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Filed pursuant to Rule 424(b)(5)
Registration No. 333-86949
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED OCTOBER 6, 1999
[GREYWOLF INC. LOGO]
13,000,000 SHARES
GREY WOLF, INC.
COMMON STOCK
------------------------
We are selling to the underwriter 13,000,000 shares of common stock at a
price of $4.00 per share.
The common stock is listed on the American Stock Exchange under the symbol
"GW." The last reported sale price of the common stock on the American Stock
Exchange on March 30, 2000 was $4.125 per share.
The common stock may be offered by the underwriter from time to time at
negotiated prices in one or more transactions. The common stock will not be sold
on or through the facilities of a national securities exchange or to or through
a market maker otherwise than on an exchange. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-9 FOR A DESCRIPTION OF CERTAIN RISKS
RELATING TO THE COMMON STOCK.
Delivery of the common stock will be made on or about April 4, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
JOHNSON RICE & COMPANY, L.L.C.
The date of this prospectus supplement is March 31, 2000
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TABLE OF CONTENTS
<TABLE>
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PROSPECTUS SUPPLEMENT PAGE
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Where You Can Find More Information... S-3
Forward-Looking Statements............ S-3
Summary............................... S-4
Risk Factors.......................... S-9
Use of Proceeds....................... S-16
Capitalization........................ S-17
Price Range of Common Stock and
Dividend Policy..................... S-18
Selected Financial and Operating
Data................................ S-19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-21
Underwriting.......................... S-32
Legal Matters......................... S-33
Experts............................... S-33
PROSPECTUS PAGE
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About This Prospectus................. 1
Where You Can Find More Information... 1
Grey Wolf, Inc. ...................... 2
Forward-Looking Statements............ 2
Risk Factors.......................... 3
Use of Proceeds....................... 11
Ratio of Earnings to Fixed Charges and
Earnings to Fixed Charges and
Preferred Stock Dividends........... 12
Description of Debt Securities........ 13
Description of Other Indebtedness..... 20
Description of Capital Stock.......... 20
Description of Depositary Shares...... 22
Description of Warrants............... 24
Plan of Distribution.................. 27
Legal Matters......................... 29
Experts............................... 29
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
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WHERE YOU CAN FIND MORE INFORMATION
In addition to the documents referred to under "Where You Can Find More
Information" in the accompanying prospectus, this prospectus supplement
incorporates by reference the following documents filed by us with the
Securities and Exchange Commission:
- our Annual Report on Form 10-K for the year ended December 31, 1999; and
- our Current Report on Form 8-K filed March 31, 2000.
FORWARD-LOOKING STATEMENTS
This prospectus supplement, particularly the sections entitled "Summary,"
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not
historical facts concerning, among other things, market conditions, the demand
for our drilling services, future utilization, future expenditures (including
rig upgrades and refurbishments) and future results of operations. We cannot
guarantee that we have identified and properly weighed all of the factors which
affect market conditions and the demand for our rigs, that the public
information upon which we have relied is accurate or complete or that our
analysis of the market and the demand for our rigs is correct or that the
strategy based on this analysis will be successful. Certain factors and risks
that could cause actual results to differ from those identified in these
forward-looking statements include, among others:
- fluctuations in prices and demand for oil and gas;
- fluctuations in levels of oil and gas exploration and development
activities;
- fluctuations in the demand for contract land drilling services;
- the existence of competitors, technological changes and developments in
the contract land drilling industry;
- the existence of operating risks inherent in the contract land drilling
industry; and
- U.S. and global economic conditions.
For a further discussion of such factors and risks, see "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Annual Report on Form 10-K for the year ended December 31,
1999 which is incorporated by reference in this prospectus supplement. These
forward-looking statements speak only as of the date of this prospectus
supplement. We disclaim any obligation to release publicly any updates or
revisions to any forward-looking statement contained in this prospectus
supplement to reflect any changes in our expectations regarding such statements
or any change in events, conditions or circumstances on which they are based.
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SUMMARY
The following summary highlights information we incorporate by reference or
present more fully elsewhere in this prospectus supplement. It does not contain
all the information that may be important to you. You should read carefully the
entire prospectus supplement and accompanying prospectus and the other
information we refer to before you decide to invest in our common stock. Except
as otherwise stated, references in this prospectus supplement to "we," "us,"
"our" and similar references refer to Grey Wolf, Inc. and its consolidated
subsidiaries, and not the underwriter.
OUR BUSINESS
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, 71 rigs are marketed while 37 are cold-stacked. We also
have an inventory of 12 non-marketed rigs located in the United States which are
held for refurbishment as demand for drilling services warrants. In addition to
our domestic operations, we maintain a fleet of five non-marketed rigs in
Venezuela, giving us a total of 125 rigs. Our customers are independent oil and
gas producers and major oil companies.
We conduct our operations in the markets that we believe have historically
had greater rig utilization rates and dayrates than the combined total of all
other domestic markets. Through March 30, 2000, the first quarter average
utilization rate of our marketable rigs is 56%, compared with 40% for all of
1999. The recent improvement in utilization rates in the markets we serve is
largely due, we believe, to increased levels of drilling for natural gas as
opposed to oil reserves. Natural gas reserves are typically found in deeper
geological formations and generally require premium equipment and quality crews
to drill the wells. During 1999, approximately 96% of the wells we drilled for
our customers were drilled in search of natural gas.
Our core markets are in Ark-La-Tex, the Gulf Coast, Mississippi/Alabama and
South Texas. We generally deploy our rig fleet based on the types of rigs
preferred by our customers for drilling in these geographic markets. The
following table summarizes the rigs we own as of March 30, 2000:
<TABLE>
<CAPTION>
MAXIMUM RATED DEPTH CAPACITY
----------------------------------------------------
10,000' 15,000'
UNDER TO TO 20,000'
10,000' 14,999' 19,999' AND DEEPER TOTAL
------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
MARKETABLE
Ark-La-Tex Division:(1)
Diesel Electric....................... -- 1 6 7 14
Trailer-Mounted....................... -- 2 -- -- 2
Mechanical............................ -- 9 9 3 21
Gulf Coast Division:
Diesel Electric....................... -- -- 1 24 25
Mechanical............................ -- 3 2 5 10
South Texas Division:
Diesel Electric....................... -- 1 6 6 13
Trailer-Mounted....................... 4 11 -- -- 15
Mechanical............................ -- 7 1 -- 8
-- -- -- -- ---
Total Marketable(2)........... 4 34 25 45 108
INVENTORY
Domestic:
Diesel Electric....................... -- -- 2 8 10
Trailer-Mounted....................... -- 1 -- -- 1
Mechanical............................ -- -- 1 -- 1
</TABLE>
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<TABLE>
<CAPTION>
MAXIMUM RATED DEPTH CAPACITY
----------------------------------------------------
10,000' 15,000'
UNDER TO TO 20,000'
10,000' 14,999' 19,999' AND DEEPER TOTAL
------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
Venezuela:
Trailer-Mounted....................... -- 2 -- -- 2
Mechanical............................ -- 3 -- -- 3
-- -- -- -- ---
Total Inventory............... -- 6 3 8 17
-- -- -- -- ---
Total Rig Fleet............... 4 40 28 53 125
== == == == ===
</TABLE>
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(1) Includes our Mississippi/Alabama market.
(2) Includes 37 cold-stacked rigs of which three are in the under 10,000'
category, ten are in the 10,000' to 14,999' category, seven are in the
15,000' to 19,999' category, and 17 are in the 20,000' and deeper category.
OUR BUSINESS STRATEGY
We operate in a cyclical industry in which the number of working land
drilling rigs and the average dayrates charged for them can change rapidly.
Because of this cyclicality, we seek to take advantage of upswings in demand by
increasing our dayrates and by being prepared to deploy additional rigs into the
market. We also remain willing to impose disciplined cost saving measures, such
as cold-stacking rigs, in times of decreasing demand.
In each of our land drilling industry activities, we focus on increasing
our operating margins. We strive to improve our operating margins in several
ways, the most important of which are by:
- maintaining a leading position in our core domestic markets;
- balancing the rates we charge for our services and market share while
trying to maintain a high level of utilization on our marketed rigs;
- enhancing cash-flow through our turnkey and trucking operations;
- searching for new market opportunities, primarily in North America, where
we believe our quality fleet of rigs would be able to generate attractive
returns; and
- searching for potential acquisition candidates that we believe would be
accretive.
Core Market Leadership. Our four core domestic markets have generally
realized comparatively higher utilization rates and dayrates than other domestic
markets, particularly for rigs capable of drilling to deeper depths in search of
natural gas. Through acquisitions and divestitures, we have become one of the
largest contractors in our core markets and have configured our rig fleet to
predominantly consist of rigs capable of drilling to deeper formations. In
recent years, these premium rigs have been in greater demand in our core markets
and have generally enjoyed higher utilization and dayrates than rigs capable of
drilling only to shallower depths.
Balancing Dayrates and Utilization Rates. We strive to adjust the size of
our marketed rig fleet to optimize the balance between the utilization of our
rigs and the rates we can charge for them. We have 71 marketed rigs and 37
cold-stacked rigs. With the recent improvements in demand, we have sought and
achieved higher dayrates for the rigs we now market. We plan to redeploy our
non-marketed rigs when we believe we can maintain our dayrates and a high level
of utilization on all our marketed rigs.
Turnkey and Trucking. We seek to improve our operating margins by offering
our drilling services on a turnkey or footage rate basis. A successfully
completed turnkey contract or footage rate contract generally earns us a greater
return than does a typical dayrate contract, though often poses greater risks.
The key to our turnkey and footage drilling strategy is maintaining a reasonable
balance between the risks and rewards of these types of contracts. In 1999,
approximately 19% of our days worked were from turnkey
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and footage contracts. We also seek margin enhancement through our trucking
operations, which includes a fleet of 54 trucks devoted exclusively to moving
our rigs. We believe that our truck fleet enables us to offer safer, more timely
service to our customers, while allowing us to save on third party
transportation costs and increase our margins.
New Market Opportunities. While we have focused our operations in our four
core markets and believe these markets are currently the best domestic land
drilling markets, we monitor other geographic markets for opportunities where
our rig fleet could produce higher margins. We watch the market conditions
outside our core markets for changes in customer drilling patterns that could
lead to opportunities for our premium deep drilling rig fleet.
Potential Acquisitions. We continue to monitor our core markets and other
geographic markets for acquisition opportunities. Our criteria for acquisition
candidates include companies or assets which can integrate with and enhance our
premium rig fleet and possibly provide us entry into new geographic markets. We
intend to pursue only those transactions that, we believe, will enhance our
returns and be accretive to earnings.
THE OFFERING
Common stock offered....... 13,000,000 shares
Common stock to be
outstanding after the
offering................. 178,547,000 shares
Use of proceeds............ Purchase five top drive units, capital expenditures
to return some of our rigs to marketable status
when we believe market conditions justify their
reactivation, and general corporate purposes,
including working capital.
American Stock Exchange
Symbol................... GW
The number of shares to be outstanding reflected in the above table does
not include 8,688,575 shares that may be issued pursuant to stock options
outstanding as of March 30, 2000 under our stock option plans.
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SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues.................................................. $147,203 $240,979 $215,923
Drilling operations costs................................. 140,924 193,140 162,552
Depreciation and amortization............................. 34,003 38,069 20,957
General and administrative................................ 6,678 8,880 8,081
Provision for asset impairment(1)......................... -- 93,193 --
Unusual charges(2)........................................ 320 1,722 --
-------- -------- --------
Operating income (loss)................................... (34,722) (94,025) 24,333
Interest expense.......................................... (24,054) (21,621) (8,748)
Other income, net......................................... 1,958 4,482 3,264
-------- -------- --------
Income (loss) before income taxes......................... (56,818) (111,164) 18,849
Income tax expense (benefit).............................. (15,976) (27,951) 8,631
-------- -------- --------
Income (loss) before extraordinary item................... (40,842) (83,213) 10,218
Extraordinary item, net of tax of $203.................... (420) -- --
-------- -------- --------
Net income (loss)......................................... $(41,262) $(83,213) $ 10,218
======== ======== ========
Net income (loss) applicable to common stock.............. $(41,262) $(83,213) $ 9,978
======== ======== ========
Basic net income (loss) per common share.................. $ (.25) $ (.50) $ .07
======== ======== ========
Basic weighted average shares outstanding................. 165,108 164,944 145,854
======== ======== ========
Diluted net income (loss) per common share................ $ (.25) $ (.50) $ .07
======== ======== ========
Diluted weighted average shares outstanding............... 165,108 164,994 149,724
======== ======== ========
Other Financial Data (unaudited):
EBITDA(3)................................................. $ (399) $ 38,959 $ 45,290
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1999 1998 1997
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<S> <C> <C> <C>
Drilling Rig Activity Data (unaudited):
Average utilization rate of marketable drilling rigs(4)... 40% 63% 82%
Average revenues per day(5)............................... $ 8,956 $ 9,187 $ 8,847
Number of operating days.................................. 16,436 26,230 24,405
Marketable drilling rigs -- end of period(4).............. 108 113 106
Inventoried drilling rigs -- end of period................ 17 12 16
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Working capital........................................... $ 16,353 $ 44,489
Property and equipment, net............................... 384,361 411,316
Total assets.............................................. 452,846 501,303
Long-term debt net of current maturities.................. 249,962 250,527
Series A preferred stock -- mandatory redeemable.......... -- 305
Shareholders' equity...................................... 125,577 166,691
</TABLE>
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(1) Represents a non-cash impairment charge to some of our drilling rigs and
equipment caused by changes in circumstances indicating that the carrying
amounts may not be recoverable. See notes 1 and 11 to our consolidated
financial statements incorporated by reference in this prospectus
supplement.
(2) For the year ended December 31, 1999, represents employment severance costs.
For the year ended December 31, 1998, represents employment severance costs
and write-downs of other assets associated with international operations.
See note 11 to our consolidated financial statements incorporated by
reference in this prospectus supplement.
(3) EBITDA means operating income (loss) before depreciation and amortization,
provision for asset impairment and unusual charges and is not a measure
recognized by generally accepted accounting principles. EBITDA is presented
here to provide additional information about our operations. EBITDA should
not be considered in isolation or as a substitute for net income as a
measure of our operating performance or for cash provided by operating
activities as a measure of our liquidity (all as determined in accordance
with generally accepted accounting principles). This method may not be
comparable to the EBITDA calculations of other companies.
(4) Includes marketed and cold-stacked rigs.
(5) Represents total contract drilling revenues divided by the total number of
rig days worked by our drilling rigs during the period.
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RISK FACTORS
An investment in common stock is very risky. You should carefully consider
the following risk factors and all of the other information set forth or
incorporated by reference in this prospectus supplement and the accompanying
prospectus before you purchase our common stock.
OUR BUSINESS CAN BE ADVERSELY AFFECTED BY LOW OIL AND GAS PRICES AND
EXPECTATIONS OF LOW PRICES.
As a supplier of land drilling services, our business depends on the level
of drilling activity by oil and gas exploration and production companies
operating in the geographic markets where we operate. The number of wells they
choose to drill is strongly influenced by past trends in oil and gas prices,
current prices, and their outlook for future oil and gas prices within those
geographic markets. Low oil and gas prices, or the perception among oil and gas
companies that future prices are likely to remain low or decline further, can
materially and adversely affect us in many ways, including:
- our revenues, cash flows and earnings;
- the fair market value of our rig fleet;
- our ability to maintain or increase our borrowing capacity;
- our ability to obtain additional capital to finance our business and make
acquisitions, and the cost of that capital; and
- our ability to retain skilled rig personnel who we would need in the
event of a upturn in the demand for our services.
Oil and gas prices have been volatile historically and, we believe, will
continue to be so in the future. Many factors beyond our control affect oil and
gas prices, including:
- weather conditions in the United States and elsewhere;
- economic conditions in the United States and elsewhere;
- actions by OPEC, the Organization of Petroleum Exporting Countries;
- political stability in the Middle East and other major producing regions;
- governmental regulations, both domestic and foreign;
- the pace adopted by foreign governments for exploration of their national
reserves;
- the price of foreign imports of oil and gas; and
- the overall supply and demand for oil and gas.
WE OPERATE IN A HIGHLY COMPETITIVE, FRAGMENTED INDUSTRY IN WHICH PRICE
COMPETITION HAS INTENSIFIED AS EXCESS DRILLING RIG CAPACITY HAS INCREASED.
We operate in a highly competitive business. The drilling contracts we
compete for are usually awarded on the basis of competitive bids. Pricing and
rig availability are the primary factors considered by our potential customers
in determining which drilling contractor to select. We believe other factors are
also important. Among those factors are:
- the type and condition of drilling rigs;
- the quality of service and experience of rig crews;
- the safety record of the rig;
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- the contractor's offering of ancillary services; and
- the ability of the contractor to provide drilling equipment adaptable to,
and personnel familiar with, new technologies and drilling techniques.
While we must generally be competitive in our pricing, our competitive
strategy generally emphasizes the quality of our equipment, the safety record of
our rigs and the experience of our rig crews to differentiate us from our
competitors. This strategy was less effective as lower demand for drilling
services intensified price competition and made it more difficult for us to
compete on the basis of factors other than price. In all of the markets in which
we compete there is an over supply of rigs which has caused greater price
competition.
Contract drilling companies compete primarily on a regional basis, and the
intensity of competition may vary significantly from region to region at any
particular time. If demand for drilling services improves in a region where we
operate, our competitors might respond by moving in suitable rigs from other
regions. An influx of rigs from other regions could rapidly intensify
competition and make any improvement in demand for drilling rigs short-lived.
We face competition from many competitors. Certain of our competitors have
greater financial and human resources than do we. Their greater capabilities in
these areas may enable them to:
- better withstand periods of low rig utilization;
- compete more effectively on the basis of price and technology;
- retain skilled rig personnel; and
- build new rigs or acquire and refurbish existing rigs so as to be able to
place rigs into service more quickly than us in periods of high drilling
demand.
OUR DRILLING OPERATIONS INVOLVE INHERENT RISKS OF LOSS WHICH IF NOT INSURED OR
INDEMNIFIED AGAINST COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our business is subject to the many hazards inherent in the land drilling
business including the risks of:
- blowouts;
- fires and explosions;
- collapse of the borehole;
- lost or stuck drill strings; and
- damage or loss from natural disasters.
We attempt to obtain indemnification from our customers by contract for
certain of these risks under daywork contracts but are not always able to do so.
We also seek to protect ourselves from some but not all operating hazards
through insurance coverage.
If these hazards occur they can produce substantial liabilities to us from,
among other things:
- suspension of drilling operations;
- damage to the environment;
- damage to, or destruction of our property and equipment and that of
others;
- personal injury and loss of life; and
- damage to producing or potentially productive oil and gas formations
through which we drill.
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The indemnification we receive from our customers and our own insurance
coverage may not, however, be sufficient to protect us against liability for all
consequences of disasters, personal injury and property damage. Additionally,
our insurance coverage generally provides that we bear a portion of the claim
through substantial insurance coverage deductibles. The premiums we pay for
insurance policies are also subject to substantial increase based upon our
claims history, which may increase our operating costs. We can offer you no
assurance that our insurance or indemnification arrangements will adequately
protect us against liability from all of the hazards of our business. We are
also subject to the risk that we may be unable to obtain or renew insurance
coverage of the type and amount we desire at reasonable rates. If we were to
incur a significant liability for which we were not fully insured or indemnified
it could have a material adverse effect on our financial position and results of
operations.
OUR OPERATIONS ARE SUBJECT TO DOMESTIC AND FOREIGN ENVIRONMENTAL LAWS THAT MAY
EXPOSE US TO LIABILITIES FOR NONCOMPLIANCE WHICH COULD ADVERSELY AFFECT US.
Many aspects of our operations are subject to domestic and foreign laws and
regulations. For example, our drilling operations are typically subject to
extensive and evolving laws and regulations governing:
- environmental quality;
- pollution control; and
- remediation of environmental contamination.
Our operations are often conducted in or near ecologically sensitive areas,
such as wetlands which are subject to special protective measures and which may
expose us to additional operating costs and liabilities for noncompliance. The
handling of waste materials, some of which are classified as hazardous
substances, is a necessary part of our operations. Consequently, our operations
are subject to stringent regulations relating to protection of the environment
and waste handling which may impose liability on us for our own noncompliance
and, in addition, that of other parties without regard to whether we were
negligent or otherwise at fault. We may also be exposed to environmental or
other liabilities originating from businesses and assets which we purchased from
others. Compliance with applicable laws and regulations may require us to incur
significant expenses and capital expenditures which could have a material and
adverse affect on our operations by increasing our expenses and limiting our
future contract drilling opportunities.
DESPITE RECENT IMPROVEMENTS, WE ARE STILL EXPERIENCING RELATIVELY WEAK DEMAND
FOR OUR SERVICES DUE, WE BELIEVE, TO UNCERTAINTY ABOUT OIL AND GAS PRICES.
Volatility in oil and gas prices can produce wide swings in the levels of
overall drilling activity in the markets we serve and affect the demand for our
drilling services and the day rates we can charge for our rigs. Pronounced
downturns in oil and gas prices can adversely affect our business.
We believe our operating and financial performance illustrates this risk.
Oil and gas prices generally dropped beginning in late 1997, with generally
lower commodity prices extending well into 1999. Beginning in the first quarter
of 1998, drilling activity in the markets we serve also dropped significantly,
and we experienced significant declines both in the utilization rates for our
rigs and in the day rates we could charge for them. Our rig utilization in our
core domestic markets was 81% during the first quarter of 1998 but declined to
an average of 41% for the year 1999. Our average revenue per rig day worked was
$9,407 in the first quarter of 1998, declining to $7,825 for the quarter ended
June 30, 1999.
Future demand for our rigs may remain the same or may decline and we can
offer you no assurance otherwise. If drilling activity does increase in the
areas where we operate, we cannot assure you that demand for our rigs will also
increase.
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IN ADDITION TO TRADE LIABILITIES, WE HAVE $250.0 MILLION IN PRINCIPAL AMOUNT OF
INDEBTEDNESS UNDER OUR SENIOR NOTES AND OUR RECENT OPERATIONS HAVE NOT GENERATED
SUFFICIENT CASH FLOW TO COVER OUR SEMI-ANNUAL INTEREST PAYMENTS OF APPROXIMATELY
$11.1 MILLION.
We are indebted for a total of $250.0 million in principal amount under our
8 7/8% Senior Notes due 2007. Semi-annual interest payments on the senior notes
of approximately $11.1 million are due on January 1 and July 1 of each year. For
the year ended December 31, 1999, however, our operating activities, investing
activities and financing activities each consumed net cash rather than provided
additional cash. To meet our debt service obligations under the senior notes and
provide necessary cash, we were required to use our cash on hand.
Our ability in the future to meet our debt service obligations and reduce
our total indebtedness will depend on a number of factors including:
- oil and gas prices;
- demand for our drilling services;
- whether our business strategy is successful;
- levels of interest rates; and
- other financial and business factors that affect us.
Many of these factors are beyond our control.
If we do not generate sufficient cash flow to pay debt service and repay
principal in the future, we will likely be required to use one or more of the
following measures:
- further diminish our cash balances;
- use our existing credit facility;
- obtain additional external financing;
- refinance our indebtedness; and
- sell our assets.
We can give no assurance that any such sources of funds will be adequate to
meet our needs or be available on terms acceptable to us.
WE HAVE HAD ONLY ONE PROFITABLE YEAR SINCE 1991.
We have a history of losses with our only profitable year since 1991 being
1997 in which we had net income of $10.2 million. Whether we are able to become
profitable in the future will depend on many factors, but primarily on whether
we are able to obtain substantially higher utilization rates for our rigs and
the rates we charge for them. Whether we can achieve those goals will largely
depend on oil and gas prices which are beyond our control.
UNEXPECTED COST OVERRUNS ON OUR TURNKEY AND FOOTAGE DRILLING JOBS COULD
ADVERSELY AFFECT US.
We have historically derived a significant portion of our revenues from
turnkey and footage drilling contracts and we expect that they will continue to
represent a significant component of our revenues. The occurrence of uninsured
or under-insured losses or operating cost overruns on our turnkey and footage
jobs could have a material adverse effect on our financial position and results
of operations. Under a typical turnkey or footage drilling contract, we agree to
drill a well for our customer to a specified depth and under specified
conditions for a fixed price. We typically provide technical expertise and
engineering service, as well as most of the equipment required for the drilling
of turnkey and footage wells. We often subcontract for related services. Under
typical turnkey drilling arrangements, we do not receive progress payments and
are entitled to be paid by our customer only after we have performed the terms
of the
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drilling contract in full. For these reasons, the risk to us under turnkey and
footage drilling contracts is substantially greater than for wells drilled on a
day work basis because we must assume most of the risks associated with drilling
operations that are generally assumed by our customer under a day work contract.
Although we attempt to obtain insurance coverage to reduce certain of the risks
inherent in our turnkey and footage drilling operations, we can offer no
assurance that adequate coverage will be obtained or will be available in the
future.
WE COULD BE ADVERSELY AFFECTED IF WE LOST THE SERVICES OF CERTAIN OF OUR SENIOR
MANAGERS.
Our business is dependent to a significant extent on a small group of our
executive management personnel. The loss of any one of these individuals could
have a material adverse effect on our financial condition and results of
operations.
OUR INDENTURES AND CREDIT AGREEMENTS MAY PROHIBIT US FROM PARTICIPATION IN
CERTAIN TRANSACTIONS THAT WE MAY CONSIDER ADVANTAGEOUS.
The indentures under which we issued our senior notes contain restrictions
on our ability and the ability of certain of our subsidiaries to engage in
certain types of transactions. These restrictive covenants may adversely affect
our ability to pursue business acquisitions and rig refurbishments. These
include covenants prohibiting or limiting our ability to:
- incur additional indebtedness;
- pay dividends or make other restricted payments;
- sell material assets;
- grant or permit liens to exist on our assets;
- enter into sale and lease-back transactions;
- enter into certain mergers, acquisitions and consolidations;
- make certain investments;
- enter into transactions with related persons; and
- engage in lines of business unrelated to our core land drilling business.
Our senior secured credit facility also contains covenants restricting our
ability and our subsidiaries' ability to undertake many of the same types of
transactions, and contains financial ratio covenants. They may also limit our
ability to respond to changes in market conditions. Our ability to meet the
financial ratio covenants of our credit agreement can be affected by events and
conditions beyond our control and we may be unable to meet those tests.
Our senior secured credit facility contains default terms that effectively
cross default with the indentures covering our senior notes. If we breach the
covenants in the indentures it could cause our default not only on our senior
notes, but also under our senior secured credit agreement, and possibly under
other then outstanding debt obligations owed by us or our subsidiaries. If the
indebtedness under our senior secured credit agreement or other indebtedness
owed by us or our subsidiaries is more than $10.0 million and is not paid when
due, or is accelerated by the holders of the debt, then an event of default
under the indenture covering our senior notes would occur. If circumstances
arise in which we are in default under our various credit agreements, our cash
and other assets may be insufficient to repay our indebtedness and that of our
subsidiaries.
WE COULD BE ADVERSELY AFFECTED IF SHORTAGES OF EQUIPMENT, SUPPLIES OR PERSONNEL
OCCUR.
While we are not currently experiencing any shortages, from time to time
there have been shortages of drilling equipment and supplies which we believe
could reoccur. During periods of shortages, the cost and delivery times of
equipment and supplies are substantially greater. In the past, in response to
such
S-13
<PAGE> 14
shortages, we have formed alliances with various suppliers and manufacturers
that enabled us to reduce our exposure to price increases and supply shortages.
Although we have formed many informal supply alliances with equipment
manufacturers and suppliers, and are attempting to establish arrangements to
assure adequate availability of certain necessary equipment and supplies on
satisfactory terms, there can be no assurance that we will be able to do so or
to maintain existing alliances. Shortages of drilling equipment or supplies
could delay and adversely affect our ability to return to service our
cold-stacked or inventory rigs and obtain contracts for our marketable rigs,
which could have a material adverse effect on our financial condition and
results of operations.
Although we have not encountered material difficulty in hiring and
retaining qualified rig crews, such shortages are occurring in the industry. We
may experience shortages of qualified personnel to operate our rigs, which could
have a material adverse effect on our financial condition and results of
operations.
OUR EXISTING DIVIDEND POLICY AND CONTRACTUAL RESTRICTIONS LIMIT OUR ABILITY TO
PAY DIVIDENDS.
We have never declared a cash dividend on our common stock and do not
expect to pay cash dividends on our common stock for the foreseeable future. We
expect that all cash flow generated from our operations in the foreseeable
future will be retained and used to develop or expand our business, pay debt
service and reduce outstanding indebtedness. Furthermore, the terms of our
senior secured credit facility prohibit the payment of dividends without the
prior written consent of the lenders and the terms of the indentures under which
our senior notes are issued also restrict our ability to pay dividends under
certain conditions.
CERTAIN PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS, SECURITIES AND CREDIT
AGREEMENTS HAVE ANTI-TAKEOVER EFFECTS WHICH MAY PREVENT OUR SHAREHOLDERS FROM
RECEIVING THE MAXIMUM VALUE FOR THEIR SHARES.
Our articles of incorporation, bylaws and securities and credit agreements
contain certain provisions intended to delay or prevent entirely a change of
control transaction not supported by our board of directors, or which may have
that general effect. These measures include:
- classification of our board of directors into three classes, with each
class serving a staggered three year term;
- giving our board of directors the exclusive authority to adopt, amend or
repeal our bylaws and thus prohibiting shareholders from doing so;
- requiring our shareholders to give advance notice of their intent to
submit a proposal at the annual meeting; and
- limiting the ability of our shareholders to call a special meeting and
act by written consent.
Additionally, the indentures under which our senior notes are issued,
require us to offer to repurchase all senior notes then outstanding at a
purchase price equal to 101% of the principal amount of the senior notes plus
accrued and unpaid interest to the date of purchase in the event that the we
become subject to a change of control, as defined in the indentures. This
feature of the indentures could also have the effect of discouraging potentially
attractive change of control offers.
In addition, we have adopted a shareholder rights plan which may have the
effect of impeding a hostile attempt to acquire control of us.
LARGE AMOUNTS OF OUR COMMON STOCK MAY BE RESOLD INTO THE MARKET IN THE FUTURE
WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
The accompanying prospectus may be used to issue common stock (in addition
to this offering ), preferred stock or debt that is convertible into common
stock and warrants to acquire common stock. If we issue a significant amount of
common stock, convertible preferred stock or warrants, the market price of our
common stock may be adversely affected.
S-14
<PAGE> 15
As of March 30, 2000, 165.5 million shares of our common stock were issued
and outstanding. 137.8 million of these shares, or 83.3%, are freely tradeable.
The remaining 27.7 million shares, or 16.7%, of our issued and outstanding
common stock are restricted shares, but are available for resale in the public
market under our currently effective registration statements or exemptions from
the registration requirements of the Securities and Exchange Commission. In
addition, as of March 30, 2000, we had issued options to purchase 8.7 million
shares of common stock and these options are currently exerciseable for 3.6
million shares of common stock. The market price of our common stock could drop
significantly if future sales of substantial amounts of our common stock occur,
or if the perception exists that substantial sales may occur.
S-15
<PAGE> 16
USE OF PROCEEDS
The net proceeds to be received by us from the issuance of the shares of
common stock will be approximately $51.5 million, net of estimated offering
expenses. We expect to use these proceeds for:
- purchasing five top drive units at a cost we estimate to be $7.0 million;
- capital expenditures to return some of our rigs to marketed status when
we believe market conditions justify their reactivation; and
- general corporate purposes, including working capital.
Pending these uses, we will invest the funds in short-term,
interest-bearing securities.
S-16
<PAGE> 17
CAPITALIZATION
The following table sets forth our unaudited capitalization as of December
31, 1999 on an actual basis, and as adjusted to reflect the sale of 13,000,000
shares of common stock in this offering at a price of $4.00 per share and the
application of the net proceeds after deducting estimated offering expenses. You
should read this table along with our selected historical financial data and our
historical financial statements and notes thereto included elsewhere or
incorporated by reference in this prospectus supplement.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 20,500 $ 72,000
--------- ---------
Current maturities of long-term debt........................ $ 831 $ 831
Long-term debt, net of current maturities:
Credit facility........................................... -- --
8 7/8% Senior Notes due 2007.............................. 249,354 249,354
Other..................................................... 608 608
--------- ---------
Total long-term debt, net of current maturities... 249,962 249,962
Shareholders' equity:
Common stock, $.10 par value per share.................... 16,516 17,816
Additional paid-in capital................................ 270,527 321,227
Cumulative translation adjustments........................ (454) (454)
Accumulated deficit....................................... (161,012) (161,012)
--------- ---------
Total shareholders' equity........................ 125,577 177,577
--------- ---------
Total capitalization.............................. $ 376,370 $ 428,370
========= =========
</TABLE>
S-17
<PAGE> 18
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the American Stock Exchange under the symbol
"GW". The following table sets forth the range of high and low sale prices per
share of our common stock as reported by the American Stock Exchange for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
First Quarter............................................. $5.5000 $3.5000
Second Quarter............................................ 4.7500 2.7500
Third Quarter............................................. 3.1250 1.1875
Fourth Quarter............................................ 1.6250 0.6875
1999
First Quarter............................................. $1.5000 $0.7500
Second Quarter............................................ 2.7500 1.0000
Third Quarter............................................. 3.7500 2.0000
Fourth Quarter............................................ 3.4375 2.1250
2000
First Quarter through March 30, 2000...................... $4.6250 $2.7500
</TABLE>
The last sale price of our common stock as reported by the American Stock
Exchange on March 30, 2000 was $4.125.
We have never declared or paid cash dividends on our common stock and do
not expect to pay cash dividends in 2000 or for the foreseeable future. We
anticipate that all cash flow generated from operations in the foreseeable
future will be retained and used to develop or expand our business, pay debt
service and reduce our indebtedness. Any future payment of cash dividends will
depend upon our results of operations, financial condition, cash requirements
and other factors deemed relevant by our board of directors.
The terms of our senior secured credit facility prohibit the payment of
dividends without the prior written consent of the lender and the terms of the
indentures under which our senior notes are issued also restrict our ability to
pay dividends.
S-18
<PAGE> 19
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth our consolidated financial and operating
data as of and for each of the years in the five-year period ended December 31,
1999. Our selected financial data as of and for the five-year period ended
December 31, 1999 has been derived from our audited consolidated financial
statements. The following data should be read together with our historical
consolidated financial statements and the notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus supplement or incorporated by reference
into this prospectus supplement or the accompanying prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND DRILLING RIG ACTIVITY
DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.................................................. $147,203 $ 240,979 $215,923 $ 81,767 $ 94,709
Drilling operations costs................................. 140,924 193,140 162,552 80,388 93,825
Depreciation and amortization............................. 34,003 38,069 20,957 4,689 4,832
General and administrative................................ 6,678 8,880 8,081 4,274 3,555
Provision for asset impairment(1)......................... -- 93,193 -- -- 5,290
Unusual charges(2)........................................ 320 1,722 -- 6,131 --
-------- --------- -------- -------- --------
Operating income (loss)................................... (34,722) (94,025) 24,333 (13,715)(6) (12,793)
Interest expense.......................................... (24,054) (21,621) (8,748) (1,220) (1,472)
Other income, net......................................... 1,958 4,482 3,264 4,058 1,590
-------- --------- -------- -------- --------
Income (loss) from continuing operations.................. (56,818) (111,164) 18,849 (10,877) (12,675)
Income (loss) from discontinued operations(3)............. -- -- -- -- (772)
-------- --------- -------- -------- --------
Income (loss) before income taxes......................... (56,818) (111,164) 18,849 (10,877) (13,447)
Income tax expense (benefits)............................. (15,976) (27,951) 8,631 845 --
-------- --------- -------- -------- --------
Income (loss) before extraordinary item................... (40,842) (83,213) 10,218 (11,722) (13,447)
Extraordinary item, net of tax of $203.................... (420) -- -- --
-------- --------- -------- -------- --------
Net income (loss)......................................... (41,262) (83,213) 10,218 (11,722) (13,447)
Series A preferred stock redemption premium............... -- -- (240) (13) --
Series B preferred stock subscription dividend............ -- -- -- (402) --
-------- --------- -------- -------- --------
Net income (loss) applicable to common stock.............. $(41,262) $ (83,213) $ 9,978 $(12,137) $(13,447)
======== ========= ======== ======== ========
Basic net income (loss) per share -- continuing
operations.............................................. $ (.25) $ (.50) $ .07 $ (.18) $ (.33)
Basic net income (loss) per share -- discontinued
operations.............................................. -- -- -- -- $ (.02)
-------- --------- -------- -------- --------
Basic net income (loss) per share......................... $ (.25) $ (.50) $ .07 $ (.18) $ (.35)
======== ========= ======== ======== ========
Basic weighted average shares outstanding................. 165,108 164,944 145,854 67,495 38,669
Diluted net income (loss) per share -- continuing
operations.............................................. $ (.25) $ (.50) $ .07 $ (.18) $ (.33)
Diluted net income (loss) per share -- discontinued
operations.............................................. -- -- -- -- $ (.02)
-------- --------- -------- -------- --------
Diluted net income (loss) per share....................... $ (.25) $ (.50) $ .07 $ (.18) $ (.35)
======== ========= ======== ======== ========
Diluted weighted average shares outstanding............... 165,108 164,944 149,724 67,495 38,669
======== ========= ======== ======== ========
Other Data (unaudited):
EBITDA(4)................................................. $ (399) $ 38,959 $ 45,290 $ (2,895) $ (2,671)
Drilling Rig Activity Data (unaudited):
Average utilization rate of marketable drilling rigs(5)... 40% 63% 82% 63% 66%
Average revenues per day(6)............................... $ 8,956 $ 9,187 $ 8,847 $ 7,610 $ 7,739
Number of operating days.................................. 16,436 26,230 24,405 10,744 11,694
Marketable drilling rigs -- end of period(5).............. 108 113 106 52 58
Inventoried drilling rigs -- end of period................ 17 12 16 25 22
</TABLE>
S-19
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Working capital........................................... $ 16,353 $ 44,489
Property and equipment, net............................... 384,361 411,316
Total assets.............................................. 452,846 501,303
Long-term debt net of current maturities.................. 249,962 250,527
Series A preferred stock -- mandatory redeemable.......... -- 305
Shareholders' equity...................................... 125,577 166,691
</TABLE>
- ---------------
(1) Represents a non-cash impairment charge to some of our drilling rigs and
equipment caused by changes in circumstances indicating that the carrying
amounts may not be recoverable. See notes 1 and 11 to our consolidated
financial statements incorporated by reference in this prospectus
supplement.
(2) For the year ended December 31, 1999, represents employment severance costs.
For the year ended December 31, 1998, represents employment severance costs
and write-downs of other assets associated with international operations.
See note 11 to our consolidated financial statements incorporated by
reference in this prospectus supplement. For the year ended December 31,
1996, represents employment severance costs and exit costs associated with
international operations.
(3) To account for the discontinued operations of DI Energy, effective April 1,
1995.
(4) EBITDA means operating income (loss) before depreciation and amortization,
provision for asset impairment and unusual charges and is not a measure
recognized by generally accepted accounting principles. EBITDA is presented
here to provide additional information about our operations. EBITDA should
not be considered in isolation or as a substitute for net income as a
measure of our operating performance or for cash provided by operating
activities as a measure of our liquidity (all as determined in accordance
with generally accepted accounting principles). This method may not be
comparable to the EBITDA calculations of other companies.
(5) Includes marketed and cold-stacked rigs.
(6) Represents total contract drilling revenues divided by the total number of
rig days worked by our drilling rigs during the period.
S-20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements incorporated by reference in this prospectus
supplement. All significant intercompany transactions have been eliminated.
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, 71 rigs are marketed while 37 are cold-stacked. We also
have an inventory of 12 non-marketed rigs located in the United States which are
held for refurbishment as demand for drilling services warrants. In addition to
our domestic operations, we maintain a fleet of five non-marketed rigs in
Venezuela, giving us a total of 125 rigs. 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 in 2000. How our drilling operations were affected by industry
conditions, both before and after the turnaround in drilling activity which
began in the second quarter of 1999, is summarized below.
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. Our average domestic
utilization rate for the year ended December 31, 1999, was 41% compared to 64%
for the year ended December 31, 1998 and 96% for the year ended December
31,1997. 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 our spare equipment or cold-stacked rigs instead of buying new replacement
parts.
Our utilization rate has improved from 31% for the second quarter of 1999
to 56% for the first two months of 2000. During the period from April 1999 to
March 30, 2000, in which the overall land drilling count rebounded by 65%, our
rig count increased by 84%. For the first two months of the first quarter of
2000, we had an average of 61 rigs working (56% utilization). The recent
increase in demand for our rigs has allowed us to return 36 rigs to work since
April 1999, including 11 of the 49 rigs which had been cold-stacked. We believe
our greater percentage increase in working rigs over the period is primarily
attributable to our strategic decision not to reduce wages in order to retain
key operating personnel, which has allowed us to return rigs to work more
quickly.
As price competition intensified in 1998 and the first half of 1999, some
of our competitors were able to reduce the rates they charged for their rigs
largely, we believe, by decreasing the wages they paid their rig crews. We chose
not to cut the wages of our rig crews for strategic reasons, principally to help
us retain the experienced rig crews so as to better position us to participate
in future increases in drilling activity. This pricing strategy caused our rig
utilization to decline and caused us to temporarily lose market share. Increases
in drilling demand since the second half of 1999 have allowed us to recapture
market share.
The table below shows our rig utilization in our core domestic markets
during the periods indicated:
<TABLE>
<CAPTION>
1997 1998 1999 2000
- ---- ---------------------------- ---------------------------- ----
FULL FULL FULL
YEAR Q-1 Q-2 Q-3 Q-4 YEAR Q-1 Q-2 Q-3 Q-4 YEAR Q-1
- ---- --- --- --- --- ---- --- --- --- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
96% 81% 71% 59% 49% 64% 39% 31% 40% 54% 41% 56%
</TABLE>
S-21
<PAGE> 22
Drilling Contract Bid Rates
In addition to the increases in rig utilization rates in 1999, 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 per day during the second quarter of 1999, our
leading edge bid rates have increased to a range of $6,500 to $7,200 per day in
early March 2000.
While bid rates for new drilling contracts in our core domestic markets for
the fourth quarter of 1999 were approximately 9% greater than the last quarter
of 1998, they remained 28% less than the bid rates received in the fourth
quarter of 1997.
Turnkey and Footage Contract Activity
Revenue generated from turnkey and footage contracts is expected to be
approximately 40% of total revenue in the first quarter of 2000, consistent with
the fourth quarter of 1999 and compared to approximately 39% for the year ended
December 31, 1999 and 21% for the year ended December 1998. EBITDA margin
generated on turnkey and footage contracts for 1999 and 1998 was 18% of revenue.
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 fourth quarter of 1999 marked the second sequential quarter of
improvement from our low in the second quarter of 1999. Net losses declined from
$12.2 million in the second quarter of 1999, to $11.5 million in the third
quarter of 1999, to $8.1 million in the fourth quarter of 1999. 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 third
and fourth quarters of 1999 reflected the improvement in utilization, dayrates
and EBITDA after a steady decline beginning in the first quarter of 1998. Based
on the current levels of utilization and day rates, we believe our results for
the first quarter of 2000 should be better than those of the fourth quarter of
1999.
FINANCIAL CONDITION AND LIQUIDITY
The following table summarizes our financial position at December 31,1999
and 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Working Capital..................................... $ 16,353 4 $ 44,489 10
Property and equipment, net......................... 384,361 94 411,316 88
Other noncurrent assets............................. 7,847 2 9,306 2
-------- --- -------- ---
Total..................................... $408,561 100 $465,111 100
======== === ======== ===
Long-term debt...................................... $249,962 61 $250,527 54
Other long-term liabilities......................... 33,022 8 47,893 10
Shareholders' equity................................ 125,577 31 166,691 36
-------- --- -------- ---
Total..................................... $408,561 100 $465,111 100
======== === ======== ===
</TABLE>
The significant changes in our financial position from December 31, 1998 to
December 31, 1999 are the decrease in working capital of $28.1 million and the
decrease in shareholders' equity of $41.1 million. The change in working capital
is due primarily to an overall decline in our operating activity, while the
decrease in shareholders' equity is due to our net loss in 1999 of $41.3
million.
We 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
S-22
<PAGE> 23
and July 1 of each year. For the year ended December 31, 1999, our operating
activities, investing activities, and financing activities each consumed net
cash rather than provided additional cash. 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 draw on our existing credit facility or seek other external
financing. We can give no assurance that any such sources of funds would be
adequate to meet our needs or be available on terms acceptable to us.
During the year ended December 31, 1999, we funded our activities through a
combination of cash generated from operations and the remaining proceeds from
our May 1998 offering of $75.0 million of senior notes. The net cash provided by
or used in our operating, investing and financing activities is summarized
below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities............................. $(17,470) $ 30,799 $ 21,783
Investing activities............................. (6,011) (109,908) (213,341)
Financing activities............................. (1,914) 71,378 239,022
-------- --------- ---------
Net increase (decrease) in cash.................... $(25,395) $ (7,731) $ 47,464
======== ========= =========
</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, as well as whether our overall activity is
expanding or contracting. We used $21.9 million in cash flow in operating
activities (before changes in operating assets and liabilities) in 1999 versus
generating $20.2 million in 1998 due primarily to a decrease in overall
operating activity in 1999 versus 1998. Our cash flows from operating activities
were also impacted by reductions in operating assets and liabilities which
provided $4.4 million in cash flow in 1999 versus $10.6 million in 1998. Our
cash flow from operating activities in 1998 was greater than in 1997 due to a
decrease in the amount of working capital required which was partially offset by
a decrease in cash flow from operations of $16.9 million due to fewer operating
days worked and lower average day rates.
Cash flow used in investing activities in 1999 primarily consisted of
capital expenditures for rig maintenance. Cash flow used in investing activities
in 1998 included the cash portion of the Murco Drilling Corporation acquisition
of $60.8 million, as well as capital expenditures for rig refurbishments, drill
pipe and other capital maintenance of $19.6 million, $11.2 million and $18.3
million, respectively. Cash flow used in investing activities during 1997
consisted of the cash portion of the Grey Wolf Drilling Company acquisition of
$62.0 million, the cash acquisition of Justiss, Kaiser-Francis rigs and other
rig purchases of $79.7 million, $52.1 million spent on refurbishments and $19.5
million spent on drill pipe and other related equipment.
Cash flow used in financing activities in 1999 primarily consisted of
repayments of long-term debt of $1.1 million and financing costs related to the
senior secured revolving credit facility with The CIT Group/Business Credit,
Inc. of $861,000. Cash flow from financing activities in 1998 primarily
consisted of net proceeds from the issuance of senior notes of $71.4 million and
borrowings and repayments of long-term debt of $30.6 million and $31.3 million,
respectively. Cash flow from financing activities in 1997 primarily consisted of
$169.1 million in net proceeds from the issuance of senior notes, net proceeds
from the issuance of common stock of $94.3 million and $52.8 million and $78.1
million, respectively, in borrowings and repayments of long-term debt.
At March 30, 2000, after our January 1, 2000 payment of $11.1 million of
interest on our senior notes, our cash balance was $10.0 million.
S-23
<PAGE> 24
Capital expenditures for 2000 are estimated to be between $13.2 million and
$19.3 million depending on our level of activity and the number of cold-stacked
rigs ultimately reactivated. In addition, the demand for top drive units is
growing in the land drilling industry and we expect to buy or rent additional
top drive units as required to meet customer demand. A top drive drilling
system, compared with the traditional kelly and rotary table drilling systems,
allows for drilling with 90-foot lengths of drill pipe rather than 30-foot
lengths, thus reducing the number of and time for making required connections. A
top drive drilling system also permits rotation of the drill string while
tripping in or out of the hole. These characteristics increase drilling speed,
safety and efficiency and reduce the risk of the drill string sticking during
operations. Estimated capital expenditures for 2000 include approximately $7.0
million for the acquisition of five additional top drives. Through March 30,
2000, we have redeployed 12 of our domestic cold-stacked rigs for an aggregate
capital investment of $1.2 million. If demand warrants, we believe we can return
the next 14 cold-stacked rigs to marketed condition for estimated capital
expenditures of approximately $1.4 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 $4.6 million to $5.9 million.
An estimated $10.0 million would be required to return our final eight
cold-stacked rigs to marketed status. The actual cost of returning cold-stacked
rigs to marketed status will depend on the extent to which component parts are
used from the cold-stacked rigs and the extent to which we choose to upgrade the
cold-stacked rigs before returning them to service. We cannot assure you that
our actual costs will not be materially higher.
CERTAIN CREDIT ARRANGEMENTS
During the year ended December 31, 1999, our principal credit arrangements
(other than customary trade credit and capital leases) consisted of a credit
facility and our 8 7/8% Senior Notes due 2007.
Bank Credit Facility
Throughout 1998, we maintained a senior secured revolving credit facility
with a syndicate of commercial banks. Effective January 14, 1999, we terminated
that credit facility and entered into a more flexible agreement with The CIT
Group/Business Credit, Inc. Also in January 1999, we wrote off approximately
$623,000 in deferred loan costs related to the terminated credit facility.
CIT Facility
Effective January 1999, we entered into a senior secured revolving credit
facility with The CIT Group/Business Credit, Inc. We have never borrowed under
the CIT facility. The CIT facility provides us with the ability to borrow up to
the lesser of $50.0 million or 50% of the orderly liquidation value 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 us with up to
$10.0 million available for letters of credit with such amounts being reserved
from availability. Interest under the CIT facility accrues at a variable rate,
using (at our election) either the prime interest 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. During the first year of the CIT facility, the
interest rate was fixed at LIBOR plus 2.5% or the prime interest rate plus 1%.
Letters of credit accrue a fee of 1.25% per annum. 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 lien security
interest in substantially all of our assets and the assets of our domestic
subsidiaries and by guarantees given by us and four of our significant wholly
owned subsidiaries.
Under the CIT facility, the lender's commitments will be reduced by the
amount of net cash proceeds received by us or our subsidiaries from sales or
other dispositions of collateral in excess of $1.0 million individually or $2.0
million in the aggregate in any 12 month period (other than sales or other
dispositions
S-24
<PAGE> 25
of certain types of inventory, rigs identified in the CIT facility as equipment
held for sale and up to $75.0 million of rigs and accessories). In addition,
mandatory prepayments would be required upon:
- the receipt of net proceeds received by us or our subsidiaries from the
incurrence of certain other debt or sales of debt or equity securities in
a public offering or private placement; or
- the receipt of net cash proceeds by us or our subsidiaries from asset
sales (including proceeds from sale of rigs identified in the credit
agreement as equipment held for sale but excluding proceeds from
dispositions of inventory in the ordinary course of business), and sales
of up to $75.0 million of rigs and rig accessories; or
- the receipt of insurance proceeds on our assets in each case to the
extent that such proceeds are in excess of $500,000 individually or $1.0
million in the aggregate in any twelve month period.
Among the various covenants that we must satisfy 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 $25.0 million:
- 1 to 1 EBITDA coverage of debt service, tested monthly on a trailing 12
month basis; and
- minimum tangible net worth (all as defined in the CIT facility) at the
end of each quarter will be the prior year tangible net worth less $30.0
million adjusted for quarterly tests.
Additionally, it will be a covenant default if the orderly liquidation
value of our domestic drilling equipment (including inventoried rigs) falls
below $150.0 million. Also, if our two month average rig utilization rate falls
below 45%, the lender will have the option to request one additional appraisal
per year to aid in determining the current orderly liquidation value of the
drilling equipment. While our rig utilization for 1999 was below 45%, the lender
did not request an additional appraisal. Prepayment would be required if the
orderly liquidation value falls below the level specified above.
The CIT facility also contains provisions restricting our ability to, among
other things:
- engage in new lines of business unrelated to our current activities;
- enter into mergers or consolidations or asset sales or purchases (with
specified exceptions);
- incur liens or debts or make advances, investments or loans (in each
case, with specified exceptions);
- pay dividends or redeem stock (except for certain inter-company
transfers);
- prepay or materially amend any other indebtedness; and
- issue any stock (other than common stock).
Events of default under the CIT facility include, in addition to
non-payment of amounts due, misrepresentations and breach of loan covenants and
certain other events of default:
- default with respect to other indebtedness in excess of $350,000;
- judgements in excess of $350,000; or
- a change in control (meaning that we cease to own 100% of our two
principal subsidiaries, some person or group has either acquired
beneficial ownership of 30% or more of our voting securities or obtained
the power to elect a majority of our board of directors or our board of
directors ceases to consist of a majority of "continuing directors" (as
defined in the CIT facility)).
Senior Notes
Concurrently with the closing of the acquisition of Grey Wolf Drilling
Company in June 1997, we concluded a public offering of $175.0 million in
principal amount of senior notes and in May 1998, we
S-25
<PAGE> 26
completed an offering of an additional $75.0 million. The senior notes bear
interest at 8 7/8% per annum and mature July 1, 2007. The terms and conditions
of these senior notes are substantially identical in all material respects. The
senior notes are general unsecured senior obligations and are guaranteed, on a
joint and several basis, by all of our domestic wholly-owned subsidiaries.
Except as discussed below, the senior notes are not redeemable at our
option prior to July 1, 2002. On or after such date, we shall have the option to
redeem the senior 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, we may at our
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 for
the senior notes, each holder of the senior notes will have the right to require
us to repurchase all or any part of such holder's senior notes at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest to the date of purchase.
The indentures for the senior notes permit us and our subsidiaries to incur
additional indebtedness, including senior indebtedness of up to $100.0 million
aggregate principal amount which may be secured by liens on all of our assets of
and the assets of our subsidiaries, subject to certain limitations. The
indentures contain other covenants limiting our ability and our subsidiaries to,
among other things, pay dividends or make certain other restricted payments,
make certain investments, incur additional indebtedness, permit liens, incur
dividend and other payment restrictions affecting subsidiaries, enter into
consolidation, merger, conveyance, lease or transfer transactions, make asset
sales, enter into transactions with affiliates or engage in unrelated lines of
business. These covenants are subject to exceptions and qualifications.
Grey Wolf, Inc. is a holding company and substantially all of its
operations are conducted through and substantially all of its assets consist of
equity interest in its subsidiaries. As a holding company, Grey Wolf Inc.'s
liquidity is dependent on the operations of its subsidiaries. The indentures
that Grey Wolf, Inc. and its subsidiaries are party to restrict Grey Wolf,
Inc.'s ability to access funds from its subsidiaries.
S-26
<PAGE> 27
RESULTS OF OPERATIONS
The following tables highlight rig days worked, revenues and operating
expenses for our domestic and foreign operations for the years ended December
31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
-------------------------------------
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
----------- ----------- ---------
($ IN THOUSANDS, EXCEPT
AVERAGES PER RIG DAY WORKED)
<S> <C> <C> <C>
Rig days worked...................................... 16,291 145 16,436
Drilling revenue..................................... $145,738 $ 1,465 $147,203
Operating expenses(1)................................ 138,221 2,126 140,347
-------- ------- --------
Gross profit (loss)........................ $ 7,517 $ (661) $ 6,856
======== ======= ========
Averages per rig day worked:
Drilling revenue................................... $ 8,946 $10,103 $ 8,956
Operating expenses................................. 8,485 14,662 8,539
-------- ------- --------
Gross profit (loss)........................ $ 461 $(4,559) $ 417
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
----------- ----------- ---------
($ IN THOUSANDS, EXCEPT
AVERAGES PER RIG DAY WORKED)
<S> <C> <C> <C>
Rig days worked...................................... 25,387 843 26,230
Drilling revenue..................................... $232,276 $ 8,703 $240,979
Operating expenses(1)................................ 182,057 9,360 191,417
-------- ------- --------
Gross profit (loss)........................ $ 50,219 $ (657) $ 49,562
======== ======= ========
Averages per rig day worked:
Drilling revenue................................... $ 9,149 $10,324 $ 9,187
Operating expenses................................. 7,171 11,103 7,298
-------- ------- --------
Gross profit (loss)........................ $ 1,978 $ (779) $ 1,889
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
DOMESTIC FOREIGN
OPERATIONS OPERATIONS TOTAL
----------- ----------- ---------
($ IN THOUSANDS, EXCEPT
AVERAGES PER RIG DAY WORKED)
<S> <C> <C> <C>
Rig days worked...................................... 23,575 830 24,405
Drilling revenue..................................... $209,423 $ 6,500 $215,923
Operating expenses(1)................................ 155,021 7,731 162,752
-------- ------- --------
Gross profit (loss)........................ $ 54,402 $(1,231) $ 53,171
======== ======= ========
Averages per rig day worked:
Drilling revenue................................... $ 8,883 $ 7,831 $ 8,847
Operating expenses................................. 6,576 9,314 6,669
-------- ------- --------
Gross profit (loss)........................ $ 2,307 $(1,483) $ 2,178
======== ======= ========
</TABLE>
- ---------------
(1) Operating expenses exclude depreciation and amortization, general and
administrative expenses, provision for doubtful accounts, and unusual
charges including the provision for asset impairment.
S-27
<PAGE> 28
Comparison of Fiscal Year Ended December 31, 1999 and 1998
Revenues decreased approximately $93.8 million, or 39%, to $147.2 million
for the year ended December 31, 1999, from $241.0 million for the year ended
December 31, 1998. The decrease is due to a reduction in revenue from domestic
operations of $86.5 million and a decrease in revenue from foreign operations of
$7.2 million. Revenues from domestic operations decreased due to a reduction in
rig days worked of 9,096 and a decrease in the average revenue per day of $203.
The decrease in average revenue per day is due to lower day rates which were
partially offset by an increase in the percentage of turnkey drilling activity
from 12% of total days worked during 1998 to 19% of total days worked for 1999.
Revenue from foreign operations decreased due to a decrease in rig days worked
of 698. The decrease in rig days worked in foreign operations is a direct result
of completing our contracts in Venezuela late in the first quarter of 1999 and
discontinuing all operations in Venezuela thereafter.
Drilling operating expenses decreased by approximately $51.1 million, or
27%, to $140.3 million for the year ended December 31, 1999, compared to $191.4
million for the year ended December 31, 1998. The decrease is due to a reduction
in operating expenses from domestic operations of $43.8 million and a decrease
in operating expenses from foreign operations of $7.2 million. The decrease in
domestic drilling operating expenses is a direct result of the decrease in rig
days worked of 9,096 which were partially offset by an increase in operating
expense per day of $1,314. 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 worked. The decrease in operating
expenses from foreign operations is a result of discontinuing Venezuelan
operations as discussed above.
Successfully completed turnkey and footage contracts generally result in
higher effective revenues per day worked than under daywork contracts. Gross
profit margins per day worked on successful turnkey and footage jobs are also
generally greater than under daywork contracts, although we are typically
required to bear additional operating costs (such as fuel costs) that would
typically be paid by the customer under daywork contracts. Revenues, operating
expenses and gross profit (or loss) margins on turnkey and footage contracts are
affected by a number of variables, and include the depth of the well, geological
complexities and the actual difficulties encountered in completing the well.
Depreciation and amortization expense decreased by $4.1 million, or 11%, to
$34.0 million for the year ended December 31, 1999, compared to $38.1 million
for the year ended December 31, 1998. The decrease in depreciation expense is
due to a $6.0 million decrease as a result of the SFAS 121 write-down discussed
below, which was partially offset by an increase in depreciation on 1998
attributable to capital expenditures during 1998 and 1999.
General and administrative expenses decreased by $2.2 million, or 25%, to
$6.7 million for the year ended December 31, 1999, from $8.9 million for the
same period of 1998 due primarily to our cost cutting measures and the decreased
level of drilling activity.
During 1998, we recorded a non-cash asset impairment charge of $93.2
million as a result of the application of Statement of Financial Accounting
Standards No. 121 (SFAS No. 121), which requires that long-lived assets and
certain identifiable intangibles held and used by us be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Our review of our long-lived assets indicated
that the carrying value of certain of our foreign and domestic drilling rigs was
more than the estimated undiscounted future net cash flows. As such, under SFAS
No. 121, we wrote-down those assets to their estimated fair market value. The
impairment was recorded based on certain estimates and projections as stipulated
in SFAS No. 121. During 1999, no write-down was necessary as a result of the
application of SFAS No. 121.
Provision for doubtful accounts decreased $1.1 million, or 67%, to $577,000
for the year ended December 31, 1999 compared to $1.7 million for the year ended
December 31, 1998. The higher provision for doubtful accounts for the year ended
December 31, 1998 is a direct result of the severity of a downturn in the oil
and gas industry which began in early 1998.
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<PAGE> 29
We recorded $320,000 in 1999 and $1.7 million in 1998 in unusual charges.
Unusual charges in 1999 consist entirely of severance costs, while unusual
charges in 1998 consist of $496,000 in severance costs and $1.2 million in
write-downs associated with international operations.
Interest expense increased by $2.4 million, or 11%, to $24.1 million for
the year ended December 31, 1999, compared to $21.6 million for the year ended
December 31, 1998. The increase is due to an increase in our average outstanding
debt balance of $36.7 million to $251.2 million for the year ended December 31,
1999, from $214.5 million for the year ended December 31, 1998. This increase in
our 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 our then-existing credit facility.
Other income, net decreased by $2.5 million, or 56%, to $2.0 million for
the year ended December 31, 1999, compared to $4.5 million for the year ended
December 31, 1998. The decrease is primarily due to the $1.8 million gain
recognized during 1998 on the sale of rigs and drilling related equipment of our
Eastern division located in Ohio to Union Drilling, Inc., an affiliate of two of
our directors.
As discussed previously, during the year ended December 31, 1999, we wrote
off $623,000 in deferred loan costs related to our former credit facility. This
amount, net of $203,000 in related taxes, is classified as an extraordinary
item.
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Contract drilling revenues increased approximately $25.1 million, or 12%,
to $241.0 million for the year ended December 31, 1998 compared to $215.9
million for the year ended December 31, 1997. This increase is due to an
increase in revenue from domestic operations of $22.9 million and an increase in
revenue from foreign operations of $2.2 million. Revenues from domestic
operations increased due to an increase in the number of rig days worked of
1,812 and an increase in average revenue per rig day worked of $266. The
increase in the number of operating days is due to the acquisition of 54
operating rigs during 1997 and in January of 1998. The increase in average
revenue per rig day worked of $266 is due to a 19% increase in the average
revenue per rig day worked on turnkey contracts as well as a 4% increase in
average revenue per rig day worked on daywork contracts. While average revenue
per rig day worked increased in 1998 compared to 1997, average revenue per rig
day worked in the fourth quarter of 1998 was below the 1997 average reflecting
the decline in drilling activity that continued in 1999. Revenue from foreign
operations increased due to an increase in average revenue per rig day worked of
$2,493, while rig days worked remained relatively flat.
Operating expenses increased by $28.7 million, or 18%, to $191.4 million
for the year ended December 31, 1998 compared to $162.7 million for the year
ended December 31, 1997. The increase is primarily due to a $27.0 million
increase in our drilling operating expenses from domestic operations. The
increase in domestic drilling operating expenses is due to the increase in the
number of rigs owned and available for service and the corresponding 1,812 day
increase in the days worked as well as increases in the average cost per rig day
worked of 10% on daywork contracts and 26% on turnkey contracts. The increase in
average cost per rig day worked on daywork and turnkey contracts was due to a
number of things including a wage increase in mid-1997, higher trucking cost due
to lower utilization and down time between contracts and fixed costs spread over
a fewer number of days. The remaining increase in operating expenses of $1.7
million is due to an increase in operating expense from foreign operations
resulting from increased labor costs in our Venezuelan operations.
Depreciation and amortization expense increased by $17.1 million, or 82%,
to $38.1 million for the year ended December 31, 1998 compared to $21.0 million
for the year ended December 31, 1997. The increase was primarily due to
additional depreciation associated with the acquisition of additional operating
rigs noted above, and refurbishment of 25 rigs from our inventory and partially
offset by approximately $6.0 million due to the change in depreciable lives of
certain of our drilling rigs.
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<PAGE> 30
General and administrative expenses increased by $799,000, or 10%, to $8.9
million for the year ended December 31, 1998 compared to $8.1 million for the
year ended December 31, 1997 due primarily to the increased size of our
operations.
As discussed previously, during 1998, we recorded pretax unusual charges of
$94.9 million ($71.0 million after tax or $.43 per share). There were no such
unusual charges recorded in 1997. The unusual charge consisted of a $93.2
million asset impairment, $0.5 million in severance costs, and $1.2 million in
write-downs associated with international operations. The asset impairment
charge was required by Statement of Financial Accounting Standards No. 121 which
requires that long-lived assets we hold and use be reviewed whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The then existing downturn in the oil and gas industry, due to
the magnitude and duration, qualified as such an event. In addition, we recorded
a provision for doubtful accounts during 1998 of $1.7 million compared to a
reversal of provision for doubtful accounts of $200,000 in 1997. The severance
cost, write-downs associated with international operations and the provision for
doubtful accounts are also associated with the downturn in the oil services
industry in 1998.
Interest expense increased by $12.9 million, or 147%, to $21.6 million for
the year ended December 31, 1998, compared to $8.7 million for the year ended
December 31, 1997. The increase was due to an increase in our average
outstanding debt balance of $112.1 million to $214.5 million for the year ended
December 31, 1998 from $102.4 for the year ended December 31, 1997. This
increase in the outstanding debt balance was primarily due to the issuance of
$175.0 million of senior notes during June 1997 to complete our Grey Wolf
Drilling Company merger and to continue refurbishment of the rigs we purchased
in 1997 and the issuance of $75.0 million of senior notes in May 1998 of which
$30.0 million was used to repay the indebtedness incurred under our previous
bank credit facility to partially finance the acquisition of Murco.
Other income, net increased by $1.2 million to $4.5 million for the year
ended December 31, 1998, compared to $3.3 million for the year ended December
31, 1997. The increase was primarily due to the $1.8 million gain recognized
during 1998 on the sale of rigs and drilling related equipment of our Eastern
Division located in Ohio to Union Drilling, Inc., an affiliate of two of our
directors, and the $543,000 gain also recognized during 1998 on the sale of a
rig yard.
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
Our Venezuelan operations during 1997, 1998 and early 1999 often performed
services pursuant to drilling contracts under which payments to us were
dominated in United States Dollars but were payable in Venezuelan currency at a
floating exchange rate. We are not a party to any currency hedging arrangements
and were not during the three-year period ended December 31, 1999, a party to
into any currency hedges to protect us from foreign currency losses. Instead, we
have attempted to manage assets in foreign countries to minimize our exposure to
currency fluctuations. During the years ended December 31, 1999 and 1998, we
recognized foreign exchange losses of $120,000 and $178,000, while in 1997,
$50,000 was recorded as a decrease in shareholders' equity due to a devaluation
of the Venezuelan Bolivar.
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 data using "00" as the year 1900 rather than the year 2000. This
S-30
<PAGE> 31
could result in a system failure causing disruptions of administrative
operations, including, among other things, temporary inability to process data.
We have undertaken various initiatives intended to ensure that our 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 systems, including accounting, data processing, telephone systems and
other miscellaneous systems, as well as systems that re not commonly thought of
as information technology systems, such as alarm systems, sprinkler systems, fax
machines, or other miscellaneous systems. These systems may contain imbedded
technology, which complicated our year 2000 identification, assessment,
remediation, and testing efforts.
Through March 31, 2000, we have experienced no significant operational
problems related to year 2000 issues and we presently believe that the year 2000
issues will not pose significant operational problems for us in the future.
However, there can be no assurance that as yet undiscovered year 2000 issues of
other entities will not have a material adverse impact on our systems or results
of operations.
As of December 31, 1999, 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 issues will not be material, and
as such will not have a significant impact on our financial position or
operating results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. We are subject to market risk exposure related to
changes in interest rates on our CIT facility. Interest on borrowings under the
CIT facility accrues at a variable rate, using (at our election) either the
prime rate plus 0.25% to 1.50% or LIBOR plus 1.75% to 3.5%, depending upon our
debt service coverage ratio for the trailing 12 month period. On March 30, 2000,
we had no outstanding balance under the CIT facility and as such had no exposure
at this time due 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 the discussion above under the heading "Foreign
Exchange."
S-31
<PAGE> 32
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated March 30, 2000, we will sell to the underwriter, Johnson Rice &
Company, L.L.C., all of the shares of common stock offered hereby.
We have been advised by the underwriter that it proposes to offer the
common stock directly to the public at a price of $4.125 per share. The
following table shows the underwriting spread in connection with this offering.
This spread is the difference between the initial price to the public and the
amount the underwriter pays us for the shares. On a per share basis, the
underwriting spread is 3.03% of the initial price to the public.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO PUBLIC SPREAD
--------------- ------------
<S> <C> <C>
Per share.................................................. $4.125 $0.125
Total...................................................... $53,625,000 $1,625,000
</TABLE>
The underwriting agreement provides that the underwriter's obligation to
purchase shares of the common stock depends on the satisfaction of the
conditions contained in the underwriting agreement, and that if any of the
shares of common stock are purchased by the underwriter, all of the shares of
common stock must be purchased. The conditions contained in the underwriting
agreement include the condition that the representations and warranties made by
us to the underwriter are true, that there has been no material adverse change
in our condition or in the financial markets and that we deliver to the
underwriter customary closing documents.
We have agreed to indemnify the underwriter against certain liabilities,
including liabilities under the Securities Act of 1933 and liabilities arising
from breaches of representations and warranties contained in the underwriting
agreement, or to contribute to payments that may be required to be made in
respect of these liabilities.
We have agreed, subject to certain exceptions, that we will not, directly
or indirectly, sell, offer or otherwise dispose of any shares of common stock or
enter into any derivative transaction with similar effect as a sale of common
stock, for a period of 14 days after the date of this prospectus supplement
without the prior written consent of the underwriter.
The underwriter may engage in stabilizing transactions in accordance with
Regulation M under the Exchange Act. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. These stabilizing transactions may cause the price of the
common stock to be higher than it would otherwise be in the absence of these
transactions, may be effected on The American Stock Exchange or otherwise and,
if commenced, may be discontinued at any time.
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<PAGE> 33
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
for us by Porter & Hedges, L.L.P., Houston, Texas and for the underwriters by
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans,
Louisiana.
EXPERTS
The consolidated financial statements of Grey Wolf, Inc. as of December 31,
1999 and 1998, and for each of the years in the three-year period ended December
31, 1999, have been incorporated by reference herein in reliance upon the report
of KPMG LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of such firm as experts in accounting and
auditing.
S-33
<PAGE> 34
PROSPECTUS
GREY WOLF INC. LOGO
$200,000,000
GREY WOLF, INC.
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
DEBT SECURITIES
WARRANTS
---------------------
We may offer and sell from time to time in one or more classes or series:
- common stock;
- preferred stock;
- depositary shares relating to our preferred stock;
- debt securities; and
- warrants to purchase debt securities, common stock or preferred stock.
The aggregate initial offering price of the securities that we will offer
will not exceed $200,000,000. We will offer the securities in amounts at prices
and on terms to be determined by market conditions at the time of our offerings.
We will provide the specific terms of the securities in supplements to this
prospectus. You should read this prospectus and the prospectus supplements
carefully before you invest in any of our securities. This prospectus may not be
used to consummate sales of our securities unless it is accompanied by a
prospectus supplement.
Our common stock trades on the American Stock Exchange under the symbol
"GW."
BEFORE INVESTING IN OUR SECURITIES, YOU SHOULD REVIEW THE RISK FACTORS
BEGINNING ON PAGE 3 IN THIS PROSPECTUS TO UNDERSTAND THE RISKS THAT MAY BE
ASSOCIATED WITH PURCHASING OUR SECURITIES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued under this
prospectus or determined that this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
This prospectus is dated October 6, 1999
<PAGE> 35
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
About this Prospectus....................................... 1
Where You Can Find More Information......................... 1
Grey Wolf, Inc. ............................................ 2
Forward-looking Statements.................................. 2
Risk Factors................................................ 3
Use of Proceeds............................................. 11
Ratio of Earnings to Fixed Charges And Earnings to Fixed
Charges And Preferred Stock Dividends..................... 12
Description of Debt Securities.............................. 13
Description of Other Indebtedness........................... 20
Description of Capital Stock................................ 20
Description of Depositary Shares............................ 22
Description of Warrants..................................... 24
Plan of Distribution........................................ 27
Legal Matters............................................... 29
Experts..................................................... 29
</TABLE>
<PAGE> 36
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the SEC utilizing a "shelf" registration process. Under this shelf registration
process, we may sell different types of securities described in this prospectus
in one or more offerings up to a total offering amount of $200.0 million. This
prospectus provides you with a general description of the securities we may
offer. Each time we sell securities, we will provide a prospectus supplement
that will contain specific information about the terms of that offering and the
securities offered by us in that offering. The prospectus supplement may also
add, update or change information in this prospectus. You should read both this
prospectus and any prospectus supplement together with additional information
described under the heading "Where You Can Find More Information."
In this prospectus references to "Grey Wolf," "we," "us" and "our" mean
Grey Wolf, Inc.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings, including the registration statement,
are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You also may read and copy any document we file at the SEC's
public reference room in Washington, D.C. Please call the SEC at 1-800-SEC-0330
for further information about the public reference room.
The SEC allows us to include some of the information required to be in the
registration statement by incorporating that information by reference to
documents we file with them. That means we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until we sell all of the securities:
- our annual report on Form 10-K for the year ended December 31, 1998;
- our quarterly report on Form 10-Q for the quarter ended June 30, 1999;
- our quarterly report on Form 10-Q for the quarter ended March 31, 1999;
- our current report on Form 8-K, filed on March 23, 1999;
- the description of our common stock contained in our current report on
Form 8-K dated October 6, 1997; and
- the description of our preferred stock purchase rights contained in our
registration statement on Form 8-A/A filed with the SEC on October 9,
1998.
You may request a copy of these filings, at no cost, by writing or calling
us at the following address:
Grey Wolf, Inc.
10370 Richmond Avenue, Suite 600
Houston, Texas 77042-4136
(713) 435-6100
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these securities in any state where the offer is not permitted.
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<PAGE> 37
GREY WOLF, INC.
Grey Wolf, Inc. is a leading provider of contract land drilling services in
the United States with a domestic fleet of 120 rigs. In addition to our domestic
operations, we maintain a fleet of five inventory rigs in Venezuela, giving us a
total of 125 rigs, 108 of which are marketable. We believe we have the largest
number of working rigs in our combined market areas which include the Gulf
Coast, South Texas, Ark-La-Tex and Mississippi/Alabama markets. We 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 include independent producers and major
oil companies. We conduct our operations through our subsidiaries.
Our principal office is located at 10370 Richmond Avenue, Suite 600,
Houston, Texas 77042-4136, and our telephone number is (713) 435-6100.
FORWARD-LOOKING STATEMENTS
The statements in this prospectus, any prospectus supplement and the
documents incorporated by reference that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements are subject to risks, uncertainties and assumptions, including those
discussed elsewhere in this prospectus. When used in this prospectus, any
prospectus supplement and the documents incorporated by reference, words such as
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"will," "could," "may," "predict," and similar expressions are intended to
identify forward-looking statements. Future events and actual results may differ
materially from the results expressed in or implied by the forward-looking
statements. Factors that might cause such a difference include:
- fluctuations in prices and demand for oil and gas;
- fluctuations in levels of oil and gas exploration and development
activities;
- fluctuations in the demand for contract land drilling services;
- the existence of competitors, technological changes and developments in
the industry;
- the existence of operating risks inherent in the contract land drilling
industry; and
- year 2000 issues and general economic conditions, in addition to the
other matters discussed under "Risk Factors."
The information contained in this prospectus, including the information
presented under the heading "Risk Factors," identifies additional factors that
could affect our operating results and performance. We urge you to carefully
consider those factors.
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<PAGE> 38
RISK FACTORS
You should carefully consider the following risk factors and all of the
other information set forth or incorporated by reference in this prospectus and
any applicable prospectus supplement before you purchase our securities. This
prospectus, any applicable prospectus supplement and the documents incorporated
by reference contain forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this prospectus,
any applicable prospectus supplement and the documents incorporated by reference
into this document.
RISKS RELATED TO OUR BUSINESS GENERALLY
OUR BUSINESS CAN BE ADVERSELY EFFECTED BY LOW OIL AND GAS PRICES AND
EXPECTATIONS OF LOW PRICES.
As a supplier of land drilling services, our business depends on the level
of drilling activity by oil and gas exploration and production companies
operating in the geographic markets where we operate. The number of wells they
choose to drill is strongly influenced by past trends in oil and gas prices,
current prices, and their outlook for future oil and gas prices within those
geographic markets. Low oil and gas prices, or the perception among oil and gas
companies that future prices are likely to remain low or decline further, can
materially and adversely effect us in many ways, including:
- our revenues, cash flows and earnings;
- the fair market value of our rig fleet;
- our ability to maintain or increase our borrowing capacity;
- our ability to obtain additional capital to finance our business and make
acquisitions, and the cost of that capital; and
- our ability to retain skilled rig personnel who we would need in the
event of a upturn in the demand for our services.
Oil and gas prices have been volatile historically and, we believe, will
continue to be so in the future. Many factors beyond our control affect oil and
gas prices, including:
- weather conditions in the United States and elsewhere;
- economic conditions in the United States and elsewhere;
- actions by OPEC, the Organization of Petroleum Exporting Countries;
- political stability in the Middle East and other major producing regions;
- governmental regulations, both domestic and foreign;
- the pace adopted by foreign governments for exploration of their national
reserves;
- the price of foreign imports of oil and gas; and
- the overall supply and demand for oil and gas.
3
<PAGE> 39
WE OPERATE IN A HIGHLY COMPETITIVE, FRAGMENTED INDUSTRY IN WHICH PRICE
COMPETITION HAS INTENSIFIED AS EXCESS DRILLING RIG CAPACITY HAS INCREASED.
We operate in a highly competitive business. The drilling contracts we
compete for are usually awarded on the basis of competitive bids. Pricing and
rig availability are the primary factors considered by our potential customers
in determining which drilling contractor to select. We believe other factors are
also important. Among those factors are:
- the type and condition of drilling rigs;
- the quality of service and experience of rig crews;
- the safety record of the rig;
- the contractor's offering of ancillary services; and
- the ability of the contractor to provide drilling equipment adaptable to,
and personnel familiar with, new technologies and drilling techniques.
While we must generally be competitive in our pricing, our competitive
strategy generally emphasizes the quality of our equipment, the safety record of
our rigs and the experience of our rig crews to differentiate us from our
competitors. This strategy has become less effective recently as lower demand
for drilling services has intensified price competition and made it more
difficult for us to compete on the basis of factors other than price. In all of
the markets in which we compete there is an over supply of rigs which has
provoked greater price competition.
Contract drilling companies compete primarily on a regional basis, and the
intensity of competition may vary significantly from region to region at any
particular time. If demand for drilling services improves in a region where we
operate, our competitors might respond by moving in suitable rigs from other
regions. An influx of rigs from other regions could rapidly intensify
competition and make any improvement in demand for drilling rigs short-lived.
The domestic land drilling business is highly fragmented. Although we
believe that at August 31, 1999, we had the largest number of rigs engaged in
drilling operations in our four domestic market areas combined, that number of
working rigs represented only 19% of all rigs working in the combined market
areas at the same date. We face competition from many competitors.
As price competition has intensified, some of our competitors have been
able to reduce the rates they charge for their rigs largely, we believe, by
decreasing the wages they pay their rig crews. We have chosen not to cut the
wages of our rig crews for strategic reasons, principally to help us retain the
experienced rig crews so as to better position us to participate in possible
future increases in drilling activity. This strategy has caused us to lose
market share in certain of our domestic markets, and may result in additional
losses of market share in the future. We can not be certain that we will be able
to recover lost market share even if the demand for drilling services improves
in the future.
Certain of our competitors have greater financial and human resources than
do we. Their greater capabilities in these areas may enable them to:
- better withstand periods of low rig utilization;
- compete more effectively on the basis of price and technology;
- retain skilled rig personnel; and
- build new rigs or acquire and refurbish existing rigs so as to be able to
place rigs into service more quickly than us in periods of high drilling
activity.
4
<PAGE> 40
OUR DRILLING OPERATIONS INVOLVE INHERENT RISKS OF LOSS WHICH IF NOT INSURED OR
INDEMNIFIED AGAINST COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our business is subject to the many hazards inherent in the land drilling
business including the risks of:
- blowouts;
- fires and explosions;
- collapse of the borehole;
- lost or stuck drill strings; and
- damage or loss from natural disasters.
If these hazards occur they can produce substantial liabilities to us from,
among other things:
- suspension of drilling operations;
- damage to the environment;
- damage to, or destruction of our property and equipment and that of
others;
- personal injury and loss of life; and
- damage to producing or potentially productive oil and gas formations
through which we drill.
We attempt to obtain indemnification from our customers by contract for
certain of these risks but are not always able to do so. We also seek to protect
ourselves from some but not all operating hazards through insurance coverage.
The indemnification we receive from our customers and our own insurance coverage
may not, however, be sufficient to protect us against liability for all
consequences of disasters, personal injury and property damage. Additionally,
our insurance coverage generally provides that we bear a portion of the claim
through substantial insurance coverage deductibles. The premiums we pay for
insurance policies are also subject to substantial increase based upon our
claims history, which may increase our operating costs. We can offer you no
assurance that our insurance or indemnification arrangements will adequately
protect us against liability from all of the hazards of our business. We are
also subject to the risk that we may be unable to obtain or renew insurance
coverage of the type and amount we desire at reasonable rates. If we were to
incur a significant liability for which we were not fully insured or indemnified
it could have a material adverse effect on our financial position and results of
operations.
OUR OPERATIONS ARE SUBJECT TO DOMESTIC AND FOREIGN ENVIRONMENTAL LAWS THAT MAY
EXPOSE US TO LIABILITIES FOR NONCOMPLIANCE WHICH COULD ADVERSELY AFFECT US.
Many aspects of our operations are subject to domestic and foreign laws and
regulations. For example, our drilling operations are typically subject to
extensive and evolving laws and regulations governing:
- environmental quality;
- pollution control; and
- remediation of environmental contamination.
Our operations are often conducted in or near ecologically sensitive areas,
such as wetlands which are subject to special protective measures and which may
expose us to additional operating costs and liabilities for noncompliance. The
handling of waste materials, some of which are classified as hazardous
substances, is a necessary part of our operations. Consequently, our operations
are subject to stringent regulations relating to protection of the environment
and waste handling which may impose liability on us for our own noncompliance
and, in addition, that of other parties without regard to whether we were
negligent or
5
<PAGE> 41
otherwise at fault. We may also be exposed to environmental or other liabilities
originating from businesses and assets which we purchased from others.
Compliance with applicable laws and regulations may require us to incur
significant expenses and capital expenditures which could have a material and
adverse effect on our operations by increasing our expenses and limiting our
future contract drilling opportunities.
RISKS RELATING TO OUR OPERATIONS
WE ARE EXPERIENCING WEAK DEMAND FOR OUR SERVICES DUE TO LOWER OIL AND GAS PRICES
AND LOSS OF MARKET SHARE, WHICH IF PROLONGED COULD HAVE SERIOUS CONSEQUENCES FOR
US.
Volatility in oil and gas prices can produce wide swings in the levels of
overall drilling activity in the markets we serve and affect the demand for our
drilling services and the day rates we can charge for our rigs. Pronounced
downturns in oil and gas prices can adversely affect our business.
We believe our recent operating and financial performance illustrates this
risk. Oil and gas prices generally dropped beginning in late 1997, with
generally lower commodity prices extending well into 1999. Beginning in the
first quarter of 1998, drilling activity in the markets we serve also dropped
significantly, and we experienced a significant decline both in the utilization
rates for our rigs and in the day rates we could charge for them. Our rig
utilization in our core domestic markets was 81% during the first quarter of
1998 but declined to 39% in the first quarter of 1999 and stood at 31% for the
quarter ended June 30, 1999. Our average revenue per rig day worked was $9,407
in the first quarter of 1998, declining to $7,825 for the quarter ended June 30,
1999. Although oil and gas prices have improved recently, drilling activity in
our core domestic markets has improved only slightly and overall land drilling
activity remains depressed. While demand for our rigs has recently improved our
day rates have shown only a slight improvement.
Future demand for our rigs may remain the same or may decline further and
we can offer you no assurance otherwise. If drilling activity does increase in
the areas where we operate, we cannot assure you that demand for our rigs will
also increase.
Although we believe the weakness in demand for our drilling services is
primarily attributable to low oil and gas prices, we also believe that strategic
pricing decisions we have made in certain domestic markets have contributed to
the weakness. In particular, we have chosen not to further lower the day rates
we charge for our rigs in certain markets by reducing the wages we pay our rig
crews. We did so in order to reduce deterioration of our operating margins and
to help us retain the experienced rig personnel we believe will be necessary to
respond to possible future upturns in our business. We do not expect to be able
to charge higher day rates for our rigs unless there is a meaningful increase in
the demand for our rigs. This pricing strategy has caused us to loose market
share to lower-priced competition in certain of our core markets and may cause
further losses in our market share if price competition intensifies.
Depressed levels of rig utilization, lower day rates and reduced market
share have adversely effected our financial condition and results of operations,
and will continue to do so unless substantial improvement in demand for our land
drilling services occurs. If these conditions persist over a prolonged period or
worsen, we may be unable to meet our debt service obligations under
approximately $250.0 million of our outstanding senior notes, and any then
outstanding indebtedness to our secured lenders.
WE OWE OVER $250.0 MILLION OF INDEBTEDNESS UNDER OUR SENIOR NOTES AND OUR
OPERATIONS ARE NOT GENERATING SUFFICIENT CASH FLOW TO COVER OUR SEMI-ANNUAL
INTEREST PAYMENTS OF APPROXIMATELY $11.1 MILLION.
We are indebted for a total of $250.0 million in principal amount under our
8 7/8% Senior Notes. Semi-annual interest payments on the senior notes of
approximately $11.1 million are due on January 1 and July 1 of each year. For
the six months ended June 30, 1999, however, our operating activities, investing
activities and financing activities each consumed net cash rather than provided
additional cash. To meet our debt service obligations under the senior notes and
provide necessary cash, we were required to use our cash on hand.
6
<PAGE> 42
Our ability in the future to meet our debt service obligations and reduce
our total indebtedness will depend on a number of factors including:
- oil and gas prices;
- demand for our drilling services;
- whether our business strategy is successful;
- levels of interest rates; and
- other financial and business factors that affect us.
Many of these factors are beyond our control.
If we do not generate sufficient cash flow to pay debt service and repay
principal in the future, we will likely be required to use one or more of the
following measures:
- further diminish our cash balances;
- use our existing credit facility;
- obtain additional external financing;
- refinance our indebtedness;
- sell our assets; and
- seek protection under federal bankruptcy laws.
WE HAVE HAD ONLY ONE PROFITABLE YEAR SINCE 1991 AND DO NOT EXPECT TO BE
PROFITABLE IN 1999.
We have a history of losses with our only profitable year since 1991 being
1997 in which we had net income of $10.2 million. Due to depressed demand for
our drilling service through most of 1999, we do not expect to be profitable in
1999. Whether we are able to become profitable in the future will depend on many
factors, but primarily on whether we are able to obtain substantially higher
utilization rates for our rigs and the rates we charge for them. Whether we can
achieve those goals will largely depend on oil and gas prices which are beyond
our control.
UNEXPECTED COST OVERRUNS ON OUR TURNKEY DRILLING JOBS COULD ADVERSELY AFFECT US.
We have historically derived a significant portion of our revenues from
turnkey drilling contracts and we expect that they will continue to represent a
significant component of our revenues. The occurrence of uninsured or
under-insured losses or operating cost overruns on our turnkey jobs could have a
material adverse effect on our financial position and results of operations.
Under a typical turnkey drilling contract, we agree to drill a well for our
customer to a specified depth and under specified conditions for a fixed price.
We typically provide technical expertise and engineering service, as well as
most of the equipment required for the drilling of turnkey wells. We often
subcontract for related services. Under typical turnkey drilling arrangements,
we do not receive progress payments and are entitled to be paid by our customer
only after we have performed the terms of the drilling contract in full. For
this reason, the risk to us under turnkey drilling contracts is substantially
greater than for wells drilled on a day work basis because we must assume most
of the risks associated with drilling operations that are generally assumed by
our customer under a day work contract. Although we attempt to obtain insurance
coverage to reduce certain of the risks inherent in our turnkey drilling
operations, we can offer no assurance that adequate coverage will be obtained or
will be available in the future.
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<PAGE> 43
WE COULD BE ADVERSELY AFFECTED IF WE LOST THE SERVICES OF CERTAIN OF OUR SENIOR
MANAGERS.
Our business is dependent to a significant extent on a small group of our
executive management personnel. The loss of any one of these individuals could
have a material adverse effect on our financial condition and results of
operations.
OUR CREDIT AGREEMENTS MAY PROHIBIT US FROM PARTICIPATION IN CERTAIN TRANSACTIONS
THAT WE MAY CONSIDER ADVANTAGEOUS.
The indentures under which we issued our 8 7/8% Senior Notes contain
restrictions on our ability and the ability of certain of our subsidiaries to
engage in certain types of transactions. These restrictive covenants may
adversely affect our ability to pursue business acquisitions and rig
refurbishments. These include covenants prohibiting or limiting our ability to:
- incur additional indebtedness;
- pay dividends or make other restricted payments;
- sell material assets;
- grant or permit liens to exist on our assets;
- enter into sale and lease-back transactions;
- enter into certain mergers, acquisitions and consolidations;
- make certain investments;
- enter into transactions with related persons; and
- engage in lines of business unrelated to our core land drilling business.
Our senior secured credit facility also contains covenants restricting our
ability and our subsidiaries' ability to undertake many of the same types of
transactions, and contains financial ratio covenants. They may also limit our
ability to respond to changes in market conditions. Our ability to meet the
financial ratio covenants of our credit agreements can be affected by events and
conditions beyond our control and we may be unable to meet those tests.
Our senior secured credit facility contains default terms that effectively
cross default with the indentures covering our 8 7/8% Senior Notes. If we breach
the covenants in the indentures it could cause our default under the indentures
but also under our senior secured credit agreement, and possibly other then
outstanding debt obligations owed by us or our subsidiaries. If the indebtedness
under our senior secured credit agreement or other indebtedness owed by us or
our subsidiaries is more than $10.0 million and is not paid when due, or is
accelerated by the holders of the debt, then an event of default under the
indenture covering our senior notes would occur. If circumstances arise in which
we are in default under our various credit agreements, our cash and other assets
may be insufficient to repay our indebtedness and that of our subsidiaries.
RISKS RELATING TO OUR SECURITIES
THERE IS NO EXISTING PUBLIC MARKET FOR CERTAIN OF THE SECURITIES WE MAY SELL
WHICH COULD LIMIT YOUR ABILITY TO RESELL THEM.
Our common stock is traded on the American Stock Exchange. All other debt
securities, preferred stock, depositary shares and warrants sold or offered
under this prospectus will be securities for which there will be no established
trading market. Any underwriters to whom we sell debt securities, preferred
stock, depositary shares or warrants in a public offering may make a market in
those securities but they will not be obligated to do so and the underwriters
may discontinue any market making activities at any time without notice to us or
you. Because there may be no secondary market for our debt securities, preferred
stock, depositary shares or warrants, you may be unable to resell those
securities.
8
<PAGE> 44
WE ARE A HOLDING COMPANY AND DEPEND ON OUR SUBSIDIARIES TO PROVIDE US WITH CASH
TO MEET OUR FINANCIAL OBLIGATIONS.
Grey Wolf, Inc. is a holding company that conducts substantially all of its
operations through both United States and foreign subsidiaries. Substantially
all of our assets consist of our equity in our subsidiaries. We are, and expect
to continue to be, dependent on our ability to obtain funds from our
subsidiaries to meet our financial needs including funds to repay interest and
principal on our indebtedness. We cannot assure you that our operating
subsidiaries will generate sufficient net income to pay upstream dividends or
sufficient cash flow to make payments of principal and interest to us for
intercompany loans we may make to them from time-to-time. Our inability to
obtain funds from our subsidiaries for any reason could impair our ability to
meet our obligations under securities we issue.
OUR EXISTING DIVIDEND POLICY AND CONTRACTUAL RESTRICTIONS LIMIT OUR ABILITY TO
PAY DIVIDENDS.
We have never declared a cash dividend on our common stock and do not
expect to pay cash dividends on our common stock for the foreseeable future. We
expect that all cash flow generated from our operations in the foreseeable
future will be retained and used to develop or expand our business, pay debt
service and reduce outstanding indebtedness. Furthermore, the terms of our
secured credit facility prohibit the payment of dividends without prior written
consent and the terms of the indentures under which our senior notes are issued
also restrict our ability to pay dividends under certain conditions. In the
event we issue any dividend-paying preferred stock, the applicable prospectus
supplement will address further any applicable restrictions on our ability to
pay dividends on the securities to be issued.
CERTAIN PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS, SECURITIES AND CREDIT
AGREEMENTS HAVE ANTI-TAKEOVER EFFECTS WHICH MAY PREVENT OUR SHAREHOLDERS FROM
RECEIVING THE MAXIMUM VALUE FOR THEIR SHARES.
Our Articles of Incorporation, bylaws, securities and credit agreements
contain certain provisions intended to delay or prevent entirely a change of
control transaction not supported by our board of directors, or which may have
that general effect. These measures include:
- classification of our board of directors into three classes, with each
class serving a staggered three year term;
- giving our board of directors the exclusive authority to adopt, amend or
repeal our Bylaws and thus prohibiting shareholders from doing so;
- requiring our shareholders to give advance notice of their intent to
submit a proposal at the annual meeting; and
- limiting the ability of our shareholders to call a special meeting and
act by written consent.
Additionally, the indentures under which our 8 7/8% Senior Notes are
issued, require us to offer to repurchase all senior notes then outstanding at a
purchase price equal to 101% of the principal amount of the senior notes plus
accrued and unpaid interest to the date of purchase in the event that the we
become subject to a change of control, as defined in the indenture. This feature
of the indenture could also have the effect of discouraging potentially
attractive change of control offers.
LARGE AMOUNTS OF OUR COMMON STOCK MAY BE RESOLD INTO THE MARKET IN THE FUTURE
WHICH COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY,
EVEN IF OUR BUSINESS IS DOING WELL.
This prospectus may be used to issue common stock, preferred stock that is
convertible into common stock and warrants to acquire common stock. If we issue
a significant amount of common stock, convertible preferred stock or warrants,
the market price of our common stock may be adversely affected.
9
<PAGE> 45
As of August 31, 1999, 165,158,791 shares of our common stock were issued
and outstanding. Approximately 60% is available for resale in the public market
as follows:
- 84,664,760 shares of common stock by certain of our shareholders, the
resale of which has been registered under the Securities Act;
- 7,296,375 shares of common stock which may be acquired upon exercise of
outstanding options; and
- 13,999,957 shares of common stock which we believe are potentially
eligible for resale pursuant to an exemption from registration under the
Securities Act.
The market price of our common stock could drop significantly if these holders
sell or are perceived by the market as intending to sell their common stock.
WE FACE A THREAT OF BUSINESS DISRUPTION FROM THE YEAR 2000 ISSUE.
The Year 2000 issue refers to the inability of computer and other
information technology systems to properly process date and time information
stemming from the outdated programming practice of using two digits rather than
four to represent the year and a date. The consequence of the Year 2000 issue is
that our computer systems and those of our customers and suppliers may not work
properly and adversely affect our business. For more information on these issues
and our plans to respond to these risks, please see our Form 10-Q for the
quarter ended June 30, 1999 under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance," which we incorporate into this Prospectus by reference.
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<PAGE> 46
USE OF PROCEEDS
Unless we specify otherwise in the applicable prospectus supplement, the
net proceeds (after the payment of offering expenses and underwriting discounts
or commissions) we receive from the sale of the securities offered by this
prospectus and any prospectus supplement will be used for general corporate
purposes. General corporate purposes may include any of the following:
- funding capital expenditures, including rig refurbishments;
- providing working capital;
- investing in or lending money to our subsidiaries;
- repaying debt;
- redeeming or repurchasing our securities; or
- paying for possible acquisitions or the expansion of our businesses.
We may temporarily invest the net proceeds we receive from any offering of
securities or use the net proceeds to repay short-term debt until we can use
them for their stated purposes.
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<PAGE> 47
RATIO OF EARNINGS TO FIXED CHARGES AND
EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The ratio of earnings to fixed charges for each of the periods set forth
below has been computed on a consolidated basis and should be read in
conjunction with our consolidated financial statements (including the notes
thereto) set forth or incorporated by reference in our Form 10-K for the fiscal
year ended December 31, 1998.
<TABLE>
<CAPTION>
SIX TWELVE NINE
MONTHS MONTHS MONTHS YEAR
ENDED YEAR ENDED DECEMBER 31, ENDED ENDED ENDED
JUNE 30, -------------------------- DECEMBER 31, DECEMBER 31, MARCH 31,
1999 1998 1997 1996 1995 1994 1994(1) 1994(1)
-------- ---- ----- ---- ---- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges.......................... (2) (2) 3.19x (2) (2) (2) (2) (2)
Ratio of earnings to fixed charges
and preferred stock dividends.... (3) (4) 3.19x (4) (4) (4) (4) (3)
</TABLE>
- ---------------
(1) In 1994, Grey Wolf changed its fiscal year end from March 31 to December 31.
(2) Earnings were insufficient to cover fixed charges for the periods indicated
as follows:
<TABLE>
<S> <C>
Year Ended
December 31, 1998......................................... $111,164
December 31, 1996......................................... 10,759
December 31, 1995......................................... 12,675
March 31, 1994............................................ 1,384
Twelve Months Ended December 31, 1994....................... 3,557
Nine Months Ended December 31, 1994......................... 2,260
Six Months Ended June 30, 1999.............................. 16,901
</TABLE>
(3) There was no preferred stock outstanding during these periods.
(4) Earnings were insufficient to cover fixed charges and preferred stock
dividends for the periods indicated as follows:
<TABLE>
<S> <C>
Year Ended
December 31, 1998......................................... $111,164
December 31, 1996......................................... 11,179
December 31, 1995......................................... 12,675
March 31, 1994............................................ 1,384
Twelve Months Ended December 31, 1994....................... 3,557
Nine Months Ended December 31, 1994......................... 2,260
Six Months Ended June 30, 1999.............................. 16,901
</TABLE>
For purposes of computing these ratios, "earnings" consist of pretax income
from continuing operations plus fixed charges (excluding capitalized interest).
"Fixed charges" represent interest incurred (whether expensed or capitalized),
amortization of debt expense, and that portion of rental expense on operating
leases deemed to be the equivalent of interest. "Fixed charges and preferred
stock dividends" represent fixed charges (as previously described) and the
preferred stock dividend requirements of Grey Wolf.
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DESCRIPTION OF DEBT SECURITIES
The following description highlights certain general terms and provisions
of the debt securities. This summary is not complete. When debt securities are
offered in the future, the prospectus supplement will explain the particular
terms of those securities and the extent to which these general provisions may
apply.
The forms of the indenture for the debt securities have been filed as
exhibits to the registration statement and you should read the applicable
indenture for provisions that may be important to you. Article and Section
references used herein are references to the applicable indenture. Capitalized
terms not otherwise defined in this Description of Debt Securities will have the
meaning given in the indentures.
GENERAL
Since Grey Wolf is a holding company, our rights and the rights of our
creditors, including the holders of the debt securities, to participate in any
distribution of the assets of any subsidiary upon its liquidation or
reorganization or otherwise are necessarily subject to the prior claims of
creditors of the subsidiary, except to the extent that we may be recognized as a
creditor of the subsidiary. Generally, the debt securities will be effectively
subordinated to all existing and future indebtedness of our operating
subsidiaries.
Any debt securities we offer will be our direct, unsecured general
obligations. The debt securities will be either senior debt securities or
subordinated debt securities which may be issued in registered or global form.
The senior debt securities will rank equally with all of our other senior and
unsubordinated debt. The subordinated debt securities will have a junior
position to all of our senior debt.
The indentures do not limit the aggregate principal amount of debt
securities that can be issued. The debt securities may be issued in one or more
series as may be authorized from time to time by Grey Wolf.
A prospectus supplement and a supplemental indenture relating to the
offering of a particular series of debt securities will set forth the specific
terms of the offered debt securities (Indentures, Section 301). These terms will
include some or all of the following:
- the title of the debt securities;
- the aggregate principal amount of the debt securities;
- the person to whom any interest on the offered debt securities will be
payable, if other than the person in whose name such offered debt
securities are registered on any regular record date;
- the date or dates (or method of determining the date) on which we will
pay the principal and premium, if any, of the debt securities;
- the interest rate (or method of determining the rate) at which the debt
securities will bear interest, the date or dates from which interest will
accrue and the dates on which interest, if any, will be payable and the
regular record dates for such interest payment dates;
- the place or places where we will pay principal, premium and interest, if
any, on the debt securities;
- any optional redemption periods and prices;
- any sinking fund or analogous provision that would obligate us to
repurchase or otherwise redeem the debt securities;
- any rights of the holders of the debt securities to convert or exchange
the debt securities into or for our securities and the terms and
conditions of the conversion or exchange;
- the denominations in which we will issue debt securities if other than
denominations of $1,000 and any integral multiple thereof;
- the manner in which we will determine the amounts of principal, premium
or interest, if any, on the debt securities if these amounts may be
determined with reference to one or more indices;
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- the currency in which we will pay principal of, premium, if any, or
interest on the debt securities if other than the United States dollar;
- the price or prices (expressed as a percentage of the principal amount
thereof) at which we will issue debt securities;
- if other than the entire principal amount, the portion of the principal
amount payable if the maturity of the debt securities is accelerated;
- whether we will issue debt securities in the form of global securities
and, if so, the depositary for, and other terms and conditions relating
to, the global securities;
- whether the principal of, premium and interest, if any, on the offered
debt securities is to be payable in securities of Grey Wolf and the terms
and conditions applicable to any such payment;
- any change in or addition to the events of default;
- any change in or addition to the covenants, definitions or to the
provisions relating to our consolidation, merger, sale or conveyance of
assets;
- any subordination provisions relating to the debt securities;
- any restriction or condition on the transferability of the debt
securities;
- any changes or additions to the defeasance or discharge provisions;
- any trustees, authenticating or paying agents, registrars, conversion
agents or other agents appointed by us with respect to the debt
securities; and
- any other terms of the debt securities.
Debt securities may be issued at a discount from their stated principal
amount. Certain United States federal income tax considerations applicable to
any debt security issued with original issue discount and any debt security on
which the interest is to be payable in our securities will be described in an
applicable prospectus supplement.
EVENTS OF DEFAULT AND NOTICE OF DEFAULT
"Events of Default" with respect to debt securities of any series means any
of the following (Indentures, Section 501):
- failure to pay principal of, or premium, if any, on, any debt security of
that series when due (in the case of the subordinated indenture, whether
or not payment is prohibited by the subordination provisions);
- failure to pay interest, if any, or deposit any mandatory sinking fund
payment, if any, on any debt security of that series when due and such
failure continues for a period of 30 days;
- failure by Grey Wolf to perform any other covenant in the indentures
(other than a covenant included in the indentures solely for the benefit
of a series of debt securities other than that series) which continues
for a period of 90 days after written notice to Grey Wolf; and
- certain events of insolvency, reorganization, receivership or liquidation
of Grey Wolf.
An event of default with respect to debt securities of a particular series
does not necessarily constitute an event of default with respect to debt
securities of any other series. If an event of default with respect to any other
series of debt securities occurs and continues, then either the trustee or the
holders of at least 25% in principal amount of the outstanding debt securities
of that series may declare the principal amount of all debt securities of that
series to be due and payable immediately; however, under certain circumstances,
the holders of a majority in aggregate principal amount of outstanding debt
securities of that series may rescind or annul such declaration and its
consequences.
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Except for a default in payment of principal, premium and interest, if any,
the trustee may withhold notice to the holders of the debt securities of any
default if it considers it in the interest of the holders of the debt securities
to do so (Indentures, Section 602). Grey Wolf must furnish annually the trustee
a statement by one of certain specified officers of Grey Wolf as to the
compliance with all conditions and covenants of the indentures (Indentures,
Section 1005).
The holders of a majority in principal amount of the outstanding debt
securities of any series will have the right, subject to certain limitations, to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee with respect to the debt securities of that series, and to waive certain
defaults (Indentures, Sections 512 and 513).
The indentures provide that, if an event of default occurs and continues,
then the trustee must exercise its rights and powers under the indentures, and
use the same degree of care and skill in its exercise, as a prudent person would
exercise or use under the circumstances in the conduct of his or her own affairs
(Indentures, Section 601). Subject to these provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indentures
at the request of any of the holders of debt securities unless they have offered
to the trustee security or indemnity in form and substance reasonably
satisfactory to the trustee against the costs, expenses and liabilities that it
might incur in compliance with the holders' request (Indentures, Section 603).
MODIFICATION OF INDENTURE
Grey Wolf and the trustee from time to time may modify the indentures,
without prior notice to or the consent of the holders of any series of debt
securities for any of the following purposes (Indentures, Section 901):
- to evidence the succession of another person to our rights and the
assumption by the successor of our covenants and obligations in an
indenture and the debt securities;
- to add to the covenants for the benefit of the holders of the debt
securities or to surrender any right or power conferred upon us in an
indenture;
- to add any events of default;
- to cure any ambiguity, defect or inconsistency, to secure the debt
securities, or to make any change that does not adversely affect the
rights of any holders;
- to modify or amend an indenture to permit the qualification of the
indenture or any supplemental indenture under the Trust Indenture Act;
- to comply with the provisions relating to consolidations, mergers and
sales of assets;
- in the case of subordinated debt securities, to make any change in the
provisions of the indenture relating to subordination that would limit or
terminate the benefits available to any holder of senior debt under such
provisions;
- to add guarantees for any or all of the debt securities or to secure any
or all of the debt securities;
- to make any change that does not adversely affect the rights of any
holder;
- to add to, change or eliminate any provision of an indenture, so long as
the addition, change or elimination will (a) neither apply to any debt
security of any series created prior to the modification which is
entitled to the benefit of the provision nor modify the rights of the
holders of any such debt security with respect to the provision or (b)
become effective only when there is no debt security outstanding;
- to permit or facilitate the defeasance and discharge of any series of
debt securities pursuant to the indenture, so long as such action does
not adversely effect the rights of any holder;
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- to evidence and provide for a successor or other trustee with respect to
the debt securities of one or more series and to add to our change any
provision of an indenture to provide for or facilitate the administration
by more than one trustee;
- to establish the form or terms of debt securities and coupons of any
series; and
- to provide for uncertificated debt securities in addition to or in place
of certificated debt securities.
Grey Wolf and the trustee may modify and amend the indentures with the
consent of the holders of at least a majority of the principal amount of each
series of the outstanding debt securities which is affected by the modification
or amendment; provided, however, no modification or amendment may, without the
consent of each holder of a debt security affected thereby (Indentures, Section
902):
- change the stated maturity of the principal of or any installment of
principal or interest if any, on any debt security;
- reduce the principal amount of, premium and interest rate, if any, on any
debt security or the principal amount due upon acceleration of any
Original Issue Discount security;
- change the place or currency of payment of principal, premium or
interest, if any, on debt security;
- impair the right to institute suit for the enforcement of any such
payment on or with respect to any debt security;
- reduce the percentage of the principal amount of debt securities
necessary to modify or amend the indentures;
- in the case of the subordinated indenture, modify the subordination
provisions in a manner adverse to the holders of the subordinated debt
securities; or
- modify the foregoing requirements or reduce the percentage of outstanding
debt securities necessary to waive compliance with certain provisions of
the indentures or to waive certain defaults.
The holders of at least a majority of the aggregate principal amount of the
outstanding debt securities of any series may, on behalf of all holders of that
series, waive compliance by Grey Wolf with any of the provisions of the
indentures and waive any past default under an indenture, except a default in
the payment of principal, premium and interest, if any, or in the performance of
certain covenants (Indentures, Sections 1006 and 513).
SATISFACTION AND DISCHARGE OF THE INDENTURES; DEFEASANCE
Discharge. Except as described below, Grey Wolf will be discharged from its
obligations under the indenture with respect to any series of debt securities by
either paying the principal of, any premium and interest on all of the
outstanding debt securities of such series when due and payable or delivering to
the trustee all outstanding debt securities of such series for cancellation.
Grey Wolf will not be able to discharge the following obligations:
- the rights of holders of debt securities to receive payments of
principal, premium and interest, if any, when due;
- our obligation to issue temporary debt securities or to replace
mutilated, lost, destroyed or stolen debt securities;
- our obligation to maintain an office or agency for payments to holders of
debt securities; and
- the rights, powers, trusts, duties and immunities of the trustee.
Legal Defeasance. Grey Wolf may be discharged from its obligations on the
debt securities of any series at any time if it deposits with the trustee
sufficient cash or government obligations to pay the principal of, any premium
and interest on the debt securities of that series to the stated maturity date
or a redemption date for the debt securities of that series. If that happens,
payment of the debt securities of
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such series may not be accelerated because of an event specified as an event of
default with respect to such debt securities, and the holders of the debt
securities of such series will not be entitled to the benefits of the indenture,
except for registration of transfer and exchange of debt securities and
replacement of lost, stolen or mutilated debt securities (Indentures, Sections
401, 403 and 405).
Grey Wolf may be discharged only if, among other things, it has delivered
to the trustee an opinion of counsel stating that it has received from the
United States Internal Revenue Service a ruling or, since the date of execution
of the indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that the holders of the debt securities of
that series will not recognize income, gain or loss for federal income tax
purposes as a result of the defeasance.
Covenant Defeasance. Grey Wolf may omit to comply with certain restrictive
covenants contained in the indenture and any omission to comply with those
covenants will not constitute a default or event of default with respect to the
debt securities of any series (Indentures, Section 406). Grey Wolf may omit to
comply with such covenants only if, among other things:
- it deposits with the trustee sufficient cash or government obligations to
pay the principal of, any premium and interest on the debt securities of
that series to the stated maturity date or a redemption date for the debt
securities of that series; and
- it delivers to the trustee an opinion of counsel to the effect that the
holders of the debt securities of the series will not recognize income,
gain or loss for federal income tax purposes as a result of the covenant
defeasance.
Effect of Discharge and Defeasance. Under federal income tax law as of the
date of this prospectus, a discharge may be treated as an exchange of the
related debt securities. Each holder might be required to recognize gain or loss
equal to the difference between the holder's cost or other tax basis for the
debt securities and the value of the holders' interest in the trust. Holders
might be required to include as income a different amount than would be
includable without the discharge. Prospective investors are urged to consult
their own tax advisors as to the tax consequences of a discharge including the
applicability and effect of tax laws other than federal income tax law.
CERTAIN COVENANTS
Under the Indentures, Grey Wolf agrees that it will:
- pay the principal, interest and any premium on the debt securities when
due;
- maintain a place of payment;
- deliver a report to the Trustee at the end of each fiscal year reviewing
our obligations under the Indentures; and
- deposit sufficient funds with any payment agent on or before the due date
for any principal, interest or any premium (Indentures, Sections 1001,
1002, 1003 and 1005).
Any respective covenants applicable to any series of debt securities will
be described in an applicable prospectus supplement.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We will only consolidate or merge with or into any other entity or sell all
or substantially all of our assets according to the terms and conditions of the
indentures. If Grey Wolf sells all or substantially all of its assets, it shall
be released from all of its liabilities and obligations under any indenture and
under the debt securities. The remaining or acquiring entity will be substituted
for Grey Wolf in the indentures and shall assume all of our responsibilities and
liabilities under the indentures including the payment of all amounts due on the
debt securities and performance of the covenants with the same effect as if it
had been an original party to the indentures. Thereafter, the successor entity
may exercise Grey Wolf's rights
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and powers under the indentures, in Grey Wolf's name or in its own name. Any act
or proceeding required or permitted to be done by Grey Wolf's board of directors
or any of its officers may be done by the board or officers of the successor
entity (Indentures, Sections 801 and 802).
PAYMENT AND TRANSFER
Grey Wolf will pay principal and any premium and interest on registered
securities at the corporate trust office of the trustee or at any other office
or agency maintained by us for such purpose. We may choose to make any interest
payment on a registered security (a) by check mailed to the address of the
holder as such address shall appear in the register or (b) if provided in the
prospectus supplement, by wire transfer to an account maintained by the holder
as specified in the register. We will make interest payments to the person in
whose name the debt security is registered at the closing of business on the
days specified by the indenture or in any applicable prospectus supplement.
Payments on debt securities in other forms will be paid at a place designated by
us and specified in a prospectus supplement (Indentures, Section 307).
Fully registered securities may be transferred or exchanged at the
corporate trust office of the trustee or at any other office or agency
maintained by us for such purposes, without the payment of any service charge
except any tax or governmental charge (Indentures, Sections 305 and 1002).
GLOBAL SECURITIES
Debt securities of a series may be issued in the form of one or more
permanent global debt securities that will be deposited with a depositary
designated in the prospectus supplement or its nominee. Unless otherwise
indicated in the prospectus supplement, the following is a summary of the
depositary arrangements applicable to debt securities issued in permanent global
form and for which The Depository Trust Company ("DTC") acts as depository.
Each global debt security will be deposited with, or on behalf of, DTC, as
depositary, or its nominee and registered in the name of a nominee of DTC.
Except under the limited circumstances described below, global debt securities
are not exchangeable for definitive certificated debt securities.
Ownership of beneficial interests in a global debt security is limited to
institutions that have accounts with DTC or its nominee, (participants), or
persons that may hold interests through participants. In addition, ownership of
beneficial interests by participants in a global debt security will be evidenced
only by, and the transfer of that ownership interest will be effected only
through; records maintained by DTC or its nominee. Ownership of beneficial
interests in a global debt security by persons that hold through participants
will be evidenced only by, and the transfer of that ownership interest within
that participant will be effected only through, records maintained by that
participant. DTC has no knowledge of the actual beneficial owners of the debt
securities. Beneficial owners will not receive written confirmation from DTC of
their purchase, but beneficial owners are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the participants through which the beneficial
owners entered the transaction. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such laws may impair the ability to transfer beneficial
interests in a global debt security.
Payment of principal of, and interest on, debt securities represented by a
global debt security registered in the name of or held by DTC or its nominee
will be made to DTC or its nominee, as the case may be, as the registered owner
and holder of the global debt security representing those debt securities. We
have been advised by DTC that upon receipt of any payment of principal of, or
interest on, a global debt security, DTC will immediately credit accounts of
participants on its book-entry registration and transfer system with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of that global debt security as shown in the records of DTC. Payments by
participants to owners of beneficial interests in a global debt security held
through those participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
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customers in bearer form or registered in "street name", and will be the sole
responsibility of those participants, subject to any statutory or regulatory
requirements that may be in effect from time to time.
Neither we, any trustee nor any of our respective agents will be
responsible for any aspect of the records of DTC, any nominee or any participant
relating to, or payments made on account of, beneficial interests in a permanent
global debt security or for maintaining, supervising or reviewing any of the
records of DTC, any nominee or any participant relating to such beneficial
interests.
A global debt security is exchangeable for definitive debt securities
registered in the name of, and a transfer of a global debt security may be
registered to, any person other than DTC or its nominee, only if:
- DTC notifies us that it is unwilling or unable to continue as depositary
for that global debt security or at any time DTC ceases to be registered
under the Securities Exchange Act of 1934;
- we determine in our discretion that the global debt security shall be
exchangeable for definitive debt securities in registered form; or
- there shall have occurred and be continuing an event of default or an
event which, with notice or the lapse of time or both, would constitute
an event of default under the debt securities.
Any global debt security that is exchangeable pursuant to the preceding
sentence will be exchangeable in whole for definitive debt securities in
registered form, of like tenor and of an equal aggregate principal amount as the
global debt security, in denominations specified in the applicable prospectus
supplement (if other than $1,000 and integral multiples of $1,000). The
definitive debt securities will be registered by the registrar in the name or
names instructed by DTC. We expect that these instructions may be based upon
directions received by DTC from its participants with respect to ownership of
beneficial interests in the global debt security.
Except as provided above, owners of the beneficial interests in a global
debt security will not be entitled to receive physical delivery of debt
securities in definitive form and will not be considered the holders of debt
securities for any purpose under the indentures. No global debt security shall
be exchangeable except for another global debt security of like denomination and
tenor to be registered in the name of DTC or its nominee. Accordingly, each
person owning a beneficial interest in a global debt security must rely on the
procedures of DTC and, if that person is not a participant, on the procedures of
the participant through which that person owns its interest, to exercise any
rights of a holder under the global debt security or the Indentures.
We understand that, under existing industry practices, in the event that we
request any action of holders, or an owner of a beneficial interest in a global
debt security desires to give or take any action that a holder is entitled to
give to take under the debt securities or the Indentures, DTC would authorize
the participants holding the relevant beneficial interests to give or take that
action, and those participants would authorize beneficial owners owning through
those participants to give or take that action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised us that DTC is a limited purpose trust company organized
under the laws of the State of New York, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code and a "clearing agency" registered under the Exchange Act. DTC was created
to hold securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in those securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a number
of its participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. The rules
applicable to DTC and its participants are on file with the SEC.
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DESCRIPTION OF OTHER INDEBTEDNESS
Certain of Grey Wolf's existing debt instruments impose, and future debt
instruments may impose, certain restrictions on Grey Wolf, including
restrictions on the payment of dividends and certain business combinations, and
require Grey Wolf to maintain certain financial ratios.
THE 8 7/8% SENIOR NOTES DUE 2007
Grey Wolf has $250.0 million principal amount of 8 7/8% Senior Notes
outstanding. The 8 7/8% Senior Notes were issued in two offerings. Grey Wolf
issued $175.0 million in principal amount of 8 7/8% Senior Notes in June 1997
and $75.0 million in May 1998. The 8 7/8% Senior Notes mature on July 1, 2007.
Interest on the 8 7/8% Senior Notes is payable semi-annually on January 1 and
July 1 of each year. The 8 7/8% Senior Notes are redeemable at the option of
Grey Wolf, in whole or in part, at any time on or after July 1, 2002, initially
at 104.4375% and at decreasing prices thereafter to 100% at maturity, in each
case together with accrued and unpaid interest. The 8 7/8% Senior Notes also may
be repurchased at the option of the holder at 101%, together with accrued and
unpaid interest, any time if there is a change in control, as defined in the
applicable indenture.
CIT CREDIT FACILITY
As of January 14, 1999, Grey Wolf entered into a senior secured revolving
credit facility with the CIT Group/Business Credit, Inc. This facility provides
us 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 facility, of marketable
drilling rig equipment located in the 48 contiguous states of the United States.
The initial term of the facility expires on 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. We can use up to $10.0
million of the available credit for letters of credit. The amount used for
letters of credit decreases our ability to borrow under the facility by the
amounts of such letters of credit. Interest under the facility accrues at a
variable rate, using, at Grey Wolf's 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. During the first year of the 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 we pay a commitment fee of 0.375% per
annum on the average unused portion of the lender's commitments. Indebtedness
under the facility is secured by an exclusive security interest in substantially
all of our and our domestic subsidiaries' assets. We and certain of our
wholly-owned subsidiaries have also guaranteed the indebtedness under the
facility. 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. As of August 31, 1999, Grey Wolf had no borrowings outstanding under
the facility and had used $3.5 million for letters of credit.
DESCRIPTION OF CAPITAL STOCK
GENERAL
As of August 31, 1999 Grey Wolf's authorized capital stock consisted of
300,000,000 shares of common stock, par value $.10 per share, of which
165,158,791 shares were outstanding, and 1,000,000 shares of preferred stock,
par value $1.00 per share, of which none are outstanding. As of that date, Grey
Wolf also had approximately 7.2 million shares of common stock reserved for
issuance upon exercise of options or in connection with other awards outstanding
under various employee or director incentive, compensation and option plans.
The following summary is not complete. You should refer to the applicable
provisions of Grey Wolf's amended and restated Articles of Incorporation, and
the documents we have incorporated by reference for a complete statement of the
terms and rights of our capital stock.
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COMMON STOCK
Voting Rights. Each share of common stock is entitled to one vote per
share. Holders of common stock are not entitled to cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of directors can elect 100% of the directors.
Dividends. Holders may receive dividends when declared by the board of
directors out of legally available funds. Dividends may be paid in cash, stock
or other form subject to the rights of holders of any preferred stock. If we
issue preferred stock, holders of common stock may not receive dividends until
we have satisfied our obligations to the holders of outstanding preferred stock.
Rights Upon Liquidation. If we liquidate, dissolve or wind-up our business,
either voluntarily or not, the holders of common stock will be entitled to share
equally in any remaining assets after we pay our creditors.
Miscellaneous. The issued and outstanding shares of common stock are fully
paid and nonassessable. Holders of shares of common stock are not entitled to
preemptive rights. Shares of common stock are not convertible into shares of any
other class of our capital stock. American Stock Transfer and Trust Company is
the transfer agent and registrar for the common stock.
PREFERRED STOCK
The following description sets forth certain general terms and provisions
of our authorized preferred stock. If we offer preferred stock, the particular
terms will be described in the prospectus supplement.
The board of directors of Grey Wolf can, without shareholder approval,
issue from time to time one or more series of preferred stock. The board of
directors can also determine the voting powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions of any series and the number of shares constituting
any series of preferred stock.
Because Grey Wolf is a holding company, its rights and the rights of
holders of its securities, including the holders of preferred stock, to
participate in the distribution of the assets of any subsidiary of Grey Wolf
upon the subsidiary's liquidation or recapitalization will be subject to the
prior claims of the creditors and preferred stockholders of the subsidiary.
ANTI-TAKEOVER DEFENSES
Preferred stock purchase rights. Grey Wolf has a shareholder rights plan
which was adopted in 1998. Under this plan, one right is attached to each
outstanding share of common stock. The rights are exercisable only if a person
or group of affiliated or associated persons acquires beneficial ownership of
15% or more of the outstanding common stock or the commencement of or the
announcement to make a tender offer which would result in ownership by a person
or group of 15% or more of the outstanding common stock. Each right entitles the
registered holder to purchase from Grey Wolf one-thousandth of a share of Series
B Junior Participating Preferred Stock, par value $1.00 per share, at an
exercise price of $11.00 per one one-thousandth of a share. The rights expire
September 18, 2008, unless the expiration date is extended. The existence of the
rights may, under certain circumstances, make it more difficult or discourage
attempts to acquire us.
Certain Provisions of our Amended and Restated Articles of Incorporation
and Bylaws. Certain provisions in our amended and restated Articles of
Incorporation and amended and restated Bylaws could have the effect of delaying,
deferring or preventing a change in control or the removal of our existing
management or deterring potential acquirors from making an offer to our
shareholders. These provisions provide that:
- shareholders may not act by less than unanimous written consent;
- special meetings of shareholders may be called by shareholders only upon
request of holders of at least 50% of the shares entitled to vote at the
meeting;
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- the board of directors has the exclusive authority to adopt, amend or
repeal our Bylaws and shareholders may not do so;
- the board of directors be divided into three classes, with each class
serving a staggered three year term; and
- shareholders must give us advance notice of their intent to submit a
proposal for action at the annual meeting.
Additionally, the board of directors' ability to issue shares of preferred
stock without shareholder approval may be used to discourage an unsolicited
acquisition proposal. For instance, the issuance of a series of preferred stock
might impede a business combination by including voting rights that would
require the approval of a percentage of the preferred stockholders.
DESCRIPTION OF DEPOSITARY SHARES
GENERAL
We may, at our option, elect to offer fractional shares of preferred stock,
rather than full shares of preferred stock. If we do, we will issue to the
public receipts for depositary shares, and each of these depositary shares will
represent a fraction of a share of a particular series of preferred stock. We
will specify that fraction in the prospectus supplement.
The shares of any series of preferred stock underlying the depositary
shares will be deposited under a deposit agreement between us and a depositary
selected by us. Subject to the terms of the deposit agreement, each owner of a
depositary share will be entitled, in proportion to the applicable fractional
interest in shares of preferred stock underlying that depositary share, to all
the rights and preferences of the preferred stock underlying that depositary
share. Those rights include dividend, voting, redemption, subscription and
liquidation rights.
The depositary shares will be evidenced by depositary receipts issued under
the deposit agreement. We will issue depositary receipts to those persons who
purchase the fractional interests in the preferred stock underlying the
depositary shares, in accordance with the terms of the offering.
The following summary of the deposit agreement, the depositary shares and
the depositary receipts is not complete. You should refer to the forms of the
deposit agreement and depositary receipts that are filed as exhibits to the
registration statement.
Dividends and Other Distributions. The depositary will distribute all cash
dividends or other cash distributions received in respect of the preferred stock
to the record holders of related depositary shares in proportion to the number
of depositary shares owned by those holders.
If we make a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary shares
that are entitled to receive the distribution, unless, after consulting with the
depositary, we determine that it is not feasible to make the distribution. If
this occurs, the depositary may sell the property and distribute the net
proceeds from the sale to the applicable holders.
Redemption of Depositary Shares. Whenever we redeem shares of preferred
stock that are held by the depositary, the depositary will redeem, as of the
same redemption date, the number of depositary shares representing the shares of
preferred stock so redeemed. The redemption price per depositary share will be
equal to the applicable fraction of the redemption price per share payable with
respect to that series of the preferred stock. If fewer than all the depositary
shares are to be redeemed, the depositary will select the depositary shares to
be redeemed by lot, pro rata or by another equitable method.
Depositary shares called for redemption will no longer be outstanding after
the applicable redemption date, and all rights of the holders of those
depositary shares will cease, except the right to receive any
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money, securities, or other property upon surrender to the depositary of the
depositary receipts evidencing those depositary shares.
Withdrawal of Preferred Stock. Any holder of depositary shares may receive,
upon surrender of the corresponding depositary receipts to the depositary, the
number of whole shares of underlying preferred stock and any money or other
property represented by the surrendered depositary receipts. Holders of
depositary shares that surrender their depositary receipts will be entitled to
receive whole shares of preferred stock as set forth in the related prospectus
supplement. However, holders of whole shares of preferred stock will not be
entitled to subsequently deposit those shares of preferred stock under the
deposit agreement or to exchange the whole shares of preferred stock for
depositary receipts. Whenever the number of depositary shares surrendered by a
holder in connection with a withdrawal exceed the number of depositary shares
underlying the preferred stock to be withdrawn, then the depositary will deliver
to that holder a new depositary receipt evidencing the excess number of
depositary shares.
Voting the Preferred Stock. Upon receipt of a notice of any meeting at
which the holders of a series of preferred stock are entitled to vote, the
depositary will mail the information contained in the notice of meeting to the
record holders of the depositary shares underlying the preferred stock. Each
record holder of the depositary shares on the record date (which will be the
same date as the record date for the preferred stock) will be entitled to
instruct the depositary to exercise the voting rights pertaining to the amount
of the preferred stock underlying that holder's depositary shares. The
depositary will try as far as practicable, to vote the number of shares of
preferred stock underlying those depositary shares in accordance with those
instructions, and Grey Wolf will agree to take all reasonable action which the
depositary deems necessary in order to enable the depositary to do so. The
depositary will not vote the shares of preferred stock to the extent that it
does not receive specific instructions from the holders of depositary shares
underlying the preferred stock.
Resignation and Removal of Depositary. The depositary may resign at any
time by delivering notice to us of its election to do so. We may remove the
depositary at any time. Any such resignation or removal will take effect upon
the appointment of a successor depositary and its acceptance of its appointment.
We must appoint a successor depositary within 45 days after delivery of the
notice of resignation or removal and such successor must be a bank or trust
company, or an affiliate of a bank or trust company, having its principal office
in the United States and having a combined capital and surplus of at least
$50,000,000.
Amendment and Termination of the Deposit Agreement. We and the depositary
may amend the form of depositary receipt evidencing the depositary shares and
any provision of the deposit agreement at any time. Any amendment that imposes
fees, taxes or other charges to the holders of depositary shares or that
materially and adversely alters the rights of the holders of depositary shares
will not be effective until 90 days after notice of the amendment has been
mailed to the record holders of the depositary shares then outstanding. Once any
amendment becomes effective, every holder of depositary shares will be bound to
the deposit agreement. However, we may not amend the form of deposit agreement
to prevent any holders of depositary shares from receiving shares of the
underlying preferred stock or any money or property that the holder may be
entitled to receive if the holder surrenders the depositary shares according to
the terms of the deposit agreement. If we decide to terminate the deposit
agreement, then within at least 30 days before the termination date, depositary
will mail notice of termination to the record holders of the depositary shares
then outstanding. If we have not appointed a successor depositary within 45 days
after depositary sends notice of resignation, the depositary may terminate the
deposit agreement.
If any depositary receipts remain outstanding after the date of
termination, the depositary will:
- discontinue the transfer of depositary receipts;
- will suspend the distribution of dividends to the holders of depositary
receipts; and
- will not give any further notices (other than notice of termination) or
perform any further acts under the deposit agreement.
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However, the depositary will continue (1) to collect dividends and any
other distributions on the preferred stock and (2) to deliver the preferred
stock, together with the corresponding dividends and distributions and the net
proceeds of any sales of rights, preferences, privileges or other property in
exchange for depositary receipts surrendered. At any time after two years from
the date of termination, the depositary may sell the preferred stock then held
by it at public or private sales, at such place or places and upon such terms as
it deems proper, and may hold the net proceeds of any sale, together with any
money and other property then held by it for the pro rata benefit of the holders
of depositary receipts which have not been surrendered.
Charges of Depositary. We will pay charges of the depositary in connection
with the initial deposit of the preferred stock, all withdrawals of preferred
stock by owners of depositary shares, any redemption of the preferred stock and
the distribution of information to holders of depositary shares. Holders of
depositary receipts will be required to pay transfer and other taxes and
governmental charges and such other charges as are expressly provided in the
deposit agreement to be for their accounts.
Miscellaneous. The depositary will be required to forward to holders of
depositary receipts all reports and communications from us that we deliver to
the depositary and that we are required to furnish to the holders of the
preferred stock.
Neither we nor the depositary will be liable if either of us is prevented
or delayed by law or any circumstance beyond our control in performing our
respective obligations under the deposit agreement. Our obligations and those of
the depositary will be limited to performing in good faith our respective duties
under the deposit agreement. Neither we nor the depositary will be obligated to
prosecute or defend any legal proceeding relating to any depositary shares or
preferred stock unless satisfactory indemnity is furnished. We and the
depositary may rely upon written advice of counsel or accountants, or upon
information provided by persons presenting preferred stock for deposit, holders
of depositary receipts or other persons we believe to be competent and on
documents we believe to be genuine.
DESCRIPTION OF PERMANENT GLOBAL PREFERRED SECURITIES.
Certain series of the preferred stock or depositary shares may be issued as
permanent global securities to be deposited with a depositary with respect to
that series. Unless otherwise indicated in the prospectus supplement, the
summary of the depositary arrangements applicable to debt securities will also
be applied to preferred stock or depositary receipts issued in permanent global
form and for which DTC acts as the depositary.
DESCRIPTION OF WARRANTS
GENERAL
We may issue warrants to purchase debt securities, preferred stock, or
common stock. We may issue warrants independently or together with any other
securities we offer pursuant to a prospectus supplement and the warrants may be
attached to or separate from the securities. We will issue each series of
warrants under a separate warrant agreement that we will enter into with a bank
or trust company, as warrant agent. We will describe additional terms of the
warrants and the applicable warrant agreements in the applicable prospectus
supplement.
DEBT WARRANTS
We will describe in the applicable prospectus supplement the terms of the
debt warrants being offered, the warrant agreement relating to the debt warrants
and the debt warrant certificates representing the debt warrants, which may
include the following:
- the title of the debt warrants;
- the price or prices at which the debt warrants will be issued;
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- the aggregate number of the debt warrants;
- the designation and terms of the debt securities purchasable upon
exercise of the debt warrants, and the procedures and conditions relating
to the exercise of the debt warrants;
- the designation and terms of any related debt securities with which the
debt warrants are issued, and the number of the debt warrants issued with
each security;
- the date, if any, on and after which the debt warrants and the related
debt securities will be separately transferable;
- the principal amount of debt securities purchasable upon exercise of each
debt warrant, and the price at which the principal amount of the debt
securities may be purchased upon exercise;
- the date on which the right to exercise the debt warrants will commence,
and the date on which the right will expire;
- the maximum or minimum number of the debt warrants which may be exercised
at any time;
- whether the debt warrants represented by the debt warrant certificates or
debt securities that may be issued upon exercise of the debt warrants
will be issued in registered or bearer form;
- information with respect to book-entry procedures, if any;
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- a discussion of the material United States federal income tax
considerations applicable to the exercise of the debt warrants;
- the antidilution provisions of the debt warrants, if any;
- the redemption or call provisions, if any, applicable to the debt
warrants; and
- any other terms of the debt warrants, including terms, procedures and
limitations relating to the exercise of the debt warrants.
Holders may exchange debt warrant certificates for new debt warrant
certificates of different denominations, and may exercise debt warrants at the
corporate trust office of the warrant agent or any other office indicated in the
applicable prospectus supplement. Prior to the exercise of their debt warrants,
holders of debt warrants will not have any of the rights of holders of the
securities purchasable upon the exercise and will not be entitled to payments
principal, premium or interest on the securities purchasable upon the exercise.
STOCK WARRANTS
We will describe in the applicable prospectus supplement the terms of the
preferred stock warrants or common stock warrants being offered, which may
include the following:
- the title of the warrants;
- the price or prices at which the warrants will be issued;
- the aggregate number of the warrants issued;
- the designation and terms of the preferred stock or common stock for
which the warrants are exercisable;
- if applicable, the designation and terms of the preferred stock or common
stock with which the warrants are issued and the number of the warrants
issued with each share of preferred stock or common stock;
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- if applicable, the date on and after which the warrants and the related
preferred stock or common stock will be separately transferable;
- the number of shares of preferred stock or common stock purchasable upon
exercise of the warrants and the exercise price of the warrants;
- the date on which the right to exercise the warrants will commence, and
the date on which the right will expire;
- the maximum or minimum number of the warrants which may be exercised at
any time;
- the currency or currency units in which the offering price, if any, and
the exercise price are payable;
- if applicable, a discussion of the material United States federal income
tax considerations applicable to the exercise of the warrants;
- any antidilution provisions of the warrants;
- any redemption or call provisions applicable to the warrants; and
- any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
EXERCISE OF WARRANTS
Each warrant will entitle the holder of the warrant to purchase for cash at
the exercise price set forth in the applicable prospectus supplement the
principal amount of debt securities or shares of preferred stock or common stock
being offered. Holders may exercise warrants at any time up to the close of
business on the expiration date set forth in the applicable prospectus
supplement. After the close of business on the expiration date, unexercised
warrants are void.
Holders may exercise warrants as set forth in the prospectus supplement
relating to the warrants being offered. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the corporate trust office
of the warrant agent or any other office indicated in the prospectus supplement,
we will, as soon as practicable, forward the debt securities or shares of
preferred stock or common stock purchasable upon the exercise of the warrant. If
less than all of the warrants represented by the warrant certificate are
exercised, we will issue a new warrant certificate for the remaining warrants.
MODIFICATIONS
The warrant agreements and the terms of the warrants may be amended by us
and the warrant agent, without the consent of the holders of warrants, for the
purpose of curing any ambiguity, or of curing, correcting or supplementing any
defective or inconsistent provision contained in a warrant agreement, or in any
other manner which we may deem necessary or desirable and which will not
materially and adversely affect the interests of holders of outstanding
warrants.
We and the warrant agent also may modify or amend certain other terms of
the warrant agreements and the warrants with the consent of the holders of not
less than a majority in number of the then-outstanding unexercised warrants
affected. However, no such modification or amendment may be made without the
consent of the affected holders if the amendment would:
- shorten the period of time during which the warrants may be exercised;
- otherwise materially and adversely affect the exercise rights of the
holders of the warrants; or
- reduce the number of outstanding warrants.
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MERGER, CONSOLIDATION OR SALE OF ASSETS
If at any time we merge, consolidate, or sell substantially all of our
assets which results in securities underlying the warrants to be converted into
the right to receive stock, securities or other property, then each outstanding
warrant will thereafter only be exercisable for the kind and amount of stock,
securities or other property receivable upon the consummation of that
transaction by a holder of the number of securities underlying the warrant.
ENFORCEABILITY OF RIGHTS BY HOLDERS
The warrant agent will act solely as our agent in connection with the
issuance and exercise of any warrants. The warrant agent will have no duty or
responsibility in case of any default by us in the performance of its
obligations under the warrant agreements or the warrant certificates. Each
holder of warrants may, without the consent of the warrant agent, enforce by
appropriate legal action, on its own behalf, its right to exercise its warrants.
PLAN OF DISTRIBUTION
We may sell our securities from time to time through agents, underwriters
or dealers or directly to purchasers, in one or more transactions at a fixed
price or prices, which may be changed, or at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices.
By Agents
We may designate agents to solicit offers to purchase our securities.
- We will name any agent involved in offering or selling our securities and
any commissions that we will pay to the agent in the prospectus
supplement.
- Unless we indicate otherwise in the prospectus supplement, our agents
will act on a best efforts basis for the period of their appointment.
- Our agents may be deemed to be underwriters under the Securities Act of
1933 of any of our securities that they offer or sell.
By Underwriters
We may use an underwriter or underwriters in the offer or sale of our
securities.
- If we use an underwriter or underwriters, the offered securities will be
acquired by the underwriters for their own account.
- We will include the names of the specific managing underwriter or
underwriters, as well as any other underwriters, and the terms of the
transactions, including the compensation the underwriters and dealers
will receive, in the prospectus supplement.
- The underwriters will use this prospectus and the prospectus supplement
to sell our securities.
We may also sell securities pursuant to one or more standby agreements with
one or more underwriters in connection with the call, redemption or exchange of
a specified class or series of any outstanding securities of Grey Wolf. In a
standby agreement, the underwriter or underwriters would agree either:
- to purchase from Grey Wolf up to the number of shares of common stock
that would be issuable upon conversion or exchange of all the shares of
the class or series of securities of Grey Wolf at an agreed price per
share of common stock; or
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- to purchase from Grey Wolf up to a specified dollar amount of offered
securities at an agreed price per offered security, which price may be
fixed or may be established by formula or other method and which may or
may not relate to market prices of the common stock or any other
outstanding security of Grey Wolf.
The underwriter or underwriters would also agree, if applicable, to convert
or exchange any securities of the class or series held or purchased by the
underwriter or underwriters into or for common stock or other security of Grey
Wolf. The underwriter or underwriters may assist in the solicitation of
conversions or exchanges by holders of the class or series of securities.
By Dealers
We may use a dealer to sell our securities.
- If we use a dealer, we, as principal, will sell our securities to the
dealer.
- The dealer will then resell our securities to the public at varying
prices that the dealer will determine at the time it sells our
securities.
- We will include the name of the dealer and the terms of our transactions
with the dealer in the prospectus supplement.
By Delayed Delivery Contracts
We may authorize our agents and underwriters to solicit offers by certain
institutions to purchase our securities at the public offering price under
delayed delivery contracts.
- If we use delayed delivery contracts, we will disclose that we are using
them in the prospectus supplement and will tell you when we will demand
payment and delivery of the securities under the delayed delivery
contracts.
- These delayed delivery contracts will be subject only to the conditions
that we set forth in the prospectus supplement.
- We will indicate in the prospectus supplement, the commission that
underwriters and agents soliciting purchases of our securities under
delayed delivery contracts will be entitled to receive.
We may directly solicit offers to purchase our securities, and we may
directly sell our securities to institutional or other investors. We will
describe the terms of our direct sales in the prospectus supplement. We may also
sell our securities upon the exercise of rights which we may issue.
GENERAL INFORMATION
Underwriters, dealers and agents that participate in the distribution of
our securities may be underwriters as defined in the Securities Act, and any
discounts or commissions they receive and any profit they make on the resale of
the offered securities may be treated as underwriting discounts and commissions
under the Securities Act. Any underwriters or agents will be identified and
their compensation described in a prospectus supplement. We may indemnify
agents, underwriters, and dealers against certain civil liabilities, including
liabilities under the Securities Act. Our agents, underwriters, and dealers, or
their affiliates, may be customers of, engage in transactions with or perform
services for us, in the ordinary course of business.
Representatives of the underwriters through whom our securities are sold
for public offering and sale may engage in over-allotment, stabilizing
transactions, syndicate short covering transactions and penalty bids in
accordance with the Regulation M under the Exchange Act. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the offered
securities so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the offered securities in
the open market after the
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distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative of the underwriters to reclaim a selling
concession from a syndicate member when the offered securities originally sold
by such syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the offered
securities to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on a national securities
exchange and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The legality of the securities will be passed upon for us by Porter &
Hedges, L.L.P., Houston, Texas. If the securities are being distributed in an
underwritten offering, certain legal matters will be passed for the underwriters
by counsel identified in the related prospectus supplement.
EXPERTS
The consolidated financial statements of Grey Wolf, Inc. as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
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MARCH 31, 2000
[GREYWOLF INC. LOGO]
GREY WOLF, INC.
SHARES OF COMMON STOCK
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PROSPECTUS SUPPLEMENT
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JOHNSON RICE & COMPANY, L.L.C.
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We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus supplement or to make
representations as to matters not stated in this prospectus supplement. You must
not rely on unauthorized information. This prospectus supplement is not an offer
to sell these securities or our solicitation of your offer to buy the securities
in any jurisdiction where that would not be permitted or legal. Neither the
delivery of this prospectus supplement nor any sales hereunder after the date of
this prospectus supplement shall create an implication that the information
contained herein or the affairs of Grey Wolf, Inc. have not changed since the
date hereof.
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Until April 25, 2000 (25 days after the date of this prospectus supplement), all
dealers that effect transactions in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
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