##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 1-8226
 
 Grey Wolf, Inc.
  Texas
(State or jurisdiction of
incorporation or organization)
    
    74-2144774
(I.R.S. Employer
Identification No.)10370 Richmond Avenue, Suite 600
Houston, Texas
(Address of principal executive offices)
    
    77042
(Zip Code)
 (713) 435-6100
  þ o
  þ o
  o þ
    - 1 -




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GREY WOLF, INC. AND SUBSIDIARIES
Table of Contents
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Shareholders Equity and Comprehensive Income
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    30Item 1A.
    
    Risk Factors
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    31Certification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification of CEO & CFO Pursuant to Section 1350
  See accompanying notes to consolidated financial statements
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    131,774
    
    
    $
    71,710Restricted cash
    
    
    773
    
    
    
    758Accounts receivable, net of allowance of $2,674
and $2,424, respectively
    
    
    146,306
    
    
    
    98,065Prepaids and other current assets
    
    
    8,649
    
    
    
    5,097Deferred tax assets
    
    
    22,200
    
    
    
    3,050Total current assets
    
    
    309,702
    
    
    
    178,680Property and equipment:Land, buildings and improvements
    
    
    5,367
    
    
    
    5,061Drilling equipment
    
    
    921,252
    
    
    
    824,901Furniture and fixtures
    
    
    3,946
    
    
    
    3,578Total property and equipment
    
    
    930,565
    
    
    
    833,540Less: accumulated depreciation
    
    
    (439,409
    )
    
    
    (396,210
    )Net property and equipment
    
    
    491,156
    
    
    
    437,330Goodwill
    
    
    10,377
    
    
    
    10,377Other noncurrent assets, net
    
    
    8,055
    
    
    
    9,489$
    819,290
    
    
    $
    635,876LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable-trade
    
    $
    60,646
    
    
    $
    40,232Accrued workers compensation
    
    
    6,465
    
    
    
    4,303Payroll and related employee costs
    
    
    7,537
    
    
    
    8,699Accrued interest payable
    
    
    3,467
    
    
    
    1,516Other accrued liabilities
    
    
    9,076
    
    
    
    5,834Total current liabilities
    
    
    87,191
    
    
    
    60,584Contingent convertible senior notes
    
    
    275,000
    
    
    
    275,000Other long-term liabilities
    
    
    8,254
    
    
    
    7,509Deferred income taxes
    
    
    117,940
    
    
    
    55,301Commitments and contingent liabilities
    
    
    
    
    
    
    Shareholders equity:Series B Junior Participating Preferred stock,
$1 par value; 250,000 shares authorized;
none outstanding
    
    
    
    
    
    
    Common stock, $0.10 par value; 300,000,000
shares
authorized; 192,607,150 and 190,136,471
issued and outstanding, respectively
    
    
    19,262
    
    
    
    19,014Additional paid-in capital
    
    
    374,863
    
    
    
    363,148Unearned restricted stock awards
    
    
    (996
    )
    
    
    Accumulated deficit
    
    
    (62,224
    )
    
    
    (144,680
    )Total shareholders equity
    
    
    330,905
    
    
    
    237,482$
    819,290
    
    
    $
    635,876
 See accompanying notes to consolidated financial statements
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##### Table of Contents



GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Contract drilling
    
    $
    181,523
    
    
    $
    116,290
    
    
    $
    492,830
    
    
    $
    295,240Costs and expenses:Drilling operations
    
    
    109,027
    
    
    
    87,493
    
    
    
    298,798
    
    
    
    234,539Depreciation and amortization
    
    
    15,676
    
    
    
    14,271
    
    
    
    44,810
    
    
    
    41,334General and administrative
    
    
    4,206
    
    
    
    3,378
    
    
    
    11,685
    
    
    
    9,685(Gain) loss on sale of assets
    
    
    73
    
    
    
    (51
    )
    
    
    (5
    )
    
    
    (69
    )Total costs and expenses
    
    
    128,982
    
    
    
    105,091
    
    
    
    355,288
    
    
    
    285,489Operating income
    
    
    52,541
    
    
    
    11,199
    
    
    
    137,542
    
    
    
    9,751Other income (expense):Interest income
    
    
    1,030
    
    
    
    174
    
    
    
    2,186
    
    
    
    510Interest expense
    
    
    (2,910
    )
    
    
    (2,200
    )
    
    
    (8,330
    )
    
    
    (12,274
    )Other expense, net
    
    
    (1,880
    )
    
    
    (2,026
    )
    
    
    (6,144
    )
    
    
    (11,764
    )Net income (loss) before income taxes
    
    
    50,661
    
    
    
    9,173
    
    
    
    131,398
    
    
    
    (2,013
    )Income tax expense (benefit):Current
    
    
    (1,724
    )
    
    
    
    
    
    
    2,645
    
    
    
    Deferred
    
    
    20,606
    
    
    
    3,711
    
    
    
    46,297
    
    
    
    438Total income tax expense
    
    
    18,882
    
    
    
    3,711
    
    
    
    48,942
    
    
    
    438Net income (loss)
    
    $
    31,779
    
    
    $
    5,462
    
    
    $
    82,456
    
    
    $
    (2,451
    )Net income (loss) per common share (Note 2):Basic
    
    $
    0.17
    
    
    $
    0.03
    
    
    $
    0.43
    
    
    $
    (0.01
    )Diluted
    
    $
    0.14
    
    
    $
    0.03
    
    
    $
    0.37
    
    
    $
    (0.01
    )Weighted average common shares outstanding:Basic
    
    
    191,939
    
    
    
    186,966
    
    
    
    191,010
    
    
    
    184,840Diluted
    
    
    236,008
    
    
    
    231,205
    
    
    
    235,103
    
    
    
    184,840
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Income
  CommonStock,
    
    
    Additional
    
    
    UnearnedCommon
    
    
    $0.10 Par
    
    
    Paid-in
    
    
    Restricted
    
    
    AccumulatedShares
    
    
    Value
    
    
    Capital
    
    
    Stock Awards
    
    
    Deficit
    
    
    TotalBalance, December 31, 2003
    
    
    181,283
    
    
    $
    18,129
    
    
    $
    330,266
    
    
    $
    
    
    
    $
    (152,758
    )
    
    $
    195,637Exercise of stock options
    
    
    4,243
    
    
    
    424
    
    
    
    9,729
    
    
    
    
    
    
    
    
    
    
    
    10,153Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    3,193
    
    
    
    
    
    
    
    
    
    
    
    3,193Non-cash compensation
expense
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Issuance of common stock
    
    
    4,610
    
    
    
    461
    
    
    
    19,883
    
    
    
    
    
    
    
    
    
    
    
    20,344Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,078
    
    
    
    8,078Balance, December 31, 2004
    
    
    190,136
    
    
    
    19,014
    
    
    
    363,148
    
    
    
    
    
    
    
    (144,680
    )
    
    
    237,482Exercise of stock options
    
    
    2,273
    
    
    
    228
    
    
    
    7,792
    
    
    
    
    
    
    
    
    
    
    
    8,020Tax benefit of stock
option exercises
    
    
    
    
    
    
    
    
    
    
    2,808
    
    
    
    
    
    
    
    
    
    
    
    2,808Issuance of restricted stock
    
    
    198
    
    
    
    20
    
    
    
    1,115
    
    
    
    (1,135
    )
    
    
    
    
    
    
    Amortization of restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    139Comprehensive net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,456
    
    
    
    82,456Balance, September 30, 2005
(Unaudited)
    
    
    192,607
    
    
    $
    19,262
    
    
    $
    374,863
    
    
    $
    (996
    )
    
    $
    (62,224
    )
    
    $
    330,905
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
   Nine Months EndedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    82,456
    
    
    $
    (2,451
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    44,810
    
    
    
    41,334Deferred income taxes
    
    
    43,489
    
    
    
    (1,420
    )Gain on sale of assets
    
    
    (5
    )
    
    
    (69
    )Amortization of restricted stock awards
    
    
    139
    
    
    
    Non-cash compensation expense
    
    
    
    
    
    
    77Accretion of debt discount
    
    
    
    
    
    
    102Tax benefit of stock option exercises
    
    
    2,808
    
    
    
    1,857Net effect of changes in assets and liabilities
related to operating accounts
    
    
    (23,826
    )
    
    
    (22,672
    )Cash provided by operating activities
    
    
    149,871
    
    
    
    16,758Cash flows from investing activities:Cash paid for acquisition, net of cash acquired
    
    
    
    
    
    
    (28,906
    )Property and equipment additions
    
    
    (99,229
    )
    
    
    (31,067
    )Proceeds from sale of property and equipment
    
    
    1,402
    
    
    
    899Cash used in investing activities
    
    
    (97,827
    )
    
    
    (59,074
    )Cash flows from financing activities:Net proceeds from long-term debt
    
    
    
    
    
    
    122,187Repayments of long-term debt
    
    
    
    
    
    
    (85,000
    )Financing costs
    
    
    
    
    
    
    (391
    )Proceeds from exercise of stock options
    
    
    8,020
    
    
    
    4,466Cash provided by financing activities
    
    
    8,020
    
    
    
    41,262Net increase (decrease) in cash and cash equivalents
    
    
    60,064
    
    
    
    (1,054
    )Cash and cash equivalents, beginning of period
    
    
    71,710
    
    
    
    54,350Cash and cash equivalents, end of period
    
    $
    131,774
    
    
    $
    53,296Supplemental cash flow disclosure:Cash paid for interest
    
    $
    5,734
    
    
    $
    12,378Cash paid for taxes
    
    $
    2,510
    
    
    $
    
 See accompanying notes to consolidated financial statements
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
  (1) General
   (2) Significant Accounting Policies
 Earnings Per Share
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Numerator:Net income (loss)
    
    $
    31,779
    
    
    $
    5,462
    
    
    $
    82,456
    
    
    $
    (2,451
    )Add interest expense on contingent
convertible senior notes,
net of related tax effects
    
    
    1,703
    
    
    
    1,238
    
    
    
    4,821
    
    
    
    Adjusted net income (loss) diluted
    
    $
    33,482
    
    
    $
    6,700
    
    
    $
    87,277
    
    
    $
    (2,451
    )Denominator:Weighted average common
shares outstanding
    
    
    191,939
    
    
    
    186,966
    
    
    
    191,010
    
    
    
    184,840Effect of dilutive securities:Options  treasury stock method
    
    
    1,562
    
    
    
    1,782
    
    
    
    1,603
    
    
    
    Restricted stock  treasury stock method
    
    
    50
    
    
    
    
    
    
    
    33
    
    
    
    Contingent convertible senior notes
    
    
    42,457
    
    
    
    42,457
    
    
    
    42,457
    
    
    
    Weighted average common shares
outstanding-diluted
    
    
    236,008
    
    
    
    231,205
    
    
    
    235,103
    
    
    
    184,840Earnings (loss) per common share:Basic
    
    $
    0.17
    
    
    $
    0.03
    
    
    $
    0.43
    
    
    $
    (0.01
    )Diluted
    
    $
    0.14
    
    
    $
    0.03
    
    
    $
    0.37
    
    
    $
    (0.01
    )
  Stock-Based Compensation
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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands, except per share amounts)Net income (loss), as reported
    
    $
    31,779
    
    
    $
    5,462
    
    
    $
    82,456
    
    
    $
    (2,451
    )Add: Stock-based employee
compensation expense included
in reported net income (loss), net of
related tax effects
    
    
    35
    
    
    
    
    
    
    
    87
    
    
    
    52Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects
    
    
    (542
    )
    
    
    (558
    )
    
    
    (1,664
    )
    
    
    (2,142
    )Pro forma net income (loss)
    
    $
    31,272
    
    
    $
    4,904
    
    
    $
    80,879
    
    
    $
    (4,541
    )Basic earnings per shareAs reported
    
    $
    0.17
    
    
    $
    0.03
    
    
    $
    0.43
    
    
    $
    (0.01
    )Pro forma
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    0.42
    
    
    $
    (0.02
    )Diluted earnings per shareAs reported
    
    $
    0.14
    
    
    $
    0.03
    
    
    $
    0.37
    
    
    $
    (0.01
    )Pro forma
    
    $
    0.14
    
    
    $
    0.03
    
    
    $
    0.36
    
    
    $
    (0.02
    )
  Recent Accounting Pronouncements
   - 9 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
    (3) Accounting for Income Taxes
   - 10 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
 (4) Long-Term Debt
  September 30,
    
    
    December 31,2005
    
    
    20043.75% Contingent Convertible
Senior Notes due May 2023
    
    $
    150,000
    
    
    $
    150,000Floating Rate Contingent Convertible
Senior Notes due April 2024
    
    
    125,000
    
    
    
    125,000275,000
    
    
    
    275,000Less current maturities
    
    
    
    
    
    
    Long-term debt
    
    $
    275,000
    
    
    $
    275,000
 Floating Rate Notes
    3.75% Notes
  - 11 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
   8 7/8% Senior Notes due 2007
  CIT Facility
   - 12 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
   (5) Segment Information
  (6) Contingencies
  (7) Capital Stock and Option Plans
  
    
    incentive stock options;
    
    non-statutory stock options;
    
    restricted shares; and
    
    other stock-based and cash awards.
   - 13 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
   (8) Concentrations
   (9) Acquisition and Intangible Assets
   - 14 -




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GREY WOLF, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements
  Current assets
    
    $
    3,992Property and equipment
    
    
    42,384Intangible assets
    
    
    3,200Goodwill
    
    
    10,377Total assets acquired
    
    
    59,953Current liabilities
    
    
    (4,490
    )Deferred tax liabilities
    
    
    (5,977
    )Total liabilities assumed
    
    
    (10,467
    )Net assets acquired
    
    $
    49,486
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GREY WOLF, INC. AND SUBSIDIARIES
 
 Managements Discussion and Analysis of Financial
 Condition and Results of Operations
  Overview
    Rig Activity
  2003
    
    
    2004
    
    
    2005DomesticLand Rig
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Full
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Oct 1 -Count
    
    Year
    
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Q-4
    
    
    Year
    
    
    Q-1
    
    
    Q-2
    
    
    Q-3
    
    
    Oct 28Baker
Hughes
    
    
    880
    
    
    
    1,002
    
    
    
    1,049
    
    
    
    1,115
    
    
    
    1,131
    
    
    
    1,074
    
    
    
    1,153
    
    
    
    1,218
    
    
    
    1,307
    
    
    
    1,371Grey Wolf
    
    
    61
    
    
    
    65
    
    
    
    86
    
    
    
    94
    
    
    
    96
    
    
    
    85
    
    
    
    98
    
    
    
    99
    
    
    
    103
    
    
    
    105
 Term Contracts
  - 16 -




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Drilling and Contract Rates
   Turnkey and Footage Contract Activity
   Financial Outlook
  - 17 -




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Critical Accounting Policies
  - 18 -




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Property and Equipment
  Impairment of Long-Lived Assets
   - 19 -




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EstimatedPer Rig RefurbishmentNumber
    
    
    and Reactivation CostRig Category
    
    Of Rigs
    
    
    (excluding drill pipe)Marketed
    
    
    110
    
    
    N/ARigs being refurbished
    
    
    2
    
    
    $8.4 millionAvailable for refurbishment
    
    
    15
    
    
    $5.0 million - $12.0 million
  Goodwill and Other Intangible Assets
   Revenue Recognition
  Insurance Accruals
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Income Taxes
   Financial Condition and Liquidity
  September 30, 2005
    
    
    December 31, 2004(Unaudited)(Dollars in thousands)Amount
    
    
    %
    
    
    Amount
    
    
    %Working capital
    
    $
    222,511
    
    
    
    30
    
    
    $
    118,096
    
    
    
    20Property and equipment, net
    
    
    491,156
    
    
    
    67
    
    
    
    437,330
    
    
    
    76Goodwill
    
    
    10,377
    
    
    
    2
    
    
    
    10,377
    
    
    
    2Other noncurrent assets
    
    
    8,055
    
    
    
    1
    
    
    
    9,489
    
    
    
    2Total
    
    $
    732,099
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100Long-term debt
    
    $
    275,000
    
    
    
    38
    
    
    $
    275,000
    
    
    
    48Other long-term liabilities
    
    
    126,194
    
    
    
    17
    
    
    
    62,810
    
    
    
    11Shareholders equity
    
    
    330,905
    
    
    
    45
    
    
    
    237,482
    
    
    
    41Total
    
    $
    732,099
    
    
    
    100
    
    
    $
    575,292
    
    
    
    100
 - 21 -




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Significant Changes in Financial Condition
  Floating Rate Notes
    3.75% Notes
   - 22 -




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CIT Facility
    - 23 -




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##### Table of Contents



Cash Flow
  Nine Months EndedSeptember 30,2005
    
    
    2004(In thousands)(Unaudited)Net cash provided by (used in):Operating activities
    
    $
    149,871
    
    
    $
    16,758Investing activities
    
    
    (97,827
    )
    
    
    (59,074
    )Financing activities
    
    
    8,020
    
    
    
    41,262Net increase (decrease) in cash
    
    $
    60,064
    
    
    $
    (1,054
    )
    Projected Cash Sources and Uses
   - 24 -




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Inflation and Changing Prices
  Results of Operations
  Reconciliation of Non-GAAP Financial Measures
  - 25 -




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##### Table of Contents



ProjectedThreeMonthsThree Months Ended
    
    
    Nine Months Ended
    
    
    EndingSeptember 30,
    
    
    September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005(In thousands)(Unaudited)Earnings before interest expense,
taxes, depreciation and
amortization
    
    $
    69,247
    
    
    $
    25,644
    
    
    $
    184,538
    
    
    $
    51,595
    
    
    $
    75,209Depreciation and amortization
    
    
    (15,676
    )
    
    
    (14,271
    )
    
    
    (44,810
    )
    
    
    (41,334
    )
    
    
    (16,200
    )Interest expense
    
    
    (2,910
    )
    
    
    (2,200
    )
    
    
    (8,330
    )
    
    
    (12,274
    )
    
    
    (3,150
    )Total income tax (expense)Benefit
    
    
    (18,882
    )
    
    
    (3,711
    )
    
    
    (48,942
    )
    
    
    (438
    )
    
    
    (20,808
    )Net income (loss)
    
    $
    31,779
    
    
    $
    5,462
    
    
    $
    82,546
    
    
    $
    (2,451
    )
    
    $
    35,051
 Comparison of the Three Months Ended September 30, 2005 and 2004
  Three Months Ended
    
    
    Three Months EndedSeptember 30, 2005
    
    
    September 30, 2004Daywork
    
    
    Turnkey
    
    

    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    8,574
    
    
    
    890
    
    
    
    9,464
    
    
    
    7,760
    
    
    
    870
    
    
    
    8,630Contract drilling revenues
    
    $
    142,937
    
    
    $
    38,586
    
    
    $
    181,523
    
    
    $
    88,923
    
    
    $
    27,367
    
    
    $
    116,290Drilling operations expenses
    
    
    (80,857
    )
    
    
    (28,170
    )
    
    
    (109,027
    )
    
    
    (67,727
    )
    
    
    (19,766
    )
    
    
    (87,493
    )General and administrative
expenses
    
    
    (3,822
    )
    
    
    (384
    )
    
    
    (4,206
    )
    
    
    (3,059
    )
    
    
    (319
    )
    
    
    (3,378
    )Interest income
    
    
    933
    
    
    
    97
    
    
    
    1,030
    
    
    
    158
    
    
    
    16
    
    
    
    174Gain (loss) on sale of assets
    
    
    (63
    )
    
    
    (10
    )
    
    
    (73
    )
    
    
    46
    
    
    
    5
    
    
    
    51EBITDA
    
    $
    59,128
    
    
    $
    10,119
    
    
    $
    69,247
    
    
    $
    18,341
    
    
    $
    7,303
    
    
    $
    25,644Average per rig day worked:Contract drilling revenues
    
    $
    16,671
    
    
    $
    43,355
    
    
    $
    19,180
    
    
    $
    11,459
    
    
    $
    31,460
    
    
    $
    13,476EBITDA
    
    $
    6,896
    
    
    $
    11,370
    
    
    $
    7,317
    
    
    $
    2,364
    
    
    $
    8,395
    
    
    $
    2,972
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  - 26 -




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Daywork Operations
  Turnkey Operations
  Other
    - 27 -




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Comparison of the Nine Months Ended September 30, 2005 and 2004
  Nine Months Ended
    
    
    
    
    
    
    
    
    
    
    Nine Months EndedSeptember 30, 2005

    
    
    
    September 30, 2004Daywork
    
    
    Turnkey
    
    
    
    
    
    
    Daywork
    
    
    TurnkeyOperations
    
    
    Operations(1)
    
    
    Total
    
    
    Operations
    
    
    Operations(1)
    
    
    Total(Dollars in thousands except averages per rig day worked)(Unaudited)Rig days worked
    
    
    24,907
    
    
    
    2,431
    
    
    
    27,338
    
    
    
    19,554
    
    
    
    2,832
    
    
    
    22,386Contract drilling revenues
    
    $
    386,113
    
    
    $
    106,717
    
    
    $
    492,830
    
    
    $
    208,451
    
    
    $
    86,789
    
    
    $
    295,240Drilling operations
expenses
    
    
    (223,215
    )
    
    
    (75,583
    )
    
    
    (298,798
    )
    
    
    (164,678
    )
    
    
    (69,861
    )
    
    
    (234,539
    )General and
administrative
expenses
    
    
    (10,676
    )
    
    
    (1,009
    )
    
    
    (11,685
    )
    
    
    (8,594
    )
    
    
    (1,091
    )
    
    
    (9,685
    )Interest income
    
    
    2,001
    
    
    
    185
    
    
    
    2,186
    
    
    
    446
    
    
    
    64
    
    
    
    510Gain (loss) on sale of
assets
    
    
    9
    
    
    
    (4
    )
    
    
    5
    
    
    
    61
    
    
    
    8
    
    
    
    69EBITDA
    
    $
    154,232
    
    
    $
    30,306
    
    
    $
    184,538
    
    
    $
    35,686
    
    
    $
    15,909
    
    
    $
    51,595Average per rig day
worked:Contract drilling
revenues
    
    $
    15,502
    
    
    $
    43,898
    
    
    $
    18,027
    
    
    $
    10,660
    
    
    $
    30,647
    
    
    $
    13,189EBITDA
    
    $
    6,192
    
    
    $
    12,466
    
    
    $
    6,750
    
    
    $
    1,825
    
    
    $
    5,618
    
    
    $
    2,305
 
 (1)
    
    Turnkey operations include the results from turnkey and footage contracts.  Daywork Operations
  Turnkey Operations
  - 28 -




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Other
    
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Interest Rate Risk.
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  - 29 -




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1a. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
    
    business strategy;
    
    demand for our services;
    
    spending by our customers;
    
    2005 rig activity and financial results;
    
    projected depreciation expense and interest expense;
    
    rigs expected to be engaged in turnkey and footage operations;
    
    reactivation, timing and cost of reactivation of rigs held for future refurbishment;
    
    projected dayrates;
    
    the ability to recover our refurbishment costs of rigs from term contracts;
    
    the availability and financial terms of term contracts;
    
    projected tax rate;
    
    wage rates and retention of employees;
    
    sufficiency of our capital resources and liquidity; and
    
    depreciation and capital expenditures in 2005.
 - 30 -




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##### Table of Contents




    
    fluctuations in prices and demand for oil and natural gas;
    
    fluctuations in levels of oil and natural gas exploration and development activities;
    
    fluctuations in demand for contract land drilling services;
    
    fluctuations in interest rates;
    
    the existence and competitive responses of our competitors;
    
    uninsured or underinsured casualty losses;
    
    technological changes and developments in the industry;
    
    the existence of operating risks inherent in the contract land drilling industry;
    
    U.S. and global economic conditions;
    
    the availability and terms of insurance coverage;
    
    the ability to attract and retain qualified personnel;
    
    unforeseen operating costs such as cost for environmental remediation and
turnkey cost overruns; and
    
    weather conditions.
  
 Item 6. Exhibits
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).4.2
    
    Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).
 - 31 -




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##### Table of Contents



4.4
    
    Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf,
Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent
Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).*
    
    31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)*
    
    31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)*
    
    32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President
and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief
Financial Officer.
 
 *
    
    Filed herewith - 32 -




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##### Table of Contents



SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  Date: November 4, 2005
    
    By:
    
    /s/ David W. WehlmannDavid W. WehlmannExecutive Vice President andChief Financial OfficerDate: November 4, 2005
    
    By:
    
    /s/ Kent D. CauleyKent D. CauleyVice President and Controller
 - 33 -




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##### Table of Contents



Exhibit Index
 3.1
    
    Articles of Incorporation of Grey Wolf, Inc., as amended (incorporated herein
by reference to Exhibit 3.1 to Form 10-Q dated May 12, 1999).3.2
    
    By-Laws of Grey Wolf, Inc., as amended (incorporated herein by reference to
Exhibit 99.1 to Form 8-K dated March 23, 1999).4.1
    
    Rights Agreement dated as of September 21, 1998 by and between the Company and
American Stock Transfer and Trust Company as Rights Agent (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed September 22, 1998).4.2
    
    Indenture, dated as of May 7, 2003, relating to the 3.75% Contingent
Convertible Senior Notes due 2023 between the Company, the Guarantors, and JPMorgan
Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.3
    
    Supplemental Indenture, dated as of May 22, 2003, relating to the 3.75%
Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors, and
JPMorgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement on Form S-3 No.
333-106997 filed July 14, 2003).4.4
    
    Indenture, dated as of March 31, 2004, relating to the Floating Rate Contingent
Convertible Senior Notes Due 2024 between the Company, the Guarantors, and J.P. Morgan
Chase Bank, a New York banking corporation, as Trustee (incorporated by reference to
Exhibit 4.1 to Form 10-Q dated May 5, 2004).4.5
    
    Registration Rights Agreement as of March 31, 2004 by and between Grey Wolf,
Inc., the Guarantors, and the Initial Purchasers of the Floating Rate Contingent
Convertible Senior Notes due 2024 (incorporated by reference to Exhibit 4.2 to the
Quarterly Report on Form 10-Q filed May 5, 2004).4.6
    
    Second Supplemental Indenture, dated as of March 31, 2004, relating to the
3.75% Contingent Convertible Senior Notes due 2023 between the Company, the Guarantors,
and JP Morgan Chase Bank, a New York Banking Corporation, as Trustee (incorporated by
reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q filed May 5, 2004).*
    
    31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a )*
    
    31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)*
    
    32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 of Thomas P. Richards, Chairman, President
and Chief Executive Officer and David W. Wehlmann, Executive Vice President and Chief
Financial Officer.
 
 *
    
    Filed herewith