for the
second quarter of 2000 should be slightly better than those of the first quarter
of 2000.
FINANCIAL CONDITION AND LIQUIDITY
The following table summarizes our financial position as of March 31,
2000 and December 31, 1999.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------- ---------------------------
(UNAUDITED)
(IN THOUSANDS)
Amount % Amount %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Working capital $ 15,008 4 $ 16,353 4
Property and equipment, net 377,809 94 384,361 94
Other noncurrent assets 7,554 2 7,847 2
------------ ------------ ------------ ------------
Total $ 400,371 100 $ 408,561 100
============ ============ ============ ============
Long-term debt $ 250,003 63 $ 249,962 61
Other long-term liabilities 29,619 7 33,022 8
Shareholders' equity 120,749 30 125,577 31
------------ ------------ ------------ ------------
Total $ 400,371 100 $ 408,561 100
============ ============ ============ ============
</TABLE>
The significant changes in our financial position from December 31,
1999 to March 31, 2000 are the decreases in property and equipment, net and
shareholders' equity of $6.6 million and $4.8 million, respectively. The change
in property and equipment, net is primarily due to $8.9 million in depreciation
expense partially offset by capital expenditures while the decrease in
shareholders' equity is due to our net loss of $5.7 million partially offset by
the funds generated from stock option exercises of $864,000.
We maintain a senior secured revolving credit facility with the CIT
Group/Business Credit, Inc. ("the CIT Facility") which provides us with the
ability to borrow up to the lesser 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 United States. The initial
term of the CIT Facility is for four years expiring 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 us with up to $10.0 million available
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<PAGE> 14
for letters of credit. The amounts used for letters of credit decrease the
borrowing base of the CIT Facility by the amount of such letters of credit.
Interest under the CIT Facility accrues at a variable rate, using (at our
election) either prime plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.50%,
depending upon our debt service coverage ratio for the trailing 12 month period.
Letters of credit accrue a fee of 1.25% per annum and we pay 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 our assets and our domestic subsidiaries' assets and by
our guarantees and certain of our wholly-owned subsidiaries guarantees. We,
however, retain 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. At March 31, 2000,
we had $46.5 million available under the CIT Facility, net of outstanding
letters of credit of $3.5 million.
Among the various covenants that must be satisfied by us under the CIT
Facility are the following two covenants which shall apply whenever our
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.
On April 4, 2000, we completed an offering of 13,000,000 shares of our
common stock which yielded proceeds to us of $52.0 million. The shares were
purchased by the underwriter for $4.00 per share and the underwriter advised us
that the shares were resold to the public at a price of $4.125 per share. The
proceeds from the issuance of the shares of common stock, net of estimated
offering costs of $500,000, are expected to be used to purchase five top drive
units, for capital expenditures to return some of our rigs to marketed status
when market conditions justify their reactivation and for general corporate
purposes, including working capital.
We also owe a total of $250.0 million in principal amount under our
senior notes. While the principal is not due until 2007, semi-annual interest
payments of approximately $11.1 million are due on January 1 and July 1 of each
year. For the three months ended March 31, 2000, our operating and investing
activities consumed net cash flow. In order to pay debt service under the senior
notes and meet our other cash needs, we were required to use our cash on hand.
To the extent we are unable to generate cash flow sufficient to pay debt service
and meet our other cash needs, including capital expenditures, we would be
required to use our cash on hand. At May 3, 2000, our cash balance was $64.2
million.
The net cash provided by or used in our operating, investing and
financing activities is summarized below:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
MARCH 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
(Unaudited)
<S> <C> <C>
Net cash provided by (used in):
Operating activities $ (4,978) $ (11,327)
Investing activities (2,243) (11)
Financing activities 453 (987)
------------ ------------
Net decrease in cash $ (6,768) $ (12,325)
============ ============
</TABLE>
Our 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
- 14 -
<PAGE> 15
services. Our cash flow generated from operating activities during the first
three months of 2000 was $1.1 million (before changes in operating assets and
liabilities) compared to cash used in operating activities during the first
three months of 1999 of $5.4 million (before changes in operating assets and
liabilities). This change is principally due to 40% more operating days and an
increase in per day gross profit margins between the two periods. Our cash flows
from operating activities were also impacted by changes in operating assets and
liabilities which used $6.1 million in cash flow for the three months ended
March 31, 2000 versus $5.9 million for the same period in 1999.
Cash flow used in investing activities for the three months ended March
31, 2000 primarily consisted of $2.3 million of capital expenditures for rig
maintenance and redeploying cold-stacked rigs. Cash flow used in investing
activities for the three month period ended March 31, 1999 was negligible as a
result of cost cutting measures employed to conserve cash.
Cash flow provided by financing activities for the three months ended
March 31, 2000 consisted principally of proceeds of $564,000 from stock option
exercises partially offset by $111,000 net repayment of long-term debt. Cash
flow used in financing activities for the three months ended March 31, 1999
primarily consisted of financing costs of $756,000 related to the CIT Facility
and net repayments of long-term debt of $231,000.
As mentioned previously, capital expenditures for the three months
ended March 31, 2000 were $2.3 million. Capital expenditures for the entire year
are estimated to be between $13.2 million and $19.3 million depending on the
level of activity and the number of cold-stacked rigs ultimately reactivated.
Estimated capital expenditures for 2000 include approximately $7.0 million for
the acquisition of five additional top drives. Through April 2000, we have
redeployed 15 of our domestic cold-stacked rigs for an aggregate capital
investment of $2.2 million. If demand warrants, we believe we can return the
next 11 cold-stacked rigs to marketed condition for estimated capital
expenditures of approximately $1.5 million, which would bring our marketed rig
count to 85 rigs. To bring the next 15 rigs to marketed status, increasing our
marketed rigs to 100, would require an estimated $9.6 million to $10.9 million,
which includes the cost of drill pipe. An estimated $12.0 million, including the
cost of drill pipe, would be required to return our final eight cold-stacked
rigs to marketed status. We expect to redeploy five cold-stacked rigs by the end
of the second quarter of 2000. The actual cost of returning cold-stacked rigs to
marketed status will depend on the extent to which component parts were used
from the cold-stacked rigs and the extent to which we choose to upgrade the
cold-stacked rigs before returning them to service. There can be no assurance
that our actual costs will not be materially higher.
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 we suspended operations in Venezuela in the first quarter of
1999, historically, operations were performed there by us pursuant to drilling
contracts under which payments to us were denominated in United States Dollars
but payable in Venezuelan currency at a floating exchange rate. We have not,
during the three months ended March 31, 2000 entered into any currency hedges to
protect us from foreign currency losses. During the three months ended March 31,
2000 and 1999, we recognized foreign exchange losses of $22,000 and $52,000,
respectively. (See Note 2 "Significant Accounting Policies - Foreign Currency"
to the Consolidated Financial Statements).
- 15 -
<PAGE> 16
Other
We have not paid any cash dividends on our common stock and do 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.
We are a holding company and substantially all of our operations are
conducted through, and substantially all of our assets consist of equity
interests in, our subsidiaries, including the guarantors of the 8 7/8% Senior
Notes due 2007. As a holding company, our liquidity is dependent on the
operations of our subsidiaries. Certain financing arrangements that we and our
subsidiaries are party to may restrict our ability to access funds from our
subsidiaries.
- 16 -
<PAGE> 17
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 and 1999
The following tables highlight rig days worked, contract drilling
revenues and drilling operating expenses for our domestic and foreign operations
for the three months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------------------------------ -------------------------------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL OPERATIONS OPERATIONS TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(In thousands, except rig days worked and averages per day)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Rig days worked 5,530 -- 5,530 3,816 145 3,961
Contract drilling revenues $ 58,709 $ -- $ 58,709 $ 36,244 $ 1,436 $ 37,680
Drilling operating expenses(1) 50,035 -- 50,035 34,212 1,613 35,825
------------ ------------ ------------ ------------ ------------ ------------
Gross profit (loss) $ 8,674 $ -- $ 8,674 $ 2,032 $ (177) $ 1,855
============ ============ ============ ============ ============ ============
Average per rig day worked
Drilling revenue $ 10,616 $ -- $ 10,616 $ 9,498 $ 9,903 $ 9,513
Operating expenses 9,048 -- 9,048 8,965 11,124 9,044
------------ ------------ ------------ ------------ ------------ ------------
Gross profit (loss) $ 1,568 $ -- $ 1,568 $ 533 $ (1,221) $ 469
============ ============ ============ ============ ============ ============
</TABLE>
- -------------------------
(1) Drilling operating expenses exclude depreciation and amortization, general
and administrative expenses, provision for doubtful accounts and unusual
charges.
Contract drilling revenues increased approximately $21.0 million, or
56%, to $58.7 million for the three months ended March 31, 2000, from $37.7
million for the three months ended March 31, 1999. This increase is primarily
due to an increase in revenue from domestic operations of $22.4 million which is
the result of an increase in rig days worked of 1,714 or 45%, and an increase in
the average revenue per day of $1,118. The increase in average revenue per day
is due to higher dayrates and an increase in the percentage of turnkey drilling
activity from 17% of total days worked during the three months ended March 31,
1999 to 18% for the same period in 2000. The increase in domestic operations is
slightly offset by lower revenues of $1.4 million from foreign operations which
is a direct result of completing our contracts in Venezuela late in the first
quarter of 1999 and suspending operations thereafter.
Drilling operating expenses increased by approximately $14.2 million,
or 40%, to $50.0 million for the three months ended March 31, 2000, as compared
to $35.8 million for the three months ended March 31, 1999. The increase is
primarily due to a $15.8 million increase in drilling operating expenses from
domestic operations due to the increased level of activity discussed above. The
increase in domestic drilling operating expenses is partially offset by lower
expenses from foreign operations of $1.6 million resulting from suspended
Venezuelan operations as discussed above.
Turnkey contracts generally result in higher effective revenues per day
worked than dayrate contracts. Gross profit margins per day worked on successful
turnkey jobs are also generally better than under dayrate contracts, although we
typically are required to bear additional operating costs (such as fuel costs)
that would typically be paid by the customer under dayrate contracts. Revenues,
operating expenses and, thus, gross profit (or loss) margins on turnkey
contracts are affected by a number of variables, and include the depth of the
well, geological complexities and the actual difficulties encountered in
drilling the well.
- 17 -
<PAGE> 18
Depreciation and amortization expense increased by $1.2 million, or
15%, to $8.9 million for the three months ended March 31, 2000, compared to $7.7
million for the three months ended March 31, 1999. The increase is primarily due
to increased depreciation attributable to capital expenditures during 1999 and
2000.
General and administrative expenses increased by $199,000, or 12%, to
$1.8 million for the three months ended March 31, 2000, from $1.6 million for
the same period of 1999 due primarily to the increased level of activity in our
operations.
The difference in interest expense for the three month periods ended
March 31, 2000 and 1999 is negligible as the average outstanding debt balance
was virtually the same.
During the three months ended March 31, 1999, we wrote off $623,000 in
deferred loan costs related to the previous credit facility. This amount, net of
$203,000 in related taxes, is classified as an extraordinary item.
YEAR 2000 COMPLIANCE
Through May 3, 2000, we have experienced no significant operational
problems related to year 2000 issues and we presently believe that year 2000
issues will not pose significant operational problems for us in the future.
However, there can be no assurance that undiscovered year 2000 issues of other
entities, if any, will not have a material adverse impact on our systems or
results of operations.
As of March 31, 2000, we had incurred costs of approximately $75,000
related to our Year 2000 identification, assessment, remediation, and testing
efforts consisting primarily of upgrades to existing software. We estimate that
the future costs associated with the year 2000 issue, if any, will not be
material, and as such will not have a significant impact on our financial
position or operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. We are 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 3.50%, depending upon our debt service coverage
ratio for the trailing 12 month period. On May 3, 2000, we had no outstanding
balance under the CIT Facility and as such have no exposure at this time to a
change in the interest rate.
Foreign Currency Exchange Rate Risk. We have historically conducted
business in Venezuela and remain somewhat 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in aggregate,
material to our consolidated financial condition or results of operations. See
Note 6 - Commitments and Contingent Liabilities.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
- 18 -
<PAGE> 19
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 our business strategy,
plans, objectives, capital expenditures and beliefs of management for future
operations and results, are forward-looking statements. Although we believe the
expectations and beliefs reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations ("Cautionary Statements") are discussed in our
Prospectus Supplement filed March 31, 2000, with the Securities and Exchange
Commission.
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 31, 2000. This current filing reported the sale of
13,000,000 shares of common stock at a net price to us of $4.00 per share.
Exhibits:
Exhibit
Number Description
-------- ------------
27.0 Financial Data Schedule
- 19 -
<PAGE> 20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREY WOLF, INC.
Date: May 10, 2000 By: /s/ David W. Wehlmann
------------------------------------
David W. Wehlmann
Senior Vice President and Chief
Financial Officer
Date: May 10, 2000 By: /s/ Merrie S. Costley
------------------------------------
Merrie S. Costley
Vice President and Controller
- 20 -
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------
<S> <C>
27.0 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,732
<SECURITIES> 0
<RECEIVABLES> 38,939
<ALLOWANCES> 1,753
<INVENTORY> 0
<CURRENT-ASSETS> 54,338
<PP&E> 577,462
<DEPRECIATION> 199,653
<TOTAL-ASSETS> 439,701
<CURRENT-LIABILITIES> 39,330
<BONDS> 249,376
16,553
0
<COMMON> 0
<OTHER-SE> 104,196
<TOTAL-LIABILITY-AND-EQUITY> 439,701
<SALES> 0
<TOTAL-REVENUES> 58,709
<CGS> 0
<TOTAL-COSTS> 58,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 44
<INTEREST-EXPENSE> 5,975
<INCOME-PRETAX> (7,788)
<INCOME-TAX> (2,096)
<INCOME-CONTINUING> (5,692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,692)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
