UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996
Commission File Number 1-8226
DI INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2144774
(State or jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
450 GEARS ROAD, SUITE 625
HOUSTON, TEXAS 77067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 874-0202
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, par value $.10
per share, outstanding at August 6, 1996, was 38,855,778.
Page 1 of 18
DI INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. Other Information 16
Signatures 17
- 2 -
DI INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------- -------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,379 $ 1,859
Restricted cash - insurance deposits 1,903 1,612
Accounts receivable, net of allowance of $2,151
and $1,951, respectively 15,910 19,423
Rig inventory and supplies 3,209 2,498
Assets held for sale 2,398 2,398
Prepaids and other current assets 5,487 3,806
------- -------
Total current assets 30,286 31,596
------- -------
Property and equipment:
Land, buildings and improvements 3,296 3,523
Drilling and well service equipment 37,184 39,039
Furniture and fixtures 1,092 1,136
------- -------
41,572 43,698
Less: Accumulated depreciation and amortization (17,494) (17,788)
------- -------
Net property and equipment 24,078 25,910
------- -------
Other noncurrent assets 277 277
------- -------
$54,641 $57,783
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,427 $ 1,315
Trade accounts payable 8,800 12,529
Accrued workers' compensation 2,377 3,357
Payroll and related employee costs 4,031 3,172
Customer advances 650 116
Other accrued liabilities 3,350 3,604
------- -------
Total current liabilities 22,635 24,093
------- -------
Long-term debt less current maturities 9,362 11,146
------- --------
Other long-term liabilities and minority interest 3,294 1,950
------- --------
Series A preferred stock - mandatory redeemable 900 900
-------- ---------
Commitments and contingent liabilities
Stockholders' equity:
Series B Preferred stock, $1 par value; 10 shares authorized
4 shares subscribed 4,300 4,000
Common stock, $.10 par value; 75,000 shares authorized
38,795 and 38,669 issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 3,879 3,867
Additional paid-in capital 46,573 46,458
Deficit (35,898) (34,631)
Cumulative translation adjustments (404) -
------- -------
Total stockholders' equity 18,450 19,694
------- -------
$54,641 $57,783
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
-------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Contract drilling ....................................... $ 19,183 $ 23,151 $ 39,285 $ 45,497
-------- -------- -------- --------
Costs and expenses:
Drilling operations ..................................... 19,382 22,076 38,318 44,602
Depreciation and amortization ........................... 1,124 1,237 2,221 2,350
General and administrative .............................. 1,075 652 1,795 1,305
Employment severance .................................... -- -- 602 --
-------- -------- -------- --------
Total costs and expenses ............................. 21,581 23,965 42,936 48,257
-------- -------- -------- --------
Operating loss ............................................. (2,398) (814) (3,651) (2,760)
-------- -------- -------- --------
Other income (expense):
Interest income ......................................... 93 122 104 152
Interest expense ........................................ (204) (412) (466) (758)
Gain (loss) on sale of assets ........................... 2,934 (18) 2,949 25
Minority interest ....................................... 99 -- 97 --
-------- -------- -------- --------
Other income (expense), net .......................... 2,922 (308) 2,684 (581)
-------- -------- -------- --------
Net income (loss) from continuing operations ............... 524 (1,122) (967) (3,341)
Discontinued operations:
Income (loss) from oil and gas operations ............... -- 7 -- (4)
Loss from sale of oil and gas properties ................ -- (550) -- (550)
-------- -------- -------- --------
Income (loss) from discontinued operations ................. -- (543) -- (554)
-------- -------- -------- --------
Net income (loss) before income taxes ...................... 524 (1,665) (967) (3,895)
Income taxes ............................................... -- -- -- --
-------- -------- -------- --------
Net income (loss) .......................................... 524 (1,665) (967) (3,895)
Series B preferred stock subscription
dividend requirement .................................... (150) -- (300) --
-------- -------- -------- --------
Net income (loss) applicable to common stock ............... $ 374 $ (1,665) $ (1,267) $ (3,895)
======== ======== ======== ========
Income (loss) per common share:
Income (loss) from continuing operations ................ $ .01 $ (.03) $ (.03) $ (.09)
Loss from discontinued operations ....................... -- (.01) -- (.01)
-------- -------- -------- --------
Net income (loss) per share ................................ $ .01 $ (.04) $ (.03) $ (.10)
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding ........................... 38,694 38,669 38,682 38,669
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SERIES B
COMMON PREFERRED
STOCK STOCK ADDITIONAL CUMULATIVE
$.10 PAR $1 PAR PAID-IN TRANSLATION
VALUE VALUE CAPITAL DEFICIT ADJUSTMENTS TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .................. $ 3,867 -- $ 46,458 $(21,184) -- $ 29,141
Net loss .................................. -- -- -- (3,895) -- (3,895)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1995 ...................... $ 3,867 -- $ 46,458 $(25,079) -- $ 25,246
======== ======== ======== ======== ======== ========
Balance, December 31, 1995 .................. $ 3,867 $ 4,000 $ 46,458 $(34,631) -- $ 19,694
Exercise of stock options ................. 12 -- 115 -- 127
Net loss .................................. -- -- -- (967) (967)
Series B Preferred Stock dividend
requirement ............................. -- 300 -- (300) --
Translation of foreign operations ......... -- -- -- -- $ (404) (404)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1996 ...................... $ 3,879 $ 4,300 $ 46,573 $(35,898) $ (404) $ 18,450
======== ======== ======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
DI INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended JUNE 30,
-----------------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................. $ (967) $(3,895)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ...................................................... 2,221 2,350
Gain on sale of assets ............................................................. (2,949) (261)
Provision for doubtful accounts .................................................... 200 96
Net effect of changes in assets and liabilities
related to operating accounts .................................................... (1,705) 3,382
Discontinued operations ............................................................ -- 2,592
------- -------
Cash provided by (used in) operating activities .................................. (3,200) 4,264
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions ..................................................... (1,954) (2,571)
Proceeds from sale of property and equipment ......................................... 4,363 542
------- -------
Cash provided by (used in) investing activities .................................... 2,409 (2,029)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt borrowings ...................................................................... 1,703 1,524
Debt repayments ...................................................................... (1,375) (2,859)
Exercise of stock options ............................................................ 127 --
------- -------
Cash provided by (used in) financing activities .................................... 455 (1,335)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................................ (144) --
Net increase (decrease) in cash and cash equivalents ................................... (480) 900
Cash and cash equivalents, beginning of period ......................................... 1,859 1,628
------- -------
Cash and cash equivalents, end of period ............................................... $ 1,379 $ 2,528
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL
The accompanying unaudited consolidated financial statements have been
prepared by DI Industries, Inc. (the "Company") in accordance with the rules and
regulations of the Securities and Exchange Commission and they include the
accounts of the Company and its subsidiaries. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, which are of a normal recurring nature, necessary to present fairly
the Company's financial position as of June 30, 1996, and the results of
operations and cash flows for the periods indicated. All significant
intercompany transactions have been eliminated. The results of operations for
the three and six months ended June 30, 1996 and 1995 are not necessarily
indicative of the results for any other period or for the year as a whole. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
1995.
(2) INCOME (LOSS) PER COMMON STOCK SHARE
The following table presents the weighted average number of shares of
common stock and common stock equivalents outstanding for the three and six
months ended June 30, 1996 and 1995.
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
---------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
(In thousands) (In thousands)
Weighted Average Shares of
Common Stock Outstanding ............. 38,694 38,669 38,682 38,669
Stock Options (Treasury Method) ........ -- -- -- --
------ ------ ------ ------
38,694 38,669 38,682 38,669
====== ====== ====== ======
Stock options are not included in the computation for the three and six
months ended June 30, 1996 and 1995 since such inclusion would be antidilutive
or not significant to the computation.
(3) ACCOUNTING FOR INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. The Company records current income taxes based on its estimated actual
tax liability or benefit for the period.
The Company accounts for income taxes based upon Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred income tax liabilities and assets for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Based on an analysis of the
Company's gross deferred tax asset (taking into consideration applicable
statutory carryforward periods and other limitations), the Company has
determined that the recognition criteria set forth in SFAS No. 109, are not met
and, accordingly, the gross deferred tax asset is reduced fully by a valuation
allowance.
Deferred income taxes reflect the gross tax effect of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and tax reporting purposes, and (b) operating loss and tax
credit carryforwards.
- 7 -
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The tax effects of the significant items comprising the Company's net
deferred tax asset as of December 31, 1995 are as follows:
December 31,
1995
--------------
(In thousands)
Deferred tax asset:
Reserves not currently deductible $ 1,804
Operating loss carryforwards 10,438
Tax credit carryforwards 2,400
-------
14,642
Deferred tax liability:
Differences between book and tax basis of property (5,303)
9,339
Valuation allowance (9,339)
-------
Net deferred tax asset $ --
=======
The analysis of the likelihood of realizing the gross deferred tax asset
will be reviewed and updated periodically. Any required adjustment to the
valuation allowance will be made in the period in which the developments on
which they are based become known.
(4) COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases certain office space under noncancellable lease
agreements accounted for as operating leases. At December 31, 1995, lease
commitments under noncancellable operating leases with an initial term of more
than one year are $96,000 for the year ended December 31, 1996.
The Company is proceeding against Charlestown Industries, Inc. (a 50%
"Partner"), who was a co-defendant along with the Company in the joint venture
to recover their respective portion ($1,800,000) of the OFS 1987, Mid-Year et al
v DI Exploration Lawsuit. A judgment has been rendered in favor of the Company
against the Partner in the state of Oklahoma. The future recovery of the amount,
and term of recovery, is uncertain and no credit has been recorded as of June
30, 1996. Charlestown Industries filed for protection with the US Bankruptcy Act
and the Company's claim is scheduled to be ruled on by the Court in the third
quarter of 1996.
The Company is involved in litigation incidental to the conduct of its
business, none of which management believes is, individually or in the
aggregate, material to the Company's consolidated financial condition or results
of operations.
Substantially all of the Company's contract drilling activities are
conducted with independent oil and gas companies in the United States or with
national utility or national petroleum companies in Mexico and South America.
Historically, the Company has not required collateral or other security to
support the related receivables from such customers. However, the Company has
required certain customers to deposit funds in escrow prior to the commencement
of drilling. Actions typically taken by the Company in the event of nonpayment
include filing a mechanic's lien on the customer's producing properties and
filing suit against the customer.
If certain of the Company's Argentina rigs remain unutilized throughout
the remainder of 1996, the Company will be subject to a permanent import fee of
approximately $1.0 million. This liability has not been recorded as of June 30,
1996. At this time, management believes the book value of its Argentina
operations is realizable.
- 8 -
DI INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(5) EVENTS SUBSEQUENT TO DECEMBER 31, 1995
On May 7, 1996 the Company entered into two separate definitive merger
agreements to effect a $25 million equity infusion and deep drilling equipment
acquisition transaction.
Under the first agreement, R. T. Oliver, Inc. ("RTO") and Land Rig
Acquisition Corporation ("LRAC") will merge with a new subsidiary of the Company
in exchange for 39,535,578 shares of DI common stock or 31,628,462 shares if the
LRAC and RTO shareholders exercise an option to receive up to $5 million in
cash. In addition, warrants will also be issued to acquire up to 1,720,000
additional shares of DI common stock, the exercise of which is contingent upon
the occurrence of certain events. These mergers will result in the acquisition
of 18 inactive, deep capacity land drilling rigs which includes five 3,000
horsepower and nine 2,000 horsepower land rigs which are rated for depths of
25,000 feet or greater. The Company believes that these rigs can be brought up
to operating condition within a reasonable time on an economic basis and that
this group of rigs represents a significant concentration of the relatively
small number of such deep drilling land rigs currently available in the market.
Under the second agreement, a subsidiary of Somerset Drilling
Associates, L.L.C. ("Somerset"), a privately-held investment limited liability
company, will be merged into the Company in exchange for 39,535,578 shares of DI
common stock and warrants to acquire up to 1,720,000 shares of DI common stock,
the exercise of which is contingent upon the occurrence of certain events. This
merger transaction will result in a $25 million equity infusion into the Company
and it is anticipated that these funds will be used for combined rig fleet
refurbishment, funding of the above described cash option and general corporate
purposes.
There are certain conditions to closing of these transactions
including approval by the Company's shareholders, the effectiveness of a
registration statement with the Securities and Exchange Commission covering the
issuance of the shares, and the cancellation of the 1995 subscription by Norex
Drilling, Ltd. ("Norex") for 4,000 shares of Series B Preferred Stock and
related Series B Warrants. The $4,000,000 subscription plus accrued dividends
will be repaid to Norex by the Company with the proceeds from a term loan that
will be made by Norex to the Company. Somerset has arranged financing for its
equity infusion.
A definitive proxy statement has been mailed to Shareholders of record
as of July 15, 1996. The Company expects a vote on the mergers at its
shareholders' meeting scheduled for August 27, 1996. These proposed mergers will
result in an ownership change in the Company as defined by Section 382 of the
Internal Revenue Code which will limit the ultimate utilization of the Company's
net operating loss carryforward.
On June 10, 1996, Norex Drilling, Ltd. advanced $1,000,000 to the
Company pursuant to a Promissory Note (the "Note") and Commercial Security
Agreement as provided for in the mergers noted above. The Note bears interest at
12% per annum and will mature on October 31, 1996 or the Closing Date of the
proposed mergers, whichever occurs first. The Company's domestic accounts
receivable are pledged under the security agreement. The Company repaid this
loan, plus accrued interest, in early July 1996 with the proceeds from the sale
of the assets noted below.
On June 24, 1996, the Company closed a transaction whereby it sold all
of the operational assets of Western Oil Well Service Co. ("Western"), a
wholly-owned subsidiary of the Company, for $3.95 million in cash. Western
provided oil and gas well workover services principally in Montana, Utah and
North Dakota. Pursuant to the sale, the buyer assumed all of Western's existing
leases, primarily for vehicles, which totalled $251,000 at closing. The Company
recorded again of $2.8 million in the second quarter of 1996 as a result of the
sale.
- 9 -
DI INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements of DI Industries, Inc. ("DI" or the "Company")
included elsewhere herein. All significant intercompany transactions have been
eliminated.
In early 1996, the Company began implementing a new strategy which
involves significant changes to the Company's organization, focusing the
Company's activities on higher margin markets and altering the Company's
corporate structure to provide a more efficient operating structure. The
proposed mergers (See Note 5 to "Notes to Consolidated Financial Statements")
represent a significant step in accomplishing the Company's new strategy in that
the 18 ultra deep drilling rigs and the capital to refurbish them will enable
the Company to focus on higher margin markets where drilling projects are of a
longer duration than the Company's current markets.
On April 9, 1996, the employment of the Company's chief executive
officer was terminated, signaling the beginning of significant organizational
changes to accomplish the new strategy. The Company is currently searching for a
new chief executive officer. Other significant personnel and organizational
changes have been made and additional changes will be made in the near future.
At the beginning of 1996, the Company's corporate structure consisted of 15
legal entities. Four of these entities have been eliminated to date this year
and the Company plans to continue to review and hopefully further streamline its
corporate structure.
FINANCIAL POSITION AND LIQUIDITY
The following is a discussion of some key items of financial position as
of June 30, 1996 compared to December 31, 1995. The Company had working capital
of $7.7 million and $7.5 million at June 30, 1996 and December 31, 1995,
respectively. The Company's current ratio (current assets to current
liabilities) at June 30, 1996 and December 31, 1995, was 1.34 to 1.00 and 1.31
to 1.00, respectively. Cash and cash equivalents decreased from $1.9 million at
December 31, 1995 to $1.4 million at June 30, 1996 exclusive of restricted cash
deposits.
On June 10, 1996, Norex advanced $1.0 million to the Company pursuant to
a Promissory Note and Commercial Security Agreement as a condition to the merger
agreements as discussed in Note 5 to the "Notes to the Consolidated Financial
Statements". In early July 1996, the Company repaid this loan plus accrued
interest with the sales proceeds noted below.
On June 24, 1996, the Company closed a transaction whereby it sold all
of the operational assets of Western Oil Well Service Co. ("Western"), a wholly
owned subsidiary of the Company, for $3.95 million in cash. Western provided oil
and gas well workover service principally in Montana, Utah and North Dakota.
Pursuant to the sales agreement, the buyer assumed all of Western's existing
capital leases, primarily for vehicles, which totaled $251,000 at closing. The
Company recorded a gain on this sale of $2.8 million in the second quarter of
1996. The proceeds from the sale of Western were used by the Company to repay
the advance from Norex, reduce accounts payable and bolster the Company's cash
position.
The following items, along with the items mentioned above, effect the
Company's liquidity. During the fourth quarter of 1995, Norex subscribed to, and
paid, $4,000,000 for Preferred Stock of the Company, to be issued subsequent to
December 31, 1995. This stock will be in the form of 4,000 shares of authorized
Series B 15% Senior Cumulative Redeemable Preferred Stock. This stock has annual
dividends of 15% per annum, payable through the issuance of additional Preferred
Shares for the first three years. After December 31, 1998, dividends are payable
in cash, as declared by the Company's Board of Directors. The outstanding
balance for this series of Preferred Stock at June 30, 1996 was $4.3 million
inclusive of the 15% dividend requirement. This subscription of Preferred Stock
is expected to be cancelled in connection with the proposed mergers (see Note 5
to "Notes to Consolidated Financial Statements).
- 10 -
The $10,000,000 NordlandsBanken AS term loan agreement was amended
October 1, 1995 to provide for deferral of monthly principal payments of
$277,777 until January 12, 1997 after which the balance of $9,444,000 will be
amortized in 36 equal monthly installments commencing January 12, 1997. As of
June 30, 1996, the Company was in compliance with all financial covenants in
this loan agreement. At March 31, 1996 the Company received a waiver from the
bank regarding compliance with one financial covenant.
The Company has an overdraft facility with a bank in Argentina, which is
payable on demand, bearing interest at the current market rate in Argentina and
secured by two drilling rigs. The overdraft facility had an outstanding balance
of approximately $186,000 and $149,000 at June 30, 1996 and December 31, 1995,
respectively.
Capital expenditures were approximately $2.0 million for the six months
ended June 30, 1996 compared to approximately $2.6 million for the six months
ended June 30, 1995. Capital expenditures for the six months ended June 30, 1995
primarily related to the Company's foreign operations expansion.
As of the current date, management believes the Company will require
additional capital to supplement cash resources available from working capital,
cash flow from operations, proceeds from non-strategic asset sales, and existing
credit facilities to satisfy cash requirements during the next twelve months at
current operating plan levels. Capital requirements for significant new projects
would require funding from supplemental sources such as joint venture partner
participation, bank project financing or other debt/equity sources; the
availability of which is not assured at this time and which would be subject to
negotiated terms and conditions. As a response to the capital need, as disclosed
in Note 5 in the accompanying "Notes to Consolidated Financial Statements", on
May 7, 1996, the Company entered into two separate definitive merger agreements
to effect a $25 million cash equity infusion and deep drilling equipment
acquisition transaction. If these mergers are completed, the Company's financial
and liquidity position will be greatly enhanced and the Company will be one of
the largest land based drilling contractors in the United States. There are
certain conditions to closing of these transactions including approval by the
Company's shareholders, the effectiveness of a registration statement with the
Securities and Exchange Commission covering the issuance of the shares, and the
cancellation of the 1995 subscription by Norex for 4,000 shares of Series B
Preferred Stock plus accrued dividends and related Series B Warrants. The
$4,000,000 subscription plus accrued dividends will be repaid to Norex by the
Company with the proceeds from a term loan that will be made by Norex to the
Company. In conjunction with the proposed mergers and the restructuring of the
Company, the Company anticipates incurring some one-time expenses. While the
Company has not yet quantified these future charges, it plans to do so during
the third quarter of 1996 and report them as a one-time restructuring charge.
The Company has no derivative contracts related to its foreign currency
exposure in the countries in which it operates. However, the Company generally
structures its foreign operations and related drilling contracts in such a
manner as to minimize any potential foreign currency exchange restrictions and
any exposure to foreign currency fluctuations. The Company believes that its
foreign currency exposure, if any, is not significant.
Due to the past poor performance in Argentina and the recent expiration
of certain contracts in that country, the Company is exploring various
alternatives to enhance its future performance. The Company is exploring
possible mergers, joint ventures, or the possible sale of some or all of the
assets. If certain of the Company's Argentine rigs remain unutilized throughout
the remainder of 1996, the Company will be subject to a permanent import fee of
approximately $1.0 million. This liability has not been recorded as of June 30,
1996. At this time, management believes the book value of its Argentine
operations are realizable.
The Company has not paid any cash dividends on the Company's Common
Stock and does not anticipate paying dividends on the Common Stock at any time
in the foreseeable future. Furthermore, the Nordlandsbanken Loan Agreement
prohibits the payment of dividends without their consent.
- 11 -
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
The following tables highlight days worked, revenues and operating
expenses, for the Company's domestic and foreign operations for the three months
ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1996
------------------------------------------------
MEXICO AND
UNITED CENTRAL SOUTH
STATES AMERICA AMERICA TOTAL
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Rig days worked 1,574 91 924 2,589
Average revenue per day $ 7,550 $ 11,099 $ 6,807 $ 7,409
Drilling revenue (In thousands) 11,883 1,010 6,290 19,183
Operating expenses (In thousands) 12,099 1,589 5,694 19,382
-------- --------- --------- ---------
Gross profit (loss) (In thousands) $ (216) $ (579) $ 596 $ (199)
========= ========== ========= =========
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1995
----------------------------------------
MEXICO AND
UNITED CENTRAL SOUTH
STATES AMERICA AMERICA TOTAL
-------- --------- ------- -------
Rig days worked ....................... 1,312 315 1,210 2,837
Average revenue per day ............... $ 8,264 $15,210 $ 6,213 $ 8,160
Drilling revenue (In thousands) ....... 10,842 4,791 7,518 23,151
Operating expenses (In thousands) ..... 9,985 3,261 8,830 22,076
------- ------- ------- -------
Gross profit (loss) (In thousands) .... $ 857 $ 1,530 $(1,312) $ 1,075
======= ======= ======= =======
Consolidated revenues decreased approximately $4.0 million (17%) to $19.2
million for the three months ended June 30, 1996 compared to $23.2 million for
the three months ended June 30, 1995. Revenues from U.S. domestic drilling
activities increased by $1.0 million from the 1995 to 1996 quarter due to
increased utilization. The Company rigs worked 262 more days in the second
quarter of 1996 compared with the corresponding quarter of 1995, however, this
increase in days worked was offset by a 9% decline in the average daily rate
received by the Company. The average daily rates were higher in 1995 due to a
turnkey contract in place at that time. Revenues from the Company's South
American operations decreased by $1.2 million from the 1995 to 1996 second
quarter due to a decrease of 286 days worked in the second quarter of 1996.
However, this decrease was offset by an approximate 10% increase in the average
revenue received per day. Revenues from the Company's Mexico and Central
American operations decreased by $3.8 million from the 1995 to 1996 second
quarter due to a reduction in rig operating levels from four rigs to one rig and
a decrease in the reimbursable costs associated with the Mexican operations.
- 12 -
Consolidated operating expenses decreased 12% to $19.4 million for the three
months ended June 30, 1996 compared to $22.1 million for the three months ended
June 30, 1995 due primarily to a 9% decrease in days worked in the second
quarter of 1996. Operating expenses for U.S. domestic drilling increased $2.1
million from the second quarter of 1995 to the same period of 1996, principally
due to the increase in the days worked. Operating expenses for the Company's
South American operations decreased $3.1 million from the 1995 to 1996 second
quarter due to the 24% decrease in the days worked in the second quarter of 1996
compared with the corresponding quarter of 1995. Mexico and Central American
operating expenses decreased $1.7 million from the 1995 to 1996 second quarter
due to a reduction in rig operating levels from four rigs to one rig.
Depreciation and amortization decreased to $1.1 million for the second
quarter of 1996 compared with $1.2 million for the 1995 quarter. This slight
decrease was primarily due to the reduction in the depreciable asset base in
1996 resulting from the $5.3 million impairment provision made in the fourth
quarter of 1995 to reduce the carrying value of certain drilling rigs and
equipment as provided for in Statement of Financial Accounting Standards No.
121.
General and administrative expenses increased by $423,000 for the second
quarter of 1996 compared with the second quarter of 1995 due to increased
payroll costs added in late 1995 and early 1996 and related travel expenditures
for the Company's expanded South American operations. In addition, bad debt
expense of $200,000 was recognized in the second quarter of 1996.
Interest expense decreased by $208,000 for the three months ended June 30,
1996 compared to the three months ended June 30, 1995. The decrease was due to
reduced levels of outstanding debt, principally the retirement of $2.1 million
of bank debt related to the Company's oil and gas properties sold in August 1995
and lower outstanding levels on the overdraft facility in Argentina.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The following tables highlight days worked, revenues and operating expenses
for the Company's domestic and foreign operations for the six months ended June
30, 1996 and 1995.
FOR THE SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------
MEXICO AND
UNITED CENTRAL SOUTH
STATES AMERICA AMERICA TOTAL
-------- -------- -------- --------
Rig days worked ................... 2,927 182 2,158 5,267
Average revenue per day ........... $ 7,623 $ 12,478 $ 6,813 $ 7,459
Drilling revenue (In thousands) ... 22,312 2,271 14,702 39,285
Operating expenses (In thousands) . 21,869 2,733 13,716 38,318
-------- -------- -------- --------
Gross profit (loss) (In thousands) $ 443 $ (462) $ 986 $ 967
======== ======== ======== ========
- 13 -
FOR THE SIX MONTHS ENDED JUNE 30, 1995
------------------------------------------
MEXICO AND
UNITED CENTRAL SOUTH
STATES AMERICA AMERICA TOTAL
-------- -------- -------- --------
Rig days worked .................... 2,639 666 2,409 5,714
Average revenue per day ............ $ 7,835 $ 11,554 $ 6,028 $ 7,507
Drilling revenue (In thousands) .... 20,676 7,695 14,522 42,893
Export sales (In thousands) ........ 2,604
Operating expenses (In thousands) .. 19,776 6,224 15,998 41,998
Export sales expenses
(In thousands) ..................... -- -- -- 2,604
-------- -------- -------- --------
Gross profit (loss)
(In thousands) ..................... $ 900 $ 1,471 $ (1,476) $ 895
======== ======== ======== ========
Consolidated revenues decreased by $6.2 million (14%) to $39.3 million for
the six months ended June 30, 1996 compared to $45.5 million for the six months
ended June 30, 1995. This decrease was mainly due to i) a decrease in revenue
from Mexico where four rigs were operating in 1995 and only one was operating
during the 1996 period and ii) one-time export sales of $2.6 million during the
first half of 1995. Revenues from U.S. drilling activities increased by $1.6
million due to an increase in days worked of 288 offset by a slight decrease in
the average daily rate of 3%. Revenues from Mexican operations decreased to $2.3
million for the 1996 period from $7.7 million for the corresponding period of
1995. As mentioned above, there was only one rig operating in 1996 compared with
four rigs operating during the same period of 1995. South American revenues
increased by only 1% between the corresponding periods, however, the average
daily drilling rate increased by 13% which was then offset by a decrease in days
worked of 10%.
Consolidated operating expenses decreased by 14% to $38.3 million for the
first half of 1996 compared with $44.6 million for the first half of 1995. The
main reason for the decrease is the 8% decrease in days worked in the first half
of 1996 compared to the first half of 1995 and the one-time cost of export sales
of $2.6 million in 1995. Operating expenses for domestic operations increased by
$2.1 million for the 1996 period compared to the 1995 period mainly due to the
increase in days worked mentioned above as well as an increase in repair expense
in 1996. Operating expenses for the Mexican operations decreased by $3.5 million
due to decrease to one rig operating in 1996 as compared to four operating in
1995 (182 operating days in 1996 compared to 666 in 1995). The decrease in South
American operating expenses of $2.3 million is principally due to the 251 day
decrease in days worked when comparing the first half of 1996 to the first half
of 1995.
Depreciation and amortization decreased to $2.2 million for the 1996 six
month period compared to $2.4 million for the 1995 six month period. This slight
decrease was primarily due to the reduction in the depreciable asset base in
1996 resulting from the $5.3 million impairment provision made in the fourth
quarter of 1995 to reduce the carrying value of certain drilling rigs and
equipment as provided for in Statement of Financial Accounting Standards No.
121.
General and administrative expenses increased by $490,000 from the 1995 to
1996 six month period due to increased payroll costs and related travel
expenditures for the Company's expanded South American operations. In addition,
bad debt expense of $200,000 was recognized in the first half of 1996.
Employment severance expense of $602,000 for the six months ended June 30,
1996 represents an accrual of contractual severance costs to be paid over a two
year period to the former chief executive officer of the Company.
Interest expense decreased by $292,000 for the six months ended June 30,
1996 compared to the six months ended June 30, 1995. The decrease was due to
reduced levels of outstanding debt, principally the retirement of $2.1 million
of bank
- 14 -
debt related to the Company's oil and gas properties sold in August 1995 and
lower outstanding levels on the overdraft facility in Argentina.
INDUSTRY TRENDS
The stabilization of working rig count that began in 1995 has continued into
1996. The weekly national count of working land rigs in the United States as
reported by Baker Hughes Incorporated on July 26, 1996 was 671 compared to 643
on July 28, 1995.
The significant decline in oil and gas prices in the mid-1980's severely
depressed oil and gas exploration activities and reduced demand for the
Company's oil and gas drilling services. Although industry conditions have
improved during 1995 and 1996, a reversal of this trend and further
deterioration could have an ongoing negative effect on the Company's future
operating results. The decline in drilling activity resulted in an oversupply of
drilling equipment and created intense competition, particularly in the price
received for contract drilling services by drilling contractors. Demand for oil
and gas drilling services will continue to be dependent upon the present and
anticipated sales price of oil and gas, which is subject to conditions such as
consumer demand, events in the Middle East, weather and other factors that are
not controlled by the Company.
There has been an increase in the demand for oil and gas drilling services
in South America. In response to this, during 1992, the Company commenced
drilling activities in Argentina and expanded into Venezuela during 1994. The
Company also formed a majority-owned subsidiary to perform geothermal drilling
in Central America and has completed projects in Guatemala, El Salvador and is
currently working on projects in Mexico. The Company will continue to market its
services into selected international markets.
Although certain consolidations have occurred within the land drilling
industry, an oversupply of land drilling rigs still exists. There is a general
shortage in the industry of used drill pipe, and the cost of obtaining new and
used drill pipe is substantially higher than in prior periods and is currently
escalating. At present, the Company does not have a critical shortage of drill
pipe or other equipment but, depending on rig utilization, will need to purchase
additional drill pipe for rigs in service. In response to this shortage, the
Company has formed an alliance with a drill pipe manufacturer to ensure a steady
supply of new drill pipe to outfit the 18 rigs that will be acquired through the
mergers mentioned above and for its existing rig fleet.
The depressed conditions in the oil and gas drilling industry also caused a
substantial portion of the labor force with drilling experience to leave the
industry. As a result of the continuing overcapacity in the drilling industry
and the Company's practice during recent years of first laying off employees
with the least amount of drilling experience, the Company has not experienced
significant shortages of trained labor. However, an increase in demand for
contract drilling services could cause shortages of trained employees.
- 15 -
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 4 of the "Notes to Consolidated
Financial Statements" is incorporated
herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- A Current Report on Form 8-K (Item 2), dated June 24, 1996, was filed
with the Securities and Exchange Commission on July 8, 1996. This
Current Report reported the sale of all the operating assets of a
wholly owned subsidiary of the Company.
(a) Exhibit 11 - Computation of Loss per Common Stock Share.
(b) Exhibit 27 - Financial Data Schedule.
- 16 -
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DI INDUSTRIES, INC.
Date: August 13, 1996 By /S/ IVAR SIEM
Ivar Siem,
Chairman of the Board,
President and Chief Executive Officer
Date: August 13, 1996 By /S/ DAVID W. WEHLMANN
David W. Wehlmann
Vice President & Controller
- 17 -
Exhibit 11
DI INDUSTRIES, INC. AND SUBSIDIARIES
COMPUTATION OF LOSS PER COMMON STOCK SHARE (in
thousands except per common stock share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
JUNE 30, JUNE 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary earnings (loss) per share:
Weighted average shares of common
stock outstanding .......................... 38,694 38,669 38,682 38,669
Stock options (treasury stock method)(a) ..... -- -- -- --
-------- -------- -------- --------
Weighted average shares of common stock
outstanding for per share computation .... 38,694 38,669 38,682 38,669
======== ======== ======== ========
Net income (loss) ............................ $ 524 $ (1,665) $ (967) $ (3,895)
Less: Series B Preferred Stock subscription
dividend requirement ........................ (150) -- (300) --
-------- -------- -------- --------
Net income (loss) applicable to common stock . $ 374 $ (1,665) $ (1,267) $ (3,895)
======== ======== ======== ========
Income (loss) per common share:
Income (loss) from continuing operations . $ .01 $ (.03) $ (.03) $ (.09)
Income (loss) from discontinued operations -- (.01) -- (.01)
-------- -------- -------- --------
Net income (loss) per share ................ $ .01 $ (.04) $ (.03) $ (.10)
======== ======== ======== ========
</TABLE>
Note: Reference is made to Note 2 to Consolidated Financial Statements regarding
computation of per common stock share amounts.
(a) Stock options are not included since inclusion would be either
antidilutive or not significant for all the periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DI INDUSTRIES, INC. 10-Q DATED 6-30-96 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,282
<SECURITIES> 0
<RECEIVABLES> 18,061
<ALLOWANCES> 2,151
<INVENTORY> 3,209
<CURRENT-ASSETS> 30,286
<PP&E> 41,572
<DEPRECIATION> 17,494
<TOTAL-ASSETS> 54,641
<CURRENT-LIABILITIES> 22,635
<BONDS> 0
900
4,300
<COMMON> 3,879
<OTHER-SE> 10,271
<TOTAL-LIABILITY-AND-EQUITY> 54,641
<SALES> 39,285
<TOTAL-REVENUES> 39,285
<CGS> 38,318
<TOTAL-COSTS> 42,936
<OTHER-EXPENSES> (3,150)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 466
<INCOME-PRETAX> (967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (967)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
