UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one) FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended November 30, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-15784
DSI INDUSTRIES, INC.
(formerly known as Diagnostic Sciences, Inc.)
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3273041
(State of Incorporation) (IRS Employer
Identification No.)
5211 Brownfield Highway
Suite 230 79407
Lubbock, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (806) 785-8400
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes X No
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 13, 1996: Common stock, par value $.01 per share,
$1,578,692. In making this computation, all shares known to be owned by
directors and executive officers of DSI Industries, Inc. (the "Company")and all
shares known to be owned by other persons holding in excess of 5% of the
Company's common stock have been deemed held by "affiliates" of the Company.
Nothing herein shall prejudice the right of the Company or any such person to
deny that any such director, executive officer, or stockholder is an
"affiliate."
Common Stock outstanding as of February 13, 1996, was 23,693,365 shares.
Page 1 of 76 Pages
PART I
Item 1. Description of Business
Historical Overview
DSI Industries, Inc. ("DSI" or the "Registrant"), formerly known as
Diagnostic Sciences, Inc. was incorporated on December 21, 1983 under the laws
of the State of Delaware. The Registrant's primary assets consist of the voting
stock of each of the following subsidiary corporations: (i) Norton Drilling
Company, a Delaware corporation ("Norton Drilling" or the "Drilling Segment"),
operates thirteen oil and gas drilling rigs and provides contract drilling
services to the oil and gas industry; (ii) Sunny's Plants, Inc., a Florida
corporation ("Sunny's Plants"), which was, until 1995 when the operations were
discontinued, engaged primarily in the production and sale of indoor foliage
plants through its wholly-owned subsidiary corporations (Sunny's Plants and its
wholly-owned operating subsidiaries are referred to collectively herein as the
"Nursery Segment"); and (iii) Lobell Corporation, a Delaware corporation
("Lobell" or the "MRI Segment"), which was, until 1994 when the operations were
discontinued, engaged primarily in providing diagnostic imaging services
through an independent out-patient facility principally offering services
involving magnetic resonance imaging technology ("MRI"). As mentioned above,
the Registrant's Board of Directors elected to discontinue the operations of
the MRI Segment on April 6, 1995, retroactively applied as of November 30,
1994, and the Nursery segment on August 18, 1994, respectively.
On May 14, 1992 the stockholders of DSI approved an amendment to the
certificate of incorporation of DSI changing its name from Diagnostic Sciences,
Inc. to DSI Industries, Inc. and increasing the Registrant's authorized shares
of common stock from thirty million (30,000,000) to one hundred million
(100,000,000) shares of common stock. The principal executive offices of DSI
are located at 5211 Brownfield Highway, Suite 230, Lubbock, Texas 79407.
DSI Industries, Inc. - On January 6, 1989 the Registrant entered into an
agreement (the "First Capital Agreement") with First Capital Partners, a New
York general partnership ("First Capital Partners"). The First Capital
Agreement, had a five-year term which commenced on January 1, 1989, subject to
certain termination rights. Under the First Capital Agreement, Gerry Angulo,
a general partner of First Capital Partners, became the Chief Executive Officer
of the Registrant and was given, subject to the supervision of the Board of
Directors of the Registrant, sole power and authority over the investment
decisions of the Registrant. The Board of Directors reviewed and approved Mr.
Angulo's investment strategy and decisions. First Capital Partners received
an option (the "Option") to purchase an amount of the common stock, par value
$.01 per share of the Registrant (the "Common Stock") equivalent to thirty
percent (30%) of the outstanding shares of the Registrant after exercise of the
Option on a fully diluted basis. The purchase price was determined based on
the market value of 3,857,142 shares at $0.21875 per share for an aggregate of
$843,750. First Capital Partners assigned the First Capital Agreement to First
Capital Advisers, Inc., a New York corporation ("FCA") on December 15, 1989.
The First Capital Agreement was ratified by a vote of shareholders at the
Annual Meeting of Stockholders of DSI on June 12, 1989. The FCA Agreement
originally provided that if the Registrant issued shares of common stock in
connection with certain transactions, the shares of Common Stock subject to the
Option would be increased to permit FCA to maintain a 25% interest in the
Registrant. During February 1991, the number of shares of common stock relative
to the Option was increased by 682,858 shares at $0.66 per share in compliance
with the anti-dilutive provisions of the original agreement. On December 11,
1991, the FCA Agreement was amended to provide that the Registrant was no
longer required to subject issuance of additional shares of common stock to the
Option in the event the Registrant issued shares of common stock in connection
with such transactions. On December 31, 1992, FCA assigned the Option to West
Loop Investments, Inc.("West Loop"), a Texas corporation, and a wholly owned
subsidiary of First Capital Associates, a New York corporation ("First Capital
Associates"), which in turn is a 98% owned subsidiary of First Capital
Partners. At various times from January 10, 1992 through March 23, 1992, West
Loop exercised Options and purchased an aggregate of 3,638,250 DSI shares of
common stock and sold such shares at prices ranging from $0.59 to $1.1056.
Options for 901,750 shares were exercisable during 1994. In 1994, options for
27,000 of these shares were exercised for $5,907. At November 30, 1994,
874,750 options remained outstanding. These remaining options expired on
December 31, 1994. See Note 13 of Notes to the Consolidated Financial
Statements included as part of Item 8 of this report.
On September 17, 1992, the Registrant entered into an agreement with The
Equity Group ("Equity") whereby Equity agreed to render financial public
relations and consulting services for the period commencing October 1, 1992 and
ending September 30, 1993. Equity also advised DSI in all other areas that
relate to its posture as a public entity. DSI agreed to pay Equity a fee of
$2,000 per month for such services. The agreement also included payment terms
involving a warrant exercisable for a two year period through September 30,
1994 to purchase 200,000 shares of DSI common stock at $0.66 per share. The
warrants were not exercised and expired under its original terms. See Note 13
of Notes to the Consolidated Financial Statements included as part of Item 8
of this report.
Effective September 1, 1993, Gerry Angulo, the former President and Chief
Executive Officer and a member of the Board of Directors of DSI and certain of
its affiliated companies, and Paul Stache, the former Secretary and a member
of the Board of Directors of DSI, resigned their positions. As part of this
termination, DSI extended the expiration date of West Loop's option by one year
until December 31, 1994.
On May 19, 1994, the disinterested members of the Board of Directors of DSI
unanimously approved a resolution accepting an offer from a group of its
stockholders comprised of the management of Norton Drilling and certain members
of their family (the "Norton Group") pursuant to which the Norton Group would
exchange all of their shares of DSI's common stock for all of the issued and
outstanding stock of Norton Drilling. The agreement expired by its terms
without consummation on September 30, 1994.
DSI, in particular its Nursery and MRI Segments, sustained substantial
losses from operations in the year ended November 30, 1994. The Board of
Directors of DSI on August 18, 1994 discontinued the MRI Segment due to the
Segment's recurring losses. On April 6, 1995, the Board also discontinued the
operations of the Nursery Segment due to the significant losses incurred by it
commencing in the third quarter of 1994 and continuing through the date of its
discontinuance. Such treatment was retroactively applied to the operations of
the segment as of November 30, 1994. At November 30, 1994, and November 30,
1995 the consolidated financial statements reflect a net liability of
$1,940,000 and $3,515,000, respectively, for the estimated liabilities of the
discontinued segments. See Item 1-Description of Business-"MRI Segment" and
"Nursery Segment" and also Note 3 of Notes to Consolidated Financial Statements
included as part of Item 8 of this report.
DSI Industries, Inc. is a holding company and accordingly does not generate
operating revenues. All of DSI's costs and expenses have previously been
funded by charging the operating segments management fees. As management fees
have diminished due to the discontinuance of the aforementioned segments, DSI
will require increased funding for its expenses as well as the liabilities of
its discontinued segments from Norton Drilling.
Norton Drilling's agreements with one of its secured creditors prohibit
virtually any loans, dividends, advances, guarantee of indebtedness or payments
to DSI or its subsidiaries. At November 30, 1994 and 1995, Norton Drilling was
in violation of some of the restrictive covenants with this secured creditors.
Waiver by the creditor of such covenant violations has been received as of
November 30, 1995, through May 1, 1996. The Company has obtained a 90 day
extension on its obligations which originally matured April 1, 1996 and
anticipates renewal at the end of the 90 day period. Management is of the
opinion that Norton Drilling is able to continue as a going concern if DSI is
successful in restructuring the remaining indebtedness of its discontinued
segments.
DSI's limited ability to obtain funds and its inability to obtain adequate
financing to meet its obligations and the obligations of its discontinued
segments raise substantial doubt concerning the ability of DSI and its only
remaining operating subsidiary, Norton Drilling, to realize their assets and
pay their liabilities as they mature in the ordinary course of business.
Unless management's negotiations with the creditors of the discontinued
segments regarding the restructuring of the debts of such segments are
successful, DSI may have to cause these subsidiaries to seek protection from
their creditors under the bankruptcy laws of the United States. Due to
cross-corporate guarantees between DSI and its subsidiaries, the possible
filing of such petition could also cause DSI and possibly Norton Drilling to
seek protection under the bankruptcy laws of the United States.
These conditions, among others, raise substantial doubt about DSI's ability
to continue as a going concern. See Notes 1 and 3 of Notes to Consolidated
Financial Statements included as part of Item 8 of this report.
Norton Drilling - On October 1, 1991, the Registrant and its wholly-owned
subsidiary Norton Drilling, consummated the merger and related transactions
contemplated by the Agreement and Plan of Merger, dated September 13, 1991 (the
"Norton Merger Agreement"), by and among the Registrant, Norton Drilling
Company, a Texas corporation ("NDC (Texas)") and each of Sherman H. Norton,
Jr., S. Howard Norton, III, John W. Norton, J.P. Rose and Barbara L. Norton
(the "Norton Shareholders"), the holders of all the capital stock of NDC
(Texas) (the "Norton Closing"). At the Norton Closing, the Norton Shareholders
surrendered for cancellation all the shares of capital stock of NDC (Texas) and
caused NDC (Texas) to be merged into Norton Drilling in exchange for the
Registrant's payment to them of 5,160,000 shares of the Registrant's common
stock (the "Purchase Price Shares"). The number of shares of common stock
comprising the Purchase Price Shares was determined based on the average of the
per share closing "bid" and "ask" price of the Registrant's common stock, as
quoted on the National Association of Securities Dealers Automated Quotation
System, Inc. ("NASDAQ"), for the 10 trading days prior to the date of the
Norton Closing and the first 10 trading days of each of the three calendar
months preceding such date. The Registrant agreed to pay to the Norton
Shareholders an additional 1,000,000 to 1,250,000 shares of its common stock
(the "Performance Consideration"), depending upon the market price thereof at
the time of issuance, if the oil and gas drilling business, as acquired had an
average modified cash flow (net earnings before interest, taxes, depreciation
and amortization and gains on sales of assets not in the ordinary course of
business) of $3,000,000 per year for either the first two, three, four or five
years after the Norton Closing. Pursuant to the Norton Merger Agreement, the
Registrant expanded its Board of Directors by three positions and appointed the
following three designees of the Norton Shareholders to fill them: Sherman H.
Norton, Jr., S. Howard Norton, III and John W. Norton. The Registrant has
covenanted to nominate and recommend for election or reelection to its Board
of Directors up to three of the Norton Shareholders' designees so long as the
Norton Shareholders maintain certain percentage ownerships of the Purchase
Price Shares. Also at the Norton Closing, four members of NDC (Texas)'s
management entered into five year employment and non-competition agreements.
On May 21, 1993, Norton Drilling paid an aggregate of $2,825,000 to the
First National Bank at Lubbock ("First National Bank") as payment of two loans
totalling $4,388,098 made by the First National Bank to Norton Drilling. The
payment of $2,825,000 was financed as follows: ( ) $1,900,000 was provided
by The Plains National Bank of West Texas ("Plains Bank") pursuant to a Loan
Agreement with Norton Drilling dated May 21, 1993 at the Plains Bank Prime Rate
plus 3.5%; (ii) $300,000 was provided by South Plains Bank of Levelland
pursuant to a loan agreement with Norton Drilling at the New York prime rate
plus 2%; (iii) $410,000 was provided by Sherman H. Norton, Jr. in exchange for
a Subordinated Convertible Note Payable due May 1998 issued by Norton Drilling
at an annual rate of interest equal to Plains Bank Prime Rate; (iv) $90,000 was
provided by Johnie P. Rose in exchange for a subordinated note upon the same
terms and conditions as the note issued to Sherman H. Norton, Jr. described in
(ii) above (collectively referred to as the "Notes"); and (v) $125,000 of the
payment was provided by the Registrant. The Notes, as described as above,
provide for: (i) the redemption of the Notes, at 100% of their principal amount
at any time, at the option of Norton Drilling, without prepayment penalty,
provided that without the written consent of Plains Bank, the Notes may not be
redeemed prior to the repayment in full by Norton Drilling of all amounts owing
to Plains Bank; (ii) the conversion of the principal amount of the Notes or
any part thereof (not less than $1,000) into shares of common stock of the
Registrant at a conversion price of $0.44 per share (the "Conversion Price");
and (iii) the subordination of the Notes to the indebtedness of Norton Drilling
pursuant to that certain loan agreement between Norton Drilling and Plains
Bank dated May 21, 1993. The Conversion Price was determined by the Board of
Directors of the Registrant at its meeting on May 19, 1993, at a premium over
the average of the bid and ask price of the shares of common stock at the close
of business on May 18, 1993. See Notes 7 and 13 of Notes to Consolidated
Financial Statements included as a part of Item 8 of this report.
On January 6, 1995, Norton Drilling entered into two additional loan
agreements with Plains Bank aggregating $1,000,000. This indebtedness and all
prior indebtedness to Plains Bank is collateralized by virtually all of the
assets of Norton Drilling. One of the two loans, mentioned above in the amount
of $350,000, is further collateralized by a corporate guaranty of DSI as well
as the common stock of Norton Drilling. See Note 7 of Notes to Consolidated
Financial Statements included as a part of Item 8 of this report.
MRI Segment - DSI's subsidiary Lobell Corporation, which was then 90%
owned by DSI, opened a magnetic resonance imaging center in August 1986 in
Huntington, New York. On September 11, 1989 the Registrant entered into an
agreement with General Electric ("GE") to replace an equipment lease for the
Magniscan 5000 Magnetic Resonance Imaging System from the Thompson-CGR Medical
Corporation with a capital equipment lease for the GE MR Max System. The
original terms of the lease were extended for an 84 month period commencing on
September 1, 1987. On July 13, 1993, after rental payments to GE had become
significantly delinquent, the rental obligation under the lease was
restructured pursuant to a settlement between the Registrant and GE. Monthly
lease payments for the equipment were $32,978 prior to the dispute and $41,772
after the settlement. Such payments were to continue through August 15, 1996.
In December 1994, the Registrant ceased making payments as stipulated in the
aforementioned settlement agreement. The Registrant and GE have since engaged
in various negotiations to settle the remaining balance. In April 1995, GE
agreed to accept $200,000 as full payment of the remaining balance if the funds
were received by April 11, 1995. The Registrant did not meet these terms and
the issue has yet to be settled.
On June 20, 1994, DSI acquired the remaining 10% interest it did not already
own in Lobell from Huntington Magnetic Resonance Imaging, P.C. DSI issued
140,019 shares of its common stock for which it received the aforementioned 10%
of Lobell, cash and trade accounts receivable of $178,063.
On August 18, 1994, the Board of Directors of DSI discontinued the MRI
Segment due to its recurring losses. The accompanying financial statements for
1994 retroactively reflect management's decision to discontinue this Segment
and include a charge to operations of $750,000 for the estimated loss to be
incurred in disposing of the Segment. See Note 3 of Notes to Consolidated
Financial Statements included as part of Item 8 of this report.
Prior to the MRI Segment being discontinued, it leased real property under
an operating lease. DSI and Lobell became involved in litigation with the
landlord concerning this operating lease as a result of the Segment failing to
perform in accordance with the payment terms of the underlying agreement. The
matter was adjudicated in 1994 and at November 30, 1994 the landlord was owed
approximately $118,600 in net arrearage and settlement costs. In December
1994, Lobell again ceased making its lease payments and in March 1995 the
landlord evicted Lobell from the premises. In March 1995, the landlord placed
a lien on all assets of Lobell and confiscated approximately $50,000 of
Lobell's assets, primarily cash and accounts receivable, as partial payment
for the rent arrearage. The premises were vacated and equipment held under the
aforementioned capital lease was abandoned. Management believes it will be able
to negotiate an agreement with the landlord in full settlement for all amounts
owed.
Management has included in its reserve for loss on the discontinuance of
this segment as of November 30, 1995, an amount estimated by management to
approximate its ultimate remaining obligations to the landlord and GE.
Management believes that its estimate of remaining future losses to be incurred
in disposing of this Segment of $492,000 at November 30, 1995 is adequate to
provide any shortfall in the aforementioned lease payments as well as any
amounts that may ultimately be paid to GE and other creditors. However, should
management successfully negotiate with its creditors, an amount less than
initially reserved will be paid resulting in a possible gain to the Registrant.
See Notes 1 and 3 of Notes to Consolidated Financial Statements included as
part of Item 8 of this report.
Nursery Segment - On February 28, 1991, the Registrant through a newly
formed subsidiary, Sunny's Plants, Inc., a Florida corporation, ("Sunny's
Plants"), purchased (i) all of the assets and assumed certain obligations of
Interior Plant Supply Partnership, a Florida general partnership ("IPS"); (ii)
all of the outstanding shares of Sunshine Botanicals, Inc. ("Sunshine"); (iii)
all of the outstanding capital stock of Interior Plant Supply Inc.
("Interior"); and (iv) certain real property from the sellers of the three
above mentioned entities pursuant to an Agreement and Plan of Reorganization.
The Agreement and Plan of Reorganization revived and modified a previous
Agreement and Plan of Reorganization dated October 30, 1990 (the "October
Agreement"). The aggregate purchase price was $3,643,125 of which $2,743,125
was paid by the issuance of 2,310,000 shares of the Registrant's common stock
to each of David Brian Hew and Christopher Paul Carvalho, collectively known
as the "Sunshine Stockholders". In connection with the October Agreement, the
Registrant advanced $250,000 of working capital to Sunshine. Upon completion
of the aforementioned acquisition, this amount was contributed to Sunshine as
a capital contribution. In addition, three members of Sunshine's management
entered into two-year employment agreements. As required under the Agreement
and Plan of Reorganization, four individuals recommended by the Sunshine
Stockholders were invited to become members of the Board of Directors of the
Registrant effective October 10, 1990. Christopher Paul Carvalho who was one
of the four individuals recommended by the Sunshine Stockholders resigned from
the Board of Directors on December 24, 1992.
The Nursery Segment was extensively damaged by Hurricane Andrew (the
"Hurricane") on August 24, 1992. The greenhouses, shadehouses, machinery and
equipment, shipping facilities, inventories (consisting of potted and stock
plants) and irrigation systems were destroyed by the Hurricane. As a result
of the severe damage, the Nursery Segment temporarily ceased operations from
August to December of 1992. During this period, the Nursery Segment's property
was cleared of storm debris, new inventory for planting and growing was
acquired, the buildings were repaired and the greenhouses, shadehouses,
machinery and equipment were rebuilt and restored. In December 1992, the
Nursery Segment resumed shipments of its products. The Nursery Segment was
adequately insured against hurricane damage. The insurance proceeds were used,
among other things, to: (i) fully repay a credit line from Barnett Bank of
South Florida N.A. ("Barnett Bank") in the amount of $1,480,261; (ii) partially
repay shareholder loans made to the Nursery Segment; and (iii) partially repair
and restore the Nursery Segment to its pre-Hurricane condition.
The Nursery Segment is restricted from declaring and paying dividends to DSI
without the consent of its lenders. In December 1994, Sunny's Plants declared
a dividend of $534,495 to its parent, DSI. The dividend was paid in the form
of a note receivable from a related party. Sunny's Plants and DSI did not
request permission from its lenders for payment of the dividend. The banks
verbally permitted the dividend when they were informed that a wholly-owned
subsidiary of Sunny's Plants was the related party.
On April 6, 1995, the Board of Directors of DSI discontinued the Nursery
Segment due to its significant losses which commenced in the third quarter of
1994 and continued through the date of its discontinuance. The accompanying
consolidated financial statements for 1994 retroactively reflect management's
decision to discontinue this Segment. Management has made certain revisions to
its initial reserve estimate during 1995 in light of the Segment's operations
and due to certain other transactions discussed below which were completed as
of September 6, 1995 (effectively known as the "disposal date"). The
consolidated financial statements are reflective of such revisions. See
"Industry Segments; Discontinued Operations-Nursery Segment" within this Item
and Note 3 of Notes to Consolidated Financial Statements included as a part of
Item 8 of this report for additional discussion/disclosure regarding financial
statement impact of the discontinuance of the Nursery Segment.
In August, 1995 the Nursery Segment and DSI entered into agreements with two
of its secured creditors, both of whom are banks, and an unrelated third party
(purchaser) in which the purchaser acquired the collateralized debt of one bank
and immediately foreclosed on the debt. The segment surrendered to the
purchaser all of the assets collateralizing this indebtedness on September 6,
1995. The purchaser took title to assets with a basis of $4,265,000, before the
1994 writedown to net realizable value, in exchange for extinguishment of
$1,293,000 in collateralized debt plus assumption by the purchaser of a
$330,000 note payable and the purchaser's guarantee to indemnify the segment
and DSI for its liabilities to certain other creditors in an amount not to
exceed $404,000. The bank has released DSI from its guarantee of this
obligation but DSI remains liable as guarantor for the $330,000 note payable
until the purchaser has fully satisfied the obligation.
The agreement with the other secured bank requires the purchaser to repay
the outstanding balance of a mortgage note in the amount of $2,128,000 which
was collateralized by the segment's real property which had a basis of
$1,465,000, before the 1994 writedown to net realizable value. DSI will remain
liable as guarantor for this indebtedness until the purchaser has fully
satisfied this obligation.
INDUSTRY SEGMENTS
DSI is a diversified holding company formerly engaged in three business
segments through its subsidiaries; Norton Drilling, Sunny's Plants and Lobell.
Norton Drilling, a wholly-owned subsidiary of DSI, and the only remaining
operating segment, operates thirteen oil and gas drilling rigs and provides
contract drilling services to the oil and gas industry. Sunny's Plants, a
wholly-owned subsidiary of DSI was engaged primarily in planting, growing and
preparing interior foliage plants for distribution and sale. Lobell, a
wholly-owned subsidiary of DSI was engaged primarily in providing diagnostic
imaging services by establishing, financing and operating, in conjunction with
health care providers, an independent out-patient facility principally offering
services involving MRI technology.
CONTINUING OPERATIONS
General
DSI, headquartered in Lubbock, Texas is a holding company and accordingly
does not generate operating revenues. DSI incurs certain administrative costs
that are paid by charging its operating subsidiaries management fees. For the
years ended November 30, 1995, 1994 and 1993, DSI incurred administrative costs
of approximately $248,000, $373,000 and $299,000, respectively which resulted
in net losses of $148,000, $273,000 and $199,000, respectively.
Norton Drilling, headquartered in Lubbock, Texas, provides contract drilling
services to the oil and gas industry primarily in Texas, New Mexico and the
Rocky Mountains. Norton Drilling provides its customers with rigs and crews to
operate the rigs. Norton Drilling's rig fleet ranges from small (7,000 ft.
depth rating) self-propelled drilling rigs to larger (20,000 ft. depth rating)
diesel electric rigs. The primary assets of the oil and gas contract drilling
segment consists of fifteen land-based drilling rigs, thirteen of which were
fully operational as of November 30, 1995, having a net book value as of
November 30, 1995 and 1994 of approximately $7,001,000 and $7,213,000,
respectively. In order to continue to provide quality and timely service to the
Segment's customers, Norton Drilling constantly maintains three rigs in the
Rocky Mountain region and ten in its primary Texas and New Mexico areas. Norton
Drilling is active in the northern Permian Basin region of the Southwest, the
Green River Basin and the Overthrust Belt in the Rockies.
For the year ended November 30, 1995, Norton Drilling reported a loss from
operations before income taxes and discontinued operations of $720,000 from
operating revenues of $20,646,000. For the year ended November 30, 1994 and
1993, the Drilling Segment had income before income taxes, discontinued
operations and extraordinary items of $104,000 from operating revenues of
$21,122,000 and $205,000 from operating revenues of $21,563,000, respectively.
As of November 30, 1995, 1994 and 1993 Norton Drilling had shareholders' equity
of approximately $4,378,000, $4,867,000 and $4,832,000, respectively. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations" and the "Consolidated Balance Sheets, Statements of Operations,
Stockholders' Equity, and Cash Flows" included as Items 7 and 8, respectively,
of this report for additional financial information pertaining to the operating
activities of this segment.
The contract drilling industry responds to a number of market factors, chief
among which is the level of exploration and production (E&P) expenditures of
the major oil companies. E&P spending responds primarily to the price of oil
and natural gas, but is also influenced by anticipated changes in supply and
demand conditions, tax incentives for tertiary recovery, and the availability
of alternative fuels. Domestic onshore drilling, which is Norton Drilling's
sole service, also competes for E&P dollars with offshore and foreign drilling.
Drilling services are provided by several large integrated oil field service
companies and by a number of mostly smaller drilling companies. Many firms
have left the industry in the past several years. Competition remains keen,
especially in light of the continuing over-capacity of drilling rigs in the
United States.
Customers
Norton Drilling's customers are generally energy companies who repeatedly
request Norton Drilling's services. Over the past year, four customers
accounted for a significant portion of Norton Drilling's gross revenues. Those
customers were Devon Energy Operating Corp., Lyco Operating, Shell Western E&P
Inc., and Shell Land and Energy. Shell-Western E&P, Inc., and Devon Energy
accounted for approximately 44% of Norton Drilling's revenues during 1995.
During the years ended November 30, 1995 and 1994, Norton Drilling completed
197 wells while working 3,254 rig days and 168 wells while working 3,275 rig
days, respectively.
Competition
The contract drilling industry is highly competitive, and no one drilling
contractor is dominant. Depressed economic conditions in the oil and gas
industry have resulted in the supply of domestic drilling equipment
substantially exceeding demand. As a consequence, there has been intense
competition in securing available drilling contracts, resulting in drilling
equipment being idle for long periods of time and generally unfavorable prices
for contract drilling.
Price is generally the most important competitive factor in the drilling
industry. Other competitive factors include the availability of drilling
equipment and experienced personnel at or near the time and place required by
customers, the reputation of the drilling contractor in the drilling industry
and its relationship with existing customers. Norton Drilling believes that
it competes favorably with respect to all of these factors. Competition is
usually on a regional basis, although drilling rigs are mobile and can be moved
from one region to another in response to increased demand. An oversupply of
rigs in any region may result. Demand for land drilling equipment is also
dependent on the exploration and development programs of oil and gas companies,
which are in turn influenced primarily by the financial condition of such
companies, by general economic conditions, by prices of oil and gas, and, from
time to time, by political considerations and policies.
It is impracticable to estimate the number of contract drilling competitors
of Norton Drilling, some of which have substantially greater resources and
longer operating histories than Norton Drilling. Also, in recent years, many
drilling companies have sought protection from creditors under bankruptcy laws
or have undertaken a business combination with other companies as a result of
the downturn in the domestic contract drilling industry. Although this has
decreased the total number of competitors, management of Norton Drilling
believes that competition for drilling contracts will continue to be intense
for the foreseeable future.
Drilling Contracts
Norton Drilling wins contracts through a competitive bidding process. The
operator of a well will request bids under the terms it wishes (daywork,
footage, turnkey), or occasionally will solicit bids under various combinations
of the above mentioned contract types.
Under daywork contracts, Norton Drilling provides the drilling rig with the
required personnel to the operator who supervises the drilling of the
contracted well. Compensation to Norton Drilling is based on a negotiated rate
per day that the rig is utilized. Daywork contracts generally specify the type
of equipment to be used, the size of the hole and the depth of the proposed
well. Under a daywork contract, Norton Drilling generally does not incur any
costs due to "inhole" losses (such as time delays for various reasons,
including stuck drill strings and blow-outs).
Footage contracts usually require Norton Drilling to bear some of the
drilling costs in addition to providing the rig. Under a footage contract,
Norton Drilling would normally determine the manner of drilling and type of
equipment to be used, subject to certain customer specifications, and also
would bear the risk and expense of mechanical malfunctions, equipment shortages
and other delays arising from drilling problems. Compensation is based on a
rate per foot drilled basis to completion of the well. Prices of both footage
and daywork contracts vary depending upon various factors such as the location,
depth, duration and complexity of the well to be drilled, operating conditions
and other factors peculiar to each proposed well.
Under turnkey contracts, Norton Drilling contracts to drill a well to a
contract depth under specified conditions and provides most of the equipment
and services required. Norton Drilling bears the risk of drilling the well to
the contract depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because Norton Drilling assumes
substantially greater economic risk associated with drilling operations. If
severe drilling problems are encountered in drilling wells under turnkey
contracts, Norton Drilling could sustain substantial losses.
Norton Drilling's management believes that it is able to prevail in certain
situations where it is not the lowest-priced bidder because of the strength of
its reputation. Nevertheless, the bidding process is standard for the industry
and ensures that pricing is competitive.
Risks and Insurance
Norton Drilling's operations are subject to the many hazards inherent in the
drilling business, including blow-outs, cratering, fires, and explosions.
These hazards could cause personal injury or death, suspend drilling operations
or seriously damage or destroy the equipment involved and could cause
substantial damage to producing formations and surrounding areas. Damage to
the environment could also result from Norton Drilling's operations,
particularly through oil spillage, gas leaks and extensive, uncontrolled fires.
As a protection against operating hazards, Norton Drilling maintains insurance
coverage considered by Norton Drilling to be adequate, including all-risk
physical damage, employer's liability, commercial general liability and
workers' compensation insurance. Norton Drilling currently has $1,000,000 of
general liability insurance with excess liability and umbrella coverages of up
to $5,000,000 per occurrence. Norton Drilling's customers generally require
Norton Drilling to have at least $1,000,000 of third party liability coverage.
See Note 14 of the Notes to Consolidated Financial Statements included as part
of Item 8 of this report for further disclosures regarding the aforementioned
contingencies.
Norton Drilling believes that it is adequately insured for public liability
and property damage to others with respect to its operations. However, such
insurance may not be sufficient to protect Norton Drilling against liability
for all consequences of well disasters, extensive fire damage or damage to the
environment. Norton Drilling also carries insurance to cover physical damage
to or loss of its drilling rigs. Norton Drilling's lenders have a security
interest in the drilling rigs and are named as loss payees on the physical
damage insurance on such rigs. In view of difficulties that may be
encountered in renewing such insurance at reasonable rates, no assurance can
be given that Norton Drilling will be able to maintain the type and amount of
coverage that it considers adequate at reasonable rates.
Norton Drilling carries worker's compensation insurance for its Texas and
New Mexico resident employees, with a deductible of $100,000 per occurrence.
At the commencement of the policy on November 1, 1992, Norton Drilling was
required to make a capital deposit with the insurance company of approximately
$103,000. Under the terms of the policy, the capital deposit presently is
scheduled to be returned to Norton Drilling in three equal installments of
approximately $34,000 commencing May 1, 1995 and ending May 1, 1997. The first
return installment was timely paid to Norton Drilling. From December 1, 1992
through February 1, 1993, Norton Drilling was required by the terms of the
policy to make payments of approximately $43,000 per month into a trust account
as a reserve against the Company's liability under the deductible portion of
the policy. From November 1, 1992 through November 30, 1995, the Company paid
a total of approximately $688,000 on account of its liability under the
deductible portion of the policy. As of November 30, 1995, the balance in the
trust account and the amount required by the terms of the policy to be in the
trust account was approximately $529,000. The balance required to be in the
trust account may increase or decrease at any time, depending upon Norton
Drilling's ability to pay its liability under the deductible portion of the
policy. If the amount required to be in the trust account is greater than the
balance in the trust account, Norton Drilling would be required to pay the
increased amount into the trust account in one or more installments.
Alternatively, the Company can provide letters of credit as collateral for its
obligations to pay additional funds into the trust account. At November 30,
1995, Norton Drilling had elected to provide the letters of credit required by
the insurance company and has had its bank issue four letters of credit
totaling $331,376 for such collateral on its behalf. Starting November 1, 1993,
Norton Drilling purchased reinsurance to provide coverage for the $100,000
deductible. The reinsurance policy provides for a deductible of $5,000. Norton
Drilling currently pays monthly premiums of approximately $31,000 and $8,000
for these self-funded workers' compensation and reinsurance policies,
respectively.
From November 11, 1994 to August 1, 1995, Norton Drilling provided workers'
compensation insurance for its New Mexico resident employees through a
fully-insured plan with USF&G insurance company sponsored by the State of New
Mexico. This policy had a deductible of $5,000 per occurance. For the year
ended November 30, 1995, Norton Drilling paid out $10,000 under this deductible
plan. Prior to November 11, 1994 this workers' compensation policy was a
fully-insured policy which carried no deductible. Subsequent to August 1, 1995,
the New Mexico resident employees are covered under the policy stated in the
preceding paragraph.
Workers' compensation insurance coverage for Norton Drilling's employees in
all the other states in which it has employees is provided for by fully-insured
plans administered by the various states.
Norton Drilling was a party in a class action as a plaintiff against certain
suppliers to the oil and gas contract drilling industry for alleged price
collusion in the late 1980s. In 1994, the action was settled and Norton
Drilling was awarded $233,479 in full and final settlement which was received
in 1995.
Amoco Production Company commenced a legal action against Norton Drilling
in connection with services rendered in 1993 and 1994. The action was brought
in District Court in Hockley County, Texas on April 6, 1995 and seeks damages
in the amount of $284,000. Norton Drilling has filed a countersuit. Management
believes that the allegations made by Amoco Production Company are without
merit and intends to prosecute its defense and counterclaims vigorously. See
Item 3-Legal Proceedings and Note 14 of Notes to Consolidated Financial
Statements included as a part of Item 8 of this report for additional
discussion regarding certain contingencies affecting the segment.
Norton Drilling is also involved in various routine litigation incident to
its business. In management's opinion, none of these proceedings will have a
material adverse effect on the Company.
Government Regulation and Environmental
The domestic drilling of oil and gas wells is subject to various state and
federal laws, rules and regulations. State statutory provisions relating to
oil and natural gas generally include requirements as to well spacing, waste
prevention, production limitations, pollution prevention and clean-up,
obtaining drilling permits and similar matters. Management of Norton Drilling
believes that it is in compliance in all material respects with all laws, rules
and regulations relating to its operations and that such compliance has not had
any material adverse effect on its operations or financial condition. To date
Norton Drilling has not been required to expend significant resources in order
to satisfy applicable environmental laws and regulations. Norton Drilling does
not anticipate any material capital expenditures for environmental control
facilities or for compliance with environmental rules and regulations in the
foreseeable future. However, compliance costs under existing laws or under any
new requirements could become material. Norton Drilling has not been fined
or incurred liability for pollution or other environmental damage in connection
with its operations and is not currently aware of any environmental hazards
which would materially affect its operations.
The contract drilling industry is dependent on demand for services from the
oil and gas exploration industry and, accordingly, is affected by changing tax
laws and other laws relating to the energy business generally. Norton
Drilling's business is affected generally by political developments and by
federal, state, foreign and local laws and regulations which relate to the oil
and gas industry. The adoption of laws and regulations affecting the oil and
gas industry for economic, environmental and other policy reason's could
increase costs relating to drilling and production, which could have an
adverse effect on the Company's operations. State and federal environmental
laws and regulations could become more stringent in the future. For instance,
legislation has been proposed in Congress in connection with the pending
reauthorization of the Federal Resource Conservation and Recovery Act ("RCRA"),
which would amend RCRA to reclassify oil and gas production wastes as
"hazardous waste". If such legislation were to be enacted, it could have a
significant impact on the operating cost of Norton Drilling, as well as the oil
and gas industry in general.
Employees
Norton Drilling had a total of 200 full-time employees (8 as office
personnel and 192 as field personnel) as of November 30, 1995. Norton Drilling
estimates that the number of field personnel will fluctuate between
approximately 154 and 254 depending on the demand for the Company's contract
drilling services. The Company considers its employee relations to be
satisfactory.
DISCONTINUED OPERATIONS
MRI Segment
The MRI Segment , through the "Huntington Facility" and prior to its
discontinuation in 1994 as discussed below, rented, for a fee based on usage,
its MRI machine to a professional corporation, whose shareholders were
physicians. The Huntington Facility was operational from July, 1986 to March,
1995. At the Huntington Facility, Lobell leased a General Electric MR Max
System from GE pursuant to a contract with an 84 month term which commenced on
September 5, 1989. On July 13, 1993, the rental obligation under the lease was
restructured pursuant to a settlement of a dispute with GE. Monthly lease
payments for the equipment increased from $32,978 to $41,772. Lobell had the
option at the end of the lease period of purchasing the machine under lease for
the lower of $150,000 or its fair market value.
Lobell ceased making payments on the settlement in December 1994. The
Registrant and GE entered thereafter into negotiations to settle the remaining
balance. GE, in April 1995, agreed to accept $200,000 as full payment of the
remaining balance if the funds were received by April 11, 1995. The Registrant
did not meet these terms and the issue has yet to be settled. In March 1995,
the MRI segment was evicted from its facilities and the equipment held under
the lease was abandoned.
On August 18, 1994, management decided to discontinue the MRI Segment in
light of its recurring losses. The financial statements for 1994 reflect a
charge to operations of $750,000 for the estimated loss to be incurred in
disposing of this Segment. At November 30, 1995 the amount remaining in the
reserve for loss on disposition of the MRI Segment is $492,000 which
management believes to be sufficient to satisfy all remaining claims. However,
should management successfully negotiate with its creditors, an amount less
than initially reserved will be paid resulting in a possible gain to the
Registrant. Management has estimated such gain to be in the range of $68,000
to $468,000.
Nursery Segment
On February 28, 1991, Sunny's Plants, a wholly-owned subsidiary of DSI
acquired (i) all of the assets and assumed certain obligations of IPS, (ii) all
of the outstanding shares of Sunshine, (iii) all of the outstanding capital
stock of Interior, and (iv) certain real property located in Florida.
The Nursery Segment, prior to its discontinuance in 1995 as discussed below,
had been involved in the production of foliage plants since 1978. The Nursery
Segment was engaged primarily in planting, growing and preparing plants for
distribution and sale in the wholesale and retail market. Sunny's Plants owned
98 acres and leased 77 acres of land in Homestead, Florida, which is
approximately 40 miles South of Miami. In addition, there were two residences
and one office building owned by Sunny's Plants on the property. The plants
were grown in mass quantities either in shadehouses or greenhouses or in open
fields. When grown, the plants were then packaged for sale and shipped in
temperature controlled trucks or containers to the indoor foliage plants target
market. The raw materials for plant production were pots, soil and seeds or
cuttings required for specific types of plants. The Nursery Segment did not
own trucks for shipping its products to customers, but did so through
independent trucking companies. For a portion of 1994, the Nursery Segment
shipped some products in trucks which it leased from rental companies and which
were driven by personnel of the Nursery Segment. Smaller customers benefited
from the opportunity to ship smaller quantities since Sunny's Plants
consolidated multiple orders on the same truck.
The Nursery Segment was extensively damaged by Hurricane Andrew ( "the
Hurricane") which struck on August 24, 1992. The greenhouses, shadehouses,
machinery and equipment, shipping facilities and inventories (consisting of
potted and stock plants) as well as the irrigation systems were destroyed and
the office and the two residential buildings were damaged. The Nursery Segment
was insured against hazards including hurricane damage to its buildings,
equipment, inventory, and loss of business to a total of $5,832,590.
Following the Hurricane, the Nursery Segment rebuilt and restocked
approximately 175 acres of shade houses, greenhouses and sun production areas,
and built a new 40,000 square foot packing and shipping facility capable of
loading up to 15 trucks at a time. A 24,000 square foot propagation facility
capable of producing young tissue culture liners was also built.
The Hurricane also destroyed virtually all foliage production in the South
Dade area. Many nurseries did not have insurance and were not rebuilt. This
led to a short term shortage of foliage plants. In order to take advantage of
the opportunity resulting from the lack of supply of foliage plants due to the
Hurricane damage, Sunny's Plants leased an additional 60 acres and purchased
an additional 30 acres of land. This brought the total available acreage to
175 acres.
On April 6, 1995, the Board of Directors of DSI discontinued the Nursery
Segment due to its significant losses which commenced in the third quarter of
1994 and continued through the date of its discontinuance. The accompanying
consolidated financial statements as of and for the two years ended November
30, 1994 retroactively reflect management's decision to discontinue this
Segment including a charge to operations of $3,000,000 in 1994 for the
estimated loss to be incurred in disposing of the Segment as well as the
estimated losses incurred from November 30, 1994 through April 6, 1995.
In August, 1995 the Nursery Segment and the Registrant entered into
agreements with two of its secured creditors, both of whom are banks, and an
unrelated third party ("purchaser") in which the purchaser acquired the
collateralized debt of one bank and immediately foreclosed on the debt. The
Nursery Segment surrendered to the purchaser all of the assets collateralizing
this indebtedness on September 6, 1995. The purchaser took title to assets
with an approximate book value of $4,625,000, in exchange for extinguishment
of approximately $1,293,000 of collateralized debt obligations of the Nursery
Segment. The bank has released the Registrant from its corporate guarantee of
this obligation. Additionally, the purchaser assumed a $330,000 note payable
of the Registrant and guaranteed to indemnify the Nursery Segment and the
Registrant for its liabilities to certain other creditors in an amount not to
exceed $404,000. As of November 30, 1995, the aforementioned indemnifications
had not been fully completed. See Note 3 of Notes to Consolidated Financial
Statements included as part of Item 8 of this report.
The agreement with the other bank requires the purchaser to repay the
outstanding balance of a mortgage note in the approximate amount of $2,128,000
collateralized by the Nursery Segment's real property having an approximate
book value of $1,465,000. The Registrant continues to guarantee this
indebtedness. The Nursery Segment will remain contingently liable under its
guarantee until the purchaser has fully extinguished the indebtedness.
As a result of the aforementioned disposition being less favorable than was
originally estimated, an additional $2,194,000 was charged to operations during
1995 to increase the reserve for loss on the ultimate disposition of the
Nursery Segment. Management is of the belief that its estimate of remaining
future losses to be incurred in disposing of this Segment of $125,000 is
adequate to provide for future liabilities.
As of November 30, 1995 estimated liabilities totaling $2,865,000 relative
to various secured and unsecured claims against the Nursery Segment are
included in management's reserve for loss on disposal of the Segment.
Management contends that should the segment elect to seek protection from its
creditors through bankruptcy, the amount actually paid will be significantly
less than the amount included in the current reserve resulting in a significant
possible gain to the Registrant. See Notes 1 and 3 of Notes to the Consolidated
Financial Statements included as part of Item 8 of this report.
Management's best estimate of the potential gain is between approximately
$1,979,000 and $2,862,000. See Notes 1 and 3 of the Notes to Consolidated
Financial Statements included as a part of Item 8 of this report.
There can be no certainty that any or all of the possible gains in the MRI
Segment or the Nursery Segment will ever be realized. Their ultimate
realization is dependent on a number of factors including, but not limited to,
the dissolution of the underlying subsidiaries without liability or payment
thereof extending to the continuing operations of the Company, or the
extinguishment of existing liabilities under Federal bankruptcy laws. While
management believes either of the two courses of action will relieve the
segments of their obligations and result in gains, there can be no certainty
of such due to potential rights of creditors under applicable state laws and/or
the intricacies of meeting the technical requirements of Federal bankruptcy
laws. Because of the inherent problems which could arise under either course
of action, the outcome is subject to many issues which are outside the control
of management and therefore, the amount of liabilities that may be extinguished
and the possible resulting gain, if any, that would be recognized is uncertain
at this time.
The results of the MRI and Nursery Segments have been reported separately
as a component of discontinued operations in the consolidated statements. Prior
year consolidated financial statements have been restated to present these
Segments as discontinued operations. Summarized results of operations are as
follows:
Dollars in thousands) November 30,
1995 1994 1993
Revenues $ - - $ 11,047 $ 7,812
Costs and expenses - - 15,011 7,355
Provision for loss on disposal 1,526 3,750 - -
Income (loss) before income taxes ( 1,526) ( 7,714) 457
Provision (credit) for income taxes - - ( 1,393) 289
$( 1,526) $( 6,321) $ 168
Additionally, as of November 30, 1995 and 1994, net liabilities of the
discontinued segments are $3,515,000 and $1,940,000, respectively.
Item 2. Description of Properties
Headquarters and Other Offices
DSI believes that its facilities, contract drilling rigs and related
equipment are suitable and adequate for the current conduct of its operations.
The Registrant's current principal facilities, their primary functions,
respective locations and square footage are as follows:
Square Feet
Location Function Owned Leased
Lubbock, Tx. Executive office - - 4,000
Levelland, Tx. Mechanic/equipment shop 14,000 - -
Rock Springs, Wy. Mechanic/equipment shop 2,400 - -
Rock Springs, Wy. Land (2 acres) 87,120 - -
Levelland, Tx. Land (5 acres) 217,800 - -
Drilling Equipment
The following table sets forth information about the drilling rigs currently
owned by Norton Drilling:
Depth Rating
Rig No. Drawworks manufacturer (feet)
1 Wilson 65.............................10,500
2 Wilson 42............................. 7,500
3 Wilson 75.............................10,500
4 Wilson 75.............................10,500
5 Wilson 75.............................10,500
6 Wilson 75.............................13,000
7 Wilson 65............................. 8,500
8 Wilson 75.............................13,000
9 Gardner Denver 1100E..................20,000
10 Gardner Denver 700....................15,000
11 Wilson 75.............................12,000
12 Wilson 75.............................12,000
14 Unit 712E.............................18,000
15 Gardner Denver 700....................14,500
16 Gardner Denver 500....................12,500
Rigs 1 and 2 were not operational during fiscal years 1994 and 1995. The
necessary capital expenditures were made during December 1995 such that the
rigs will be utilized in the subsequent fiscal period.
All of the drilling rigs are pledged as collateral on notes payable of
Norton Drilling. See Note 7 of Notes to Consolidate Financial Statements
included as a part of Item 8 of this report.
Item 3. Legal Proceedings
In February 1995, a default judgment in the amount of $79,999 was obtained
in the Local District Court, Huntington, New York, against Lobell and DSI, as
guarantor, by the landlord of the premises which were then occupied by Lobell.
The judgment was secured based on the non-payment of monies alleged to be due
and owing under a stipulation executed by the parties on November 1, 1994.
Following such judgment, the landlord evicted Lobell and obtained a judgment
on February 15, 1995 for the non-payment of rent in the amount of $33,408.
The Registrant is a named defendant, as guarantor of a lease obligation, in
a lawsuit commenced by Colonial Pacific Leasing Corp. in the 11th Judicial
Circuit in Dade County, Florida against the Registrant's wholly-owned
subsidiary Sunny Plant's Inc. Summary judgment in excess of $363,000 was
granted in favor of Colonial Pacific Leasing Corp. on November 15, 1995.
As of January 26, 1996, the subsidiaries of the Registrant which comprise
the discontinued Nursery Segment were defendants in 24 actions seeking payment
of past liabilities owed to suppliers, lessors and other creditors of the
Nursery Segment. Such actions, in which damages aggregating in excess of
$611,000 are sought, have been brought in Dade, Orange, Palm Beach, Lake and
Broward counties in Florida. The Nursery Segment does not intend to contest
such claims. In September, 1995, the Nursery Segment surrendered to their
senior lender real and personal property which constituted substantially all
of the property of the Nursery Segment and ceased to conduct all business
operations.
Amoco Production Company commenced a legal action against Norton Drilling
in connection with services rendered in 1993 and 1994. The action was brought
in District Court in Hockley County, Texas on April 6, 1995 and seeks damages
in the amount of $284,000. Norton Drilling has filed a countersuit.
Management believes that the allegations made by Amoco Production Company are
without merit and intends to pursue its defense and counterclaims vigorously.
The Registrant is from time to time subject to routine litigation incidental
to its business. Other than as set forth above, as of November 30, 1995, there
were no pending material proceedings to which the Registrant or management of
the Registrant was a party. See Note 14 of Notes to Consolidated Financial
Statements included as a part of Item 8 of this report.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Registrant's common stock, $.01 par value per share, is traded on the
NASDAQ national market under the symbol "DSIC". The table below sets forth the
high and low selling prices for the Registrant's common stock for the periods
indicated on the NASDAQ National Market.
HIGH LOW
Fiscal 1994
December 1, 1993 - February 28, 1994 .59 .41
March 1, 1994 - May 31, 1994 .50 .33
June 1, 1994 - August 31, 1994 .44 .25
September 1, 1994 -November 30, 1994 .28 .06
Fiscal 1995
December 1, 1994 - February 28, 1995 .12 .06
March 1, 1995 - May 31, 1995 .09 .03
June 1, 1995 - August 31, 1995 .12 .03
Sept. 1, 1995 - Nov. 30, 1995 .12 .03
On February 13, 1996, the number of holders of record of the Registrant's
common stock was approximately 361.
DIVIDEND POLICY
The Registrant has not paid dividends on its common stock in the past and
does not expect to pay any dividends on its common stock in the foreseeable
future. The Registrant instead intends to retain its earnings to support the
operations and anticipated growth of its businesses. Any future cash dividends
would depend on future earnings, capital requirements, the Registrant's
financial condition and other factors deemed relevant by the Board of
Directors. In addition, the terms of existing bank indebtedness prohibits
payment of dividends by the Registrant without prior written consent of its
lenders. See Note 7 of Notes to Consolidated Financial Statements included as
a part of Item 8 of this report for discussion regarding certain restrictive
covenants inherent in the Registrant debt agreements.
Item 6. Selected Financial Data
The Registrant acquired its wholly-owned subsidiaries Norton Drilling and
Sunny's Plants during October 1991 and February 1991, respectively. The
related transactions were accounted for under the purchase method of
accounting. The operations of the MRI Segment and Nursery Segment were
discontinued in August 1994 and April 1995, respectively. The following table
illustrates the consolidated results of operations and selected balance sheet
information for the Registrant considering the above mentioned acquisition
dates. Furthermore, the financial information is being provided as restated
in the prior years in accordance with the aforementioned discontinuance of
operations. See also PART I, Item 1-Description of Business and Note 3 of
Notes to Consolidated Financial Statements included as part of Item 8 of this
report.
Years ended November 30,
1995 1994 1993
Continuing operations:
Operating revenue $20,645,757 $21,121,885 $21,563,415
Operating costs and expenses 21,244,818 20,928,871 21,320,169
Income (loss) from continuing
operations ( 868,319)( 178,508) ( 5,397)
Income (loss) from discontinued
operations ( 1,526,060)( 6,320,829) 167,976
Extraordinary gain, net of tax - - - - 985,098
Net income (loss) $(2,394,379)$(6,499,337) $ 1,147,677
Earnings (loss) per common share:(1)
Primary:
Income (loss) from continuing
operations $(.04) $(.01) $- -
Income (loss) from discontinued
operations (.07) (.28) .01
Continuing operations:
Extraordinary gain - - - - .04
Net income (loss) $(.11) $(.29) $.05
Fully diluted:
Income (loss) from continuing
operations $ - - $ - - $ - -
Income (loss) from discontinued
operations - - - - .01
Extraordinary gain - - - - .04
Net income (loss) $ - - $ - - $.05
Total assets $13,004,461 $13,007,196 $26,692,953
Notes payable, net of current
maturities $ 763,738 $ 1,587,248 $ 5,962,426
Stockholders' equity $ 1,312,694 $ 3,571,686 $ 9,887,052
Years ended November 30,
1992 1991
Continuing operations:
Operating revenue $15,149,321 $ 3,953,958
Operating costs and expenses 15,381,734 3,924,434
Income (loss) from continuing
operations ( 232,413) 29,524
Income (loss) from discontinued
operations 252,049 373,819
Extraordinary gain, net of tax - - - -
Net income (loss) $ 19,636 $ 403,343
Earnings (loss) per common share:(1)
Primary:
Income (loss) from continuing
operations $(.01) $ - -
Income (loss) from discontinued
operations .01 .06
Continuing operations:
Extraordinary gain - - - -
Net income (loss) $ - - $ .06
Fully diluted:
Income (loss) from continuing
operations $ - - $ - -
Income (loss) from discontinued
operations - - .04
Extraordinary gain - - - -
Net income (loss) $ - - $ .04
Total assets $20,790,107 $23,881,432
Notes payable, net of current
maturities $ 6,043,137 $ 7,637,136
Stockholders' equity $ 8,739,375 $ 7,923,872
(1) Earnings (Loss) Per Common Share:
Primary net income (loss) per common and common equivalent shares for the
five years ended November 30, 1995 has been computed based upon the weighted
average number of common shares outstanding during each year and on the net
additional number of shares which would be issuable upon the exercise of
warrants and stock options, assuming that the Registrant used the proceeds
received to purchase additional shares at market value. Common stock
equivalents are not included in the outstanding shares computation for 1994 and
1995 as they are anti-dilutive.
Fully diluted earnings per share amounts for 1993 are based on an increased
number of shares that would be outstanding assuming conversion of the
subordinated convertible notes payable to affiliates. For purposes of the
fully diluted computations, the number of shares that would be issued from the
exercise of the warrants and the stock options has been reduced by the number
of shares which could have been purchased from the proceeds at the market price
of the Company's stock on November 30, 1993 and 1991 because those prices were
higher than the average market prices during those years. Net income for
fiscal 1993 has been adjusted for interest expense (net of income tax effect)
on the convertible debt. Fully dilutive data for fiscal 1995, 1994 and 1992
is not shown as it was not dilutive.
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of November 30, 1995, DSI had a working capital deficiency from
continuing operations of approximately $7,040,000 and cash and cash equivalents
of approximately $283,000 as compared to a working capital deficiency of
approximately $4,126,000 and cash and cash equivalents of approximately $76,000
in 1994. For the year ended November 30, 1995, DSI used approximately $95,000
in operations and provided approximately $1,101,000 in its financing
activities. For the year ended November 30, 1994, DSI used approximately
$233,000 in operations and approximately $5,708,000 in its financing
activities. The use of funds is largely attributable to the Registrant's
decision to discontinue the aforementioned segments resulting in an approximate
$5,128,000 use of funds relative to financing activities of the respective
segments as well as an approximate $1,541,000 reduction in the Registrant's
deferred tax liability. See "Part I. Item 1. Description of Business-Industry
Segments; Discontinued Operations-MRI Segment and Nursery Segment" of this
report and Note 3 of Notes to Consolidated Financial Statements included as
part of Item 8 of this report.
Significant expenditures of DSI primarily consist of the Drilling Segment's
continual acquisition of replacement drilling equipment, such as drill collars,
drill pipe, engines and transportation equipment to adequately maintain the
operating status of the drilling fleet. Such expenditures for the years ended
November 30, 1995, 1994 and 1993 approximate $1,012,000, $552,000 and
$3,946,000, respectively. Capital expenditures during fiscal 1994 were
curtailed due to significant constraints imposed on the cash flows of the
Registrant. The capital expenditures were resumed to their normal level during
mid-fiscal year 1995. The Drilling Segment anticipates capital expenditures of
approximately $1,000,000 for fiscal 1996 to be funded from existing bank credit
lines, cash flow from operations and proceeds from sales of assets. See Note
7 of Notes to Consolidated Financial Statements included as a part of Item 8
of this report. Due to numerous uncertainties regarding the availability, price
and delivery of certain drilling equipment, the Registrant's anticipated level
of capital expenditures may fluctuate commensurate with the volatility of the
industry.
Management of the Registrant believes that cash flows from operations and
borrowing (if available) should be sufficient to fund continuing operations and
adequately service the Registrant's debt for the next twelve months. However,
the ability of the Registrant to perform under the existing terms of its debt
agreements and adequately extinguish certain other liabilities associated with
its discontinued segments is contingent upon the Registrant's ability to
successfully negotiate with its creditors (primarily creditors of the MRI and
Nursery Segments). Furthermore, the inherent macroeconomic risks associated
with the oil and gas industry, such as the volatility of oil and gas prices,
could adversely affect the Registrant's operations. See Notes 1 and 3 of Notes
to Consolidated Financial Statements included as part of Item 8 of this report.
Results of Continuing Operations
Comparison of the years ended November 30, 1995 and 1994
For the year ended November 30, 1995 contract drilling revenues were
$20,613,000 as compared to $21,110,000 for the year ended November 30, 1994,
a decrease of $497,000 or 2.4%. Average rig utilization was 68.6% in 1995
compared to 69.4% in 1994. The decrease in drilling revenues was due to a
decrease in the number of large dollar, turnkey contracts that were completed
in the current year. More wells were drilled in the current year under turnkey
contracts, but they were for smaller dollar amounts than in the prior year.
Direct job and rig costs for 1995 were $18,860,000 or 91.5% of contract
drilling revenues as compared to $18,787,000 or 89.0% of contract drilling
revenues in 1994. The increase in costs was primarily attributable to three
factors. First, labor costs in the current year increased due to pay raises
given in order to retain the work force necessary to operate the rig fleet.
Shortages of trained rig workers have been experienced in the contract drilling
industry. Second, as an incentive to maintain a safe work environment, safety
bonuses were increased. Finally, trucking costs increased due to the greater
utilization of outside trucking companies to move the rigs. General and
administrative expenses for the contract drilling segment were $978,000 in 1995
as compared to $948,000 in 1994. Included in general and administrative
expenses for 1995 was an increase in the allowance for doubtful accounts
receivable in the approximate amount of $85,000. Conversely, in 1994 there was
a collection on account receivable considered in prior years to be
uncollectible of approximately $8,000. Furthermore, professional fees incurred
by the parent corporation declined in 1995 as compared to 1994 due to the
discontinuing of operations of the other two segments as previously discussed.
Net interest expense was $399,000 in 1995 compared to $379,000 in 1994, an
increase of $20,000. The current year increase is attributable to an increase
in the amount of debt borrowings to pay for equipment purchases, payment of
liabilities of the Registrant and to pay vendor accounts payable. In 1995 loss
before income taxes and discontinued operations was $868,000 as compared to a
loss of $169,000 in 1994. This increase in loss was due to increased direct
job and rig costs as a percent of gross revenues.
Comparison of the years ended November 30, 1994 and 1993
For the year ended November 30, 1994, contract drilling revenues were
$21,110,000 as compared to $21,552,000 for the year ended November 30, 1993,
a decrease of $442,000 or 2.0%. The decrease in drilling revenues was due to
a decrease in the number of wells drilled under turnkey contracts. Average rig
utilization was 69.4% in 1994 as compared to 63.6% in 1993. For the year
ended November 30, 1994, direct job and rig costs were $18,787,000 or 89.0% of
contract drilling revenues as compared to $19,290,000 or 89.5% of contract
drilling revenues in 1993. The decrease corresponded directly with the decrease
in revenues. General and administrative expense was $948,000 for the year
ended November 30, 1994 as compared to $923,000 for the year ended November 30,
1993. The increase was due to increased salaries for certain of the segment's
officers in accordance with employment contracts. Net interest expense was
$379,000 for the year ended November 30, 1994 compared to $237,000 in 1993, an
increase of $142,000 due to an increase in interest rates, additional
borrowings on a larger line of credit available in 1994, and debt on some new
capital leases for equipment entered into in 1994. For the year ended November
30, 1994, loss before income taxes, discontinued operations and extraordinary
items was $169,000 as compared to income before income taxes, discontinued
operations and extraordinary items of $6,000 in 1993, a decrease of $175,000.
This decrease was largely attributable to increased interest expense and a
provision for loss on idle equipment of approximately $190,000 charged to 1994
operations.
Results of Discontinued Operations
MRI Segment
During fiscal 1994, the Board of Directors of DSI chose to discontinue its
MRI Segment due to its recurring losses. In fiscal 1995, all of the assets of
this segment were garnished, confiscated or abandoned. The results of
operations of this segment was net income of $288,000 for the year ended
November 30, 1995 (approximately four months of operations), and net losses of
$741,000 in 1994 and $394,000 in 1993. The increase in the segment's results
of operations for the year ended November 30, 1995 compared to 1994 is
attributable to management's current year revision of its initial estimate made
in 1994 to reserve for the ultimate loss to be incurred in the disposal of the
segment. Such revision resulted in an approximate $668,000 credit to
operations. Conversely, the decrease in results of operations for the year
ended November 30, 1994 compared to 1993 is largely attributable to the
aforementioned estimate for future losses relative to the disposal of the
segment in which $750,000 was charged to 1994 operations. See also PART 1, Item
1-Description of Business; "Industry Segments-Discontinued Operations" for
additional discussion.
Nursery Segment
As of November 30, 1994, the Board of Directors of DSI chose to discontinue
its Nursery Segment due to its recurring losses. In fiscal 1995, all of the
assets of this segment were seized through foreclosure of the segment's
indebtedness. As such, the results of operations of this segment was a net loss
of $2,194,000 in 1995 (approximately eight and one-half months of operations),
and losses of $6,453,000 in 1994 and net income of $911,000 in 1993. The
increase in the segment's results of operations for the year ended November 30,
1995 compared to 1994 is attributable to management's estimate of the reserve
for ultimate loss to be incurred in the disposal of the segment. In the year
ended November 30, 1995 and 1994, the results of operations reflected a charge
to this reserve of $2,194,000 and $3,000,000, respectively. The decrease in the
segment's results of operations for the year ended November 30, 1994 as
compared to 1993 is due to the aforementioned $3,000,000 reserve incurred in
1994, as well as an increase in the cost of sales and increased selling and
general and administrative expense.
Recent Accounting Standards
The Financial Accounting Standards Board issued SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." Preliminary analysis of this new standard by management indicates that the
standard will not have a material impact on the Company. The standard is
effective for financial statements for fiscal years beginning after December
15, 1995.
SFAS 123, " Accounting for Stock-Based Compensation" which was issued in
1995 is not effective until fiscal year 1997. The Statement defines a fair
value based method of accounting (i.e., using an option pricing model such as
Black-Scholes) for employee stock options or similar equity instrument plans,
but also allows an entity to measure compensation costs for those plans using
the intrinsic value (the amount by the amount by which the market price of the
underlying stock exceeds the underlying price of the option) based method
accounting as prescribed by Accounting Principles Board Opinion No. 25. The
Company plans to continue using the intrinsic value based method.
Item 8. Financial Statements
Consolidated Financial Statements are filed as a part of this report at the
end of PART IV beginning at page F-1, Index to Consolidated Financial
Statements and are incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 14, 1995, the Board of Directors of the Registrant elected to
change its independent accountants. Accordingly, on such date, the Registrant
filed Form 8-K informing the SEC of its intent to change independent
accountants from Weinick, Sanders & Co, L.L.P. to the firm of Robinson
Burdette Martin & Cowan, L.L.P. At the date of the change in accountants there
were no unresolved issues, scope restrictions, unanswered questions and/or
alternatively any disagreements with Weinick Sanders & Co., L.L.P. on any
matters of accounting principles, practices, or audit procedures, financial
statement disclosures and/or auditing procedures, which were not resolved.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's Board of Directors consists of nine members, each of which
hold office until the next Annual Meeting of Stockholders and until the
election and qualification of their respective successors. Each of the persons
listed below is presently a director of the Company and, with the exception of
Brian J. McDonald, was elected to such office at the last Annual Meeting of
Stockholders. In December 1992, Mr. McDonald was appointed a Director by the
remaining members of the Board of Directors to fill a vacancy caused by the
resignation of Christopher Paul Carvalho.
The following biographical information is provided with respect to each
director:
Harvey Bayard, age 64, has been a Director of the Company since December 1983.
Harvey Bayard has been a practicing certified public accountant in New York for
more than 35 years and has operated his own financial consulting practice.
He was co-founder and from August 1980 to April 1982 , was Treasurer of Autospa
Corporation, a nationwide automobile service and franchise company which
consummated an initial public offering in 1985. In 1983, Mr. Bayard founded
Diagnostic Sciences, Inc., a developer of MRI diagnostic imaging centers, of
which he was its Chief Financial Officer through January 1982 and which
consummated an initial public offering in March 1987. From 1992 to Feb. 1995,
Mr. Bayard was Treasurer and Director of ObjectSoft Corp., a developer of
software based on object related technology utilizing a Microsoft Windows
platform. Mr. Bayard, from 1988 until 1989 was an account executive with
Global Capital Securities, Inc., a full service securities brokerage firm and
member of the NASD and since that time has been an account executive with Lew,
Lieberbaum, Inc., an investment banking firm and member of NASD. Mr. Bayard
earned a Bachelor of Science Degree and Master of Business Administration
Degree from New York University.
D. Brian Hew, age 41, has been a Director of the Company since February 1991
and was the Company's President and Chief Executive Officer until May 1995.
From 1991 to August 1995, Mr. Hew was production manager for Sunny's Plant's,
Inc. D. Brian Hew is currently a Vice President of the Company and a
Production Manager for Tuttle's Design- Build Inc. Mr. Hew is the President
and Treasurer of the Company's discontinued subsidiary, Sunny's Plants, Inc.,
and it's subsidiaries Sunshine Botanicals, Inc. and Interior Plant Supply, Inc.
D. Brian Hew was a Vice President and has been the Treasurer of Sunshine
Botanicals, Inc. and the President of Interior Plant Supply, Inc. since 1987.
Peter L. Hew, age 36, has been a Director of the Company since February 1991
and is currently its Secretary. Peter L. Hew is currently Director of
Marketing and Sales for Tuttle's Design-Build, Inc.. Mr. Hew is also the Vice
President and Secretary of the Company's discontinued subsidiary, Sunny's
Plants, Inc. From 1989 to August 1995, Mr. Hew was director of Marketing of
Sunny's Plants and it's subsidiaries Sunshine Botanicals, Inc. and Interior
Plant Supply, Inc. Peter L. Hew received a Bachelor of Science degree from the
University of Western Ontario in 1980 and also a Masters of Business
Administration from Stanford University in 1984.
Robert C. Hew, age 38, has been a Director of the Company since February 1991.
Since 1987, Robert C. Hew has been Vice President of ICON International Inc.,
a New York based barter finance company. Prior to that, he was employed by the
Boston Consulting Group, a worldwide consulting company specializing in
corporate strategy, and was involved in managing a group of family-owned
companies in Jamaica, including a start-up venture and finance company. Robert
C. Hew received two law degrees from Oxford University in 1978 and 1981 where
he was a Rhodes Scholar, as well as a Masters of Business Administration from
the Harvard Business School in 1980.
Kenneth M. Levy, age 49, has been a Director of the Company since February
1988, and was Secretary of the Company from 1988 to 1991. In October 1994, Mr.
Levy was appointed as the Executive Vice President of the Company. From 1991
through 1994 he was Vice President and a Director of M.R. International, Inc.,
a corporation involved with trade in Russia. He was the Secretary/Treasurer
and a Director of Global Capital Group from 1988 to 1991. From 1984 to 1987,
Mr. Levy was self-employed and worked as an investment banker. He has
initiated and participated in public offerings, private placements, mergers and
acquisitions, and public financing, as well as acting as a consultant to public
and private companies. Mr. Levy is a Director of America Electromedics
Corporation.
Brian J. McDonald, age 29, has been a Director of the Company since December
1992 and is currently an Assistant Secretary and Assistant Treasurer of the
Company. From July 1992 through September 1, 1993, Mr. McDonald served as the
Company's Treasurer and Vice President, and as its Chief Financial Officer
until October 16, 1993. From February 1990 through September 1, 1993, Brian
J. McDonald was Vice President of the Company's subsidiary Lobell Corp. and was
also responsible for overseeing the financial and general management operations
of the Company. He is President, Chief Executive Officer and a Director of
Spur Ventures, Inc., a private investment group. Mr. McDonald was a Director
of F.C. Financial Services, Inc. from 1989 to June 1994 and from September 1989
to February 1990 was employed as a financial analyst at First Capital Advisors.
Mr. McDonald received his Bachelor of Business Administration from the
University of Texas.
John William Norton, age 35, has been a Director of the Company since October
1991. Mr. Norton is a sales representative with the Company's subsidiary,
Norton Drilling Company. From 1991 until 1994, Mr. Norton was a Vice President
of the Company's subsidiary, Norton Drilling Company, and a drilling engineer
for Norton Drilling Company and its predecessor corporation since 1987. From
1986 to 1987, John William Norton was self-employed as a drilling engineer
consultant. John William Norton received his Bachelor of Science degree in
Petroleum Engineering from Texas A&M University.
Sherman H. Norton, Jr., age 65, has been a Director of the Company since
October 1991 and Chairman of the Board of the Company since August 1993 and
Chief Executive Officer and President since May 1995. He is currently and has
been the President of the Company's subsidiary, Norton Drilling Company, and
its predecessor corporation since 1976. Sherman H. Norton, Jr. received his
Bachelor of Science degree in Petroleum Engineering from the University of
Oklahoma.
S. Howard Norton, III, age 38, has been a Director of the Company since October
1991. Mr. Norton is a sales representative with the Company's subsidiary,
Norton Drilling Company. From 1991 until 1994, Mr. Norton was a Vice President
of the Company's subsidiary, Norton Drilling Company, and its predecessor
corporation since 1982. S. Howard Norton, III received his Bachelor of
Business Administration degree from Texas A&M University.
In addition to the persons listed above, the only other executive officer
of DSI is David W. Ridley. Mr. Ridley, age 39, became the Company's Chief
Financial Officer, Vice President and Treasurer on October 16, 1993 and
performs similar duties for the Company's subsidiaries, Norton Drilling Company
and Lobell Corporation.
Under the securities laws of the United States, the Company's directors,
its executive officers, and any persons holding more than ten percent of the
Company's common stock are required to report their initial ownership of the
Company's common stock and any subsequent changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established, and the Company is required to disclose any failure to file
by these dates. All of these filing requirements with respect to the Company's
past fiscal year were satisfied on a timely basis. In making these
disclosures, the Company has relied solely on written representations of its
directors and executive officers and copies of the reports that they have filed
with the Commission.
Item 11. Executive Compensation
The following table sets forth information regarding all cash compensation
paid by the Registrant and stock options granted during the fiscal years
indicated to D. Brian Hew, the President and Treasurer, and Peter L. Hew, the
Vice President and Secretary of DSI's subsidiary Sunny's Plants, Inc., Sunshine
Botanicals, Inc. and Interior Plant Supply, Inc. There were no other executive
officers of the Company whose cash compensation exceeded $100,000.
Name of Executive and Number of Stock
Principal Positions Year Salary Options Awarded
D. Brian Hew, Director of the 1995 $ 65,798(1) 0
Company; President and Treasurer 1994 $132,099 0
of Sunny's Plants, Inc., Sunshine 1993 $115,385 0
Botanicals, Inc. and Interior Plant 1992 $136,100 0
Supply, Inc.
Name of Executive and Number of Stock
Principal Positions Year Salary Options Awarded
Peter L. Hew, Director of the Company; 1995 $ 52,616(1) 0
Vice President and Secretary of Sunny's 1994 $118,138 0
Plants, Inc., Sunshine Botanicals, Inc. 1993 $ 74,952 0
and Interior Plant Supply, Inc. 1992 $ 79,327 0
(1) Includes Salary through August 11, 1995, the last date of employment by
the Nursery Segment.
Employment Arrangements
On February 28, 1991, the Company, through its subsidiary, Sunny's Plants,
Inc., entered into two-year employment contracts with D. Brian Hew and Peter
L. Hew which expired by their terms on February 28, 1993. On April 26, 1993,
the Company, through its subsidiary, Sunny's Plants, Inc., entered into new
three-year employment contracts with D. Brian Hew and Peter L. Hew providing
for annual base salaries of $125,000 and $100,000, respectively. Pursuant to
these employment agreements, the employees agreed not to compete with Sunny's
Plants, Inc. and its operating subsidiaries during the term of these employment
agreements and, in some respects, for a two-year period thereafter. On August
11, 1995 both employees terminated their employment with Sunny's Plants, Inc.
On October 1, 1991, the Company, through its subsidiary, Norton Drilling
Company, entered into five-year employment contracts with each of Sherman H.
Norton, Jr., S. Howard Norton, III, John William Norton and Johnie P. Rose.
In addition to the applicable base salaries payable under each employment
agreement, the four employees can allocate among themselves an aggregate of
$50,000 in additional compensation each year over the total compensation paid
to such employees as a group during the prior year. Pursuant to these
employment agreements, the employees agreed not to compete with Norton Drilling
Company for a five-year period.
On December 1, 1995, the Company, through its subsidiary, Norton Drilling
Company, entered into new five year employment contracts with Sherman H.
Norton, Jr, S. Howard Norton, III, John William Norton and Johnie P. Rose.
The new contracts provide for salaries of $104,500 to each of these employees.
The provisions of the new agreements are the same as the prior agreement except
for the amount of salary.
Stock Options
No stock options were granted to, or exercised by D. Brian Hew or Peter Hew
during the fiscal year ended November 30, 1995. Although Messrs. D. Brian and
Peter Hew own common stock, they do not currently hold any stock options.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to those
persons or groups known to the Company who beneficially own more than 5% of the
Company's common stock, for all directors of the Company, for David W. Ridley
who is an executive officer of the Company, and for all directors and officers
as a group.
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class (10)
Sherman H. Norton, Jr. . . . . . . . . .2,656,292(2) 7.3
5211 Brownfield Highway, Suite 230
Lubbock, Texas 79407-3501
D. Brian Hew.. .. . . . . . . . . . 2,001,548(9) 8.4
17800 S.W. 268th Street
Homestead, Florida 33031
Harvey Bayard. . . . . . . . . . . . . . . 41,500(3) *
Peter L. Hew . . . . . . . . . . . . . . .637,548(9) 2.7
Robert C. Hew. . . . . . . . . . . . . . . 20,000(4) *
Kenneth M. Levy. . . . . . . . . . . . . .175,000(5) *
Brian J. McDonald. . . . . . . . . . . . . 30,200(6) *
S. Howard Norton, III . . . . . . . . .. 771,805 3.3
John William Norton. . . . . . . . . . . ..771,805 3.3
David W. Ridley. . . . . . . . . . . . . . 22,000(7) *
All directors and executive officers
as a group (10 persons) . . . . . . . .7,127,698(8) 28.7
* Less than 1%.
(1) All information is as of February 13, 1996 and was determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934 based
upon information furnished by the persons listed or contained in filings
made by them with the Securities and Exchange Commission or otherwise
known to the Company. Unless otherwise indicated, beneficial ownership
disclosed consists of sole voting and dispositive power. Sherman H.
Norton, Jr. is the father of S. Howard Norton and John William Norton,
which are all directors of the Company. D. Brian Hew, Peter L. Hew, and
Robert C. Hew are brothers and are all directors of the Company.
(2) Includes 931,818 shares of Common Stock issuable pursuant to a convertible
note held by Mr. Norton which becomes due on May 18, 1998.
(3) Includes (i) options to purchase 20,000 shares of common stock at an
exercise price of $0.375 per share which expire on June 15, 1998; (ii)
options to purchase 10,000 shares of Common Stock at an exercise price of
$0.391 per share which expire on August 27, 1998; and (iii) options to
purchase 10,000 shares of Common Stock at an exercise price of $0.34 per
share which expire on May 18, 1999.
(4) Consists of (i) options to purchase 10,000 shares of common stock at an
exercise price of $0.391 per share which expire on August 27, 1998; and
(ii) options to purchase 10,000 shares of common stock at an exercise
price of $0.34 per share which expire on May 18, 1999.
(5) Includes (i) options to purchase 20,000 shares of common stock at an
exercise price of $0.375 per share which expire on June 15, 1998; (ii)
options to purchase 10,000 shares of Common Stock at an exercise price of
$0.391 per share which expire on August 27, 1998; (iii) options to
purchase 10,000 shares of Common Stock at an exercise price of $0.34 per
share which expire on May 18, 1999; and (iv) options to purchase 100,000
shares of common stock at an exercise price of $0.125 per share which
expire on October 15, 1999.
(6) Includes (i) options to purchase 20,000 shares of common stock at an
exercise price of $0.375 per share which expire on May 19, 1998; and (ii)
options to purchase 10,000 shares of Common Stock at an exercise price of
$0.34 per share which expire on May 18, 1999.
(7) Includes 4,000 shares of Common Stock owned by Mr. Ridley's wife, as to
which shares Mr. Ridley disclaims all beneficial ownership, and options
to purchase 8,000 shares of Common Stock at an exercise price of $0.406
per share which expire on May 19, 1998.
(8) Includes the securities described above listed in footnotes (2) through
(7) above.
(9) Includes 541,548 of the 1,083,096 shares owned by Everbloom Growers, Inc.
which D. Brian Hew and Peter C. Hew own along with their spouses.
(10) Shares of common stock subject to option currently exercisable, or
exercisable within sixty days, are deemed outstanding for computing the
percentage of ownership of the person holding the options, but not deemed
outstanding for computing the percentage of ownership of any other person
Item 13. Certain Relationships and Related Transactions
An officer of Norton Drilling in May 1993, loaned Norton Drilling $90,000
(evidenced by a note payable on May 18, 1993). Interest charged to operations
was $8,841, $5,393, and $4,899 in 1995, 1994, 1993, respectively, on this note
payable. This officer also loaned Norton Drilling $36,000 in April 1993 for
the purchase of certain machinery which was pledged as collateral for the loan.
The loan was repaid in seven monthly principal payments of $3,000 each and a
final payment in November 1993 of $15,000. Interest paid on this indebtedness
was $1,891.
Another officer/stockholder of DSI in April 1989 advanced Norton Drilling
$225,000 in the form of an unsecured demand note with interest payable monthly
at prime which was exchanged on February 8, 1992 for an installment note with
interest payable at 1% over prime. The note was payable in equal monthly
installments of $6,250 through November 1994. As part of the debt
restructuring in May 1993, this officer lent Norton Drilling $410,000 as
evidenced by a new note payable May 18, 1998, and the then remaining unpaid
$125,000 of the prior installment note was repaid in full. This note, as well
as the $90,000 note in the preceding paragraph, is convertible into DSI's
common stock at $0.44 per share for an aggregate 1,136,364 shares of DSI's
common stock. Interest charged to operations for these notes amount to
$40,275, $30,186 and $17,842 in 1995, 1994 and 1993, respectively.
Additionally, this officer loaned Norton Drilling $28,000 in March 1994 which
was repaid in April 1994 plus interest of $200.
Four officers of Norton Drilling have ownership interests in an entity
from which Norton Drilling acquired drilling rig machinery at a cost of $98,207
in 1994. On December 6, 1993 this entity loaned Norton Drilling $62,000 which
was repaid on January 13, 1994 along with accrued interest in the amount of
$239.
In the year ended November 30, 1995, three officers and a corporation
owned by an officer of the Drilling Segment, along with the Drilling Segment,
participated in a joint venture in three wells. The joint venture contracted
with Norton Drilling to drill and equip the three wells and incurred costs
totalling approximately $716,000 through November 30, 1995. Each joint venture
participant was liable for their pro rata share of the costs incurred.
Norton's share was approximately $200,000. The aggregate costs to be borne by
the four related parties mentioned above was approximately $79,000 of which
approximately $11,000 was outstanding at November 30, 1995.
On October 3, 1995, DSI issued 1,083,096 shares of its common stock at
$0.125 per share to a corporation owned by two directors/officers of DSI and
their spouses in satisfaction of an indebtedness of the Nursery Segment of
$135,387.
See Note 12 of Notes to Consolidated Financial Statements included as part
of Item 8 of this report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Reports of Independent Certified Public Accountants;
(2) Consolidated Financial Statements; and
(3) Notes to Consolidated Financial Statements:
The response to this portion of Item 14 is submitted as a separate section
of the report starting on page F-1.
(b) Reports on Form 8-K:
On September 6, 1995, the Registrant filed a Form 8-K which reported the
entering into of an agreement (the "Purchase Agreement") between the three
subsidiaries of the Registrant's Nursery Segment ( the "Nursery Corporations")
relating to the purchase of loan documents and collateral with NationsBank of
Florida, N.A. (the "Bank") and Tuttle's Design-Build, Inc ("Tuttle"). In
accordance with the Purchase Agreement, on September 6, 1995, the Nursery
Corporations surrendered to the Bank certain real property and improvements as
to which the Bank had mortgage liens and certain personal property encumbered
by the Bank's first priority security interest. Such real and personal
property constituted substantially all of the property of the Nursery
Corporations. Also in accordance with the Purchase Agreement, the Bank sold its
lien position with respect to such property and the business conducted by the
Nursery Corporations to Tuttle. Then, on September 6, 1995, Tuttle foreclosed
on such lien position and all of the obligations of the Nursery Corporations
under such loan documents, including the obligation to repay an aggregate of
$1,326,381.84 then due, were terminated.
In consideration of the Registrant authorizing the Nursery Corporations
to enter into the Purchase agreement, the Registrant received (i) a release
from its guaranty of the obligations of the Nursery Corporations to the Bank
(ii) the agreement by Tuttle to indemnify the Registrant for any liability
related to the Registrant's guaranty of the loan obligations in the amount of
$2,300,000 owed by the Nursery Corporations to Farm Credit of South Florida
(iii) the agreement by Tuttle to assume certain obligations of the Registrant
and (iv) to pay up to $404,000 of certain obligations of the Nursery
Corporations.
On December 14, 1995, Registrant filed a Form 8-K which discussed their
changing of independent accountants from Weinick Sanders and Co. L.L.P. to the
accounting firm of Robinson Burdette Martin and Cowan L.L.P., as described in
that Form 8-K,. At the date of the change in accountants there were no
unresolved issues, scope restrictions, unanswered questions and/or
alternatively any disagreements with Weinick, Sanders and Co. L.L.P. on any
matter of accounting principles, practices, audit procedures, financial
statement disclosures and /or auditing procedures which were not resolved on
February 1, 1996. Registrant filed a Form 8-KA which attached thereto was a
letter from Weinick Sanders and Co. L.L.P. acknowledging their agreement with
the statement made in connection with their firm on the December 14, 1995 Form
8-K.
(c) Exhibits required by Item 601 of Regulation S-K are as follows:
Exhibit No. Name
(3) Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of Registrant, as amended,
filed as Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended November 30,
1992 and incorporated herein by reference.
3.2 By-Laws of Registrant, as amended, filed as Exhibit
3(ii) to the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1993 and
incorporated herein by reference.
3.3 By Laws of the Registrant, as amended.
(10) Material Contracts
10.1 Agreement between Diagnostic Sciences, Inc. and First Capital
Partners, effective January 6, 1989, filed as Exhibit (10)A
to the Annual Report on Form 10-K for the year ended November
30, 1990 (the "1990 10-K"), and incorporated herein by
reference.
10.2 Incentive Stock Option Plan of Diagnostic Science, Inc.,
filed as Exhibit (10)A to the 1990 Form 10-K, and
incorporated herein by reference.
10.3 Amendment, dated December 11, 1991, to the Agreement between
Diagnostic Sciences, Inc. and First Capital Advisers, Inc.
dated January 6, 1989, filed as the Exhibit to the Current
Report on Form 8-K dated December 16, 1991, and incorporated
herein by reference.
10.4 Agreement and Plan of Reorganization (the "Agreement and Plan
of Reorganization") made and entered into October 3, 1990, by
and between Diagnostic Sciences, Inc. and Sunshine
Botanicals, Inc., Interior Plant Supply, Inc. David Brian Hew
and Christopher Paul Carvalho, filed as Exhibit (10)A to the
March 15, 1991 Form 8-K and incorporated herein by reference.
10.5 Amendment, dated as of October 3, 1990, to the Agreement and
Plan of Reorganization, filed as Exhibit (10)C to the March
15, 1991 Form 8-K, and incorporated herein by reference.
10.6 IPS Agreement, dated February 28, 1991, filed as Exhibit
(10)P to the Current Report on March 15, 1991 Form 8-K, and
incorporated herein by reference.
10.7 Assignment and Assumption Agreement pursuant to Section 3.1
of the IPS Agreement, filed as Exhibit (10)Q to the March 15,
1991 Form 8-K, and incorporated herein by reference.
10.8 Employment Agreement by and among Sunshine and Carvalho, D.
Brian Hew, and FCA, dated February 28, 1991, filed as Exhibit
(10)AD to the March 15, 1991 Form 8-K, and incorporated
herein by reference.
10.10 Agreement and Plan of Merger, dated September 13, 1991, by
and among Diagnostic Sciences, Inc., Norton Drilling Company,
Sherman H. Norton, Jr., S. Howard Norton, III, J.P. Rose,
John W. Norton and Barbara L. Norton, filed as an Exhibit to
the Form 8, dated October 23, 1991, amending Current Report
on Form 8-K filed on October 7, 1991 (the "October 7, 1991
Form 8-K Amendment), and incorporated herein by reference.
10.11 Form of Employment Agreement entered into as of October 1,
1991 between Norton Drilling Company and each of Sherman H.
Norton, Jr., S. Howard Norton, III, J.P. Rose and John W.
Norton, filed as an Exhibit to the October 7, 1991 Form 8-K
Amendment, and incorporated herein by reference.
10.12 Letter of Agreement between Strategic Growth International
and Diagnostic Sciences, Inc. dated January 23, 1991, filed
as an Exhibit to the Registrant's 1992 Form 10K, and
incorporated herein by reference.
10.13 Consulting Agreement dated September 17, 1991 between the
Equity Group Inc., and the Registrant, filed as an Exhibit to
the Registrant's 1992 Form 10K, and incorporated herein by
reference.
10.14 Letter Agreement dated October 26, 1992 between Raphael S.
Grunfeld and the Registrant, filed as in Exhibit to the
Registrant's 1992 Form 10K, and incorporated herein by
reference.
10.15 Settlement Agreement dated as of July 9, 1993 between General
Electric Company, GE Medical Systems, DSI Industries, Inc.
and Lobell Corp., filed as Exhibit 1 to the Registrant's
Current Report on Form 8-K dated July 27, 1993 and
incorporated herein by reference.
10.16 Escrow Agreement dated as of July 9, 1993 between General
Electric Company, GE Medical Systems, DSI Industries, Inc.,
Lobell Corp., and Moritt, Mock and Hamroff filed as Exhibit
2 to the Registrant's Current Report on Form 8-K dated July
27, 1993 and incorporated herein by reference.
10.17 Subordinated Convertible Note dated May 19, 1993 issued by
Norton Drilling Company and DSI Industries, Inc. in favor of
Sherman H. Norton, Jr. filed as Exhibit 1 to the Registrant's
Current Report on Form 8-K dated June 2, 1993 and
incorporated herein by reference.
10.18 Subordinated Convertible Note Subscription Agreement dated as
of May 19, 1993, between Norton Drilling Company, DSI
Industries, Inc. and Sherman H. Norton, Jr. filed as Exhibit
2 to the Registrant's Current Report on Form 8-K dated June
2, 1993 and incorporated herein by reference.
10.19 Subordinated Convertible Note dated May 19, 1993 issued by
Norton Drilling Company and DSI Industries, Inc. in favor of
Johnie P. Rose filed as Exhibit 3 to the Registrant's Current
Report on Form 8-K dated June 2, 1993 and incorporated herein
by reference.
10.20 Subordinated Convertible Note Subscription Agreement dated as
of May 19, 1993, between Norton Drilling Company, DSI
Industries, Inc. and Johnie P. Rose filed as Exhibit 4 to the
Registrant's Current Report on Form 8-K dated June 2, 1993
and incorporated herein by reference.
10.21 Letter Agreement dated as of August 25, 1993 by and among
Gerry Angulo, First Capital Partners, First Capital Asset
Management Inc., First Capital Advisers Inc., F.S. Financial
Services Inc., DSI Industries, Inc., Sunny's Plants, Inc.,
Sunshine Botanicals, Inc., Interior Plant Supply, Inc.,
Norton Drilling Company, Lobell Corp., West Loop Investments,
Inc. and Paul Stache filed as Exhibit 1 to the Registrant's
Current Report on Form 8-K dated September 3, 1993 and
incorporated herein by reference.
10.22 Security Agreement dated as of January 6, 1995 between DSI
Industries, Inc. and The Plains National Bank of West Texas
filed as an Exhibit to the Registrant's 1994 Form 10-K and
incorporated herein by reference.
10.23 Guaranty Agreement dated as of January 6, 1995 between DSI
Industries, Inc. and The Plains National Bank of West Texas
filed as an Exhibit to the Registrant's 1994 Form 10-K and
incorporated herein by reference.
10.24 Promissory Note dated January 6, 1995 issued by DSI
Industries, Inc. and Norton Drilling Company in favor of The
Plains National Bank of West Texas in the amount of $350,000
filed as an Exhibit to the Registrant's 1994 Form 10-K and
incorporated herein by reference.
10.25 Promissory Note dated January 6, 1995 issued by Norton
Drilling Company in favor of The Plains National Bank of West
Texas in the amount of $650,000 filed as an Exhibit to the
Registrant's 1994 Form 10-K and incorporated herein by
reference.
10.26 Agreement for purchase of loan documents and collateral dated
as of August 24, 1995 by and among Sunshine Botanicals, Inc.,
Sunny's Plants, Inc., Interiorplant Supply, Inc., NationsBank
of Florida, N.A., and Tuttle's Design-Build, Inc.filed as an
Exhibit to the Registrant's Form 8-K dated September 6, 1995
and incorporated herein by reference.
10.27 Agreement by and between Tuttle's Design-Build, Inc. in favor
of Peter Hew, David Brian Hew and DSI Industries, Inc. dated
August 24, 1995 filed as an Exhibit to the Registrant's Form
8-K dated September 6, 1995 and incorporated herein by
reference.
10.28 Indemnification Agreement dated as of August 24, 1995 by and
between Tuttle's Design-Build, Inc., Brian Tuttle and Merja
Tuttle and DSI Industries, Inc. filed as an Exhibit to the
Registrant's Form 8-K dated September 6, 1995 and
incorporated herein by reference.
10.29 Agreement dated August 24, 1995 by Tuttle's Design Build,
Inc. in favor of DSI Industries, Inc. filed as an Exhibit to
the Registrant's Form 8-K dated September 6, 1995 and
incorporated herein by reference.
10.30 Form of Employment Agreement entered into as of December 1,
1995 between Norton Drilling Company and each of Sherman H.
Norton, Jr., S. Howard Norton, III, J.P.Rose and John W.
Norton.
(22) The subsidiaries of the Registrant are: Sunny's Plants, Inc., a Florida
corporation, (whose subsidiaries are: Sunshine Botanicals, Inc., a
Florida corporation, and Interior Plant Supply, Inc. a Florida
corporation),NortonDrilling Company, a Delaware corporation, and Lobell
Corp., a Delaware corporation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DSI INDUSTRIES, INC.
Dated: April 4, 1996 By: /s/ Sherman H. Norton, Jr.
Sherman H. Norton, Jr.
Chairman, Chief Executive Officer
and President, Director
Dated: April 4, 1996 By: /s/ David Ridley
David Ridley, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: April 4, 1996 By: /s/ D. Brian Hew
D. Brian Hew, Director
Dated: April 4, 1996 By: /s/ Harvey Bayard
Harvey Bayard, Director
Dated: April 4, 1996 By: /s/ Brian J. McDonald
Brian J. McDonald, Director
Dated: April 4, 1996 By: /s/ Kenneth Levy
Kenneth Levy, Director
Dated: April 4, 1996 By: /s/ Peter Hew
Peter Hew, Director
Dated: April 4, 1996 By: /s/ Robert Hew
Robert Hew, Director
Dated: April 4, 1996 By: /s/ S. Howard Norton
S. Howard Norton, III, Director
Dated: April 4, 1996 By: /s/ John William Norton
John William Norton, Director
DSI INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Reports of Independent Accountants
Robinson Burdette Martin & Cowan, L.L.P..........................F-2
Weinick Sanders & Co., L.L.P.....................................F-4
Financial Statements:
Consolidated Balance Sheets......................................F-6
Consolidated Statements of Operations............................F-8
Consolidated Statements of Stockholders' Equity..................F-10
Consolidated Statements of Cash Flows............................F-11
Notes to Consolidated Financial Statements.......................F-13
F-1<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
DSI Industries, Inc.
Lubbock, Texas
We have audited the accompanying consolidated balance sheet of DSI
Industries, Inc. and subsidiaries as of November 30, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, the
Company has recorded significant liabilities relating to obligations of
the Company's discontinued segments. Although the liabilities have been
recorded based on known claims against and obligations of the Company, it
is possible that such liabilities will be extinguished without payment
under management's planned courses of action. If the Company is successful
in the extinguishment of any part of these liabilities, there will be a
significant effect on the financial position of the Company.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of DSI
Industries, Inc. and Subsidiaries as of November 30, 1995, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred significant net
losses for the years ended November 30,1995 and 1994. As described in
Notes 1, 3 and 7 to the consolidated financial statements, the Company's
subsidiaries were not in compliance with certain terms of their debt,
capital and operating lease agreements and certain other creditors have
filed judgements in certain State courts to force these subsidiaries to
pay their obligations. As a result of the violations of debt and lease
agreements by the Company's subsidiaries, the holders of the debt may
declare the entire amount of such indebtedness due and payable immediately
which would result in cross-defaults under certain of the Company's and
its other subsidiary's debt instruments. Although the Company and its
remaining operating subsidiary are currently operating, the continuation
of such business as a going concern is contingent upon, among other
things, the ability of the Company to discharge the indebtedness of the
discontinued segments and the continued forbearance by the operating
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
(Continued)
subsidiary's creditors from exercising their rights in connection with
delinquent debt payments and defaults on debt covenants. Management has
indicated that part of its plan to meet its obligations might be to seek
protection from its creditors in bankruptcy court for the Company's
magnetic resonance imaging segment, and/or its nursery segment, and/or the
Company and all of its subsidiaries. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Robinson Burdette Martin & Cowan, L.L.P.
Lubbock, Texas
March 1, 1996
F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
DSI Industries, Inc.
We have audited the consolidated balance sheet of DSI Industries, Inc. and
subsidiaries as of November 30, 1994 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the two
years ended November 30, 1994 and 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DSI
Industries, Inc. and subsidiaries as at November 30, 1994, and the
results of its operations and its cash flows for the two years ended
November 30, 1994 and 1993 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred a significant net
loss for the year ended November 30, 1994. As described in Notes 1, 3 and
14, the Company's subsidiaries were not in compliance with certain terms
of their debt, capital lease and operating lease agreements and certain
other creditors have filed judgements in certain State courts to force
these subsidiaries to pay. As a result of the violations of debt and
lease agreements by the Company's subsidiaries, the holders of the debt
may declare the entire amount of such indebtedness due and payable
immediately which would result in cross-defaults under certain of the
Company's and its other subsidiary's debt instruments. In March 1995, a
lessor of a segment's operating premises, which had previously
discontinued its operations, executed a judgement against a subsidiary
evicting that subsidiary from its operating premises and forcing the
confiscation of certain of the subsidiary's assets in partial payment of
rent arrearage. On April 6, 1995, the Company discontinued its nursery
segment.
Although the Company and it remaining operating subsidiary are currently
operating their own businesses, the continuation of such business as a
going concern is contingent upon, among other things, the ability of the
Company to discharge the indebtedness of the discontinued segments and of
F-4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
(Continued)
the continued forbearance by the operating subsidiary's creditors from
exercising their rights in connection with delinquent debt payments and
defaults on debt covenants. Management has indicated that part of its
plan to meet its obligations might be to seek protection from its
creditors in bankruptcy court for the Company's magnetic resonances
imaging segment, and/or it nursery segment, and/or the Company and all of
its subsidiaries. These conditions, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
Weinick, Sanders & Co. LLP
New York, NY
February 1, 1995 (Except as to portions of Notes
1, 3 and 7 as to which the date is April 7, 1995)
F-5
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
November 30,
1995 1994
Current assets:
Cash and cash equivalents $ 283,055 $ 76,342
Accounts receivable, trade, less allowance
for doubtful accounts of $90,000 and $6,000 2,171,187 2,944,583
Litigation receivable - - 233,479
Costs and estimated earnings in excess
of billings on uncompleted contracts 518,529 190,465
Insurance proceeds recoverable 682,661 - -
Prepaid expenses and other current assets 233,007 277,859
Total current assets 3,888,439 3,722,728
Property and equipment, at cost, net
of accumulated depreciation and depletion 7,410,612 7,453,979
Goodwill, net of accumulated amortization
of $396,910 and $301,650 as of November 30,
1995 and 1994, respectively 1,507,587 1,602,847
Security deposits 197,745 226,650
Other assets 78 992
Total assets $13,004,461 $13,007,196
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,
1995 1994
Current liabilities:
Current maturities of notes payable $ 2,661,391 $ 892,606
Accounts payable 3,957,514 4,122,335
Billings in excess of costs of uncompleted
contracts - - 19,483
Accrued expenses and other current liabilities 794,084 873,421
Net liabilities of discontinued operations 3,515,040 1,940,417
Total current liabilities 10,928,029 7,848,262
Notes payable, less current maturities 763,738 1,587,248
Total long-term obligations 763,738 1,587,248
Commitments and contingencies - - - -
Stockholders' equity:
Common stock-par value $.01; authorized-
100,000,000 shares, issued and outstanding-
23,693,365 shares and 22,610,269 shares in
1995 and 1994, respectively 236,934 226,103
Additional paid-in capital 9,718,928 9,594,372
Accumulated deficit (8,643,168) (6,248,789)
Total stockholders' equity 1,312,694 3,571,686
Total liabilities and stockholders' equity $13,004,461 $13,007,196
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended November 30,
1995 1994 1993
Operating revenues:
Contract drilling revenues $20,613,287 $21,110,439 $21,552,418
Other 32,470 11,446 10,997
Total operating revenues 20,645,757 21,121,885 21,563,415
Operating costs and expenses:
Direct drilling costs 18,860,006 18,787,362 19,290,598
General and administrative 978,080 948,185 922,719
Depreciation, depletion and
amortization 1,223,384 1,141,658 1,099,561
Other 183,348 51,666 7,291
Total operating costs and
expenses 21,244,818 20,928,871 21,320,169
Operating income (loss) ( 599,061) 193,014 243,246
Other income (expense):
Net gain on sale of assets 111,165 1,235 - -
Interest expense ( 398,896)( 405,934) ( 288,421)
Interest income - - 27,409 51,137
Estimated loss on idle
equipment - - ( 189,968) - -
Other 18,473 205,736 - -
Total other expenses, net ( 269,258)( 361,522) ( 237,284)
Income (loss) before provision
for income taxes, discontinued
operations and extraordinary
item ( 868,319)( 168,508) 5,962
Income taxes:
Current - - 161,000 1,159
Deferred tax expense (benefit) - - ( 151,000) 10,200
Income tax expense - - 10,000 11,359
Loss from continuing operations ( 868,319)( 178,508) ( 5,397)
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax
effect of $-0-, $(1,392,873)
and $288,926 - - ( 2,570,829) 167,976
Estimated loss on disposal ( 1,526,060)( 3,750,000) - -
Income (loss) from discontinued
operations before
extraordinary item ( 1,526,060)( 6,320,829) 167,976
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Year ended November 30,
1995 1994 1993
Income (loss) before
extraordinary item ( 2,394,379)( 6,499,337) 162,579
Extraordinary item:
Gain on extinguishment of
debt, net of income taxes
of $578,000 - - - - 985,098
Net income (loss) $( 2,394,379)$( 6,499,337)$ 1,147,677
Per share data:
Loss from continuing
operations $(.04) $(.01) $(- -)
Income (loss) from
discontinued operations (.07) (.28) .01
Extraordinary item - - - - .04
Net income (loss) $(.11) $(.29) $ .05
Weighted average number of
common shares outstanding 22,761,606 22,498,801 22,529,229
The accompanying notes are an integral part of these consolidated financial
statements.
F-9<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained
Additional Earnings/ Total
Common Stock Paid In (Accumulated Stockholders'
Shares Par Value Capital Deficit) Equity
Balance,
November 30, 1992 22,418,250 $224,182 $9,412,322 $( 897,129) $8,739,375
Net income - - - - - - 1,147,677 1,147,677
Balance,
November 30, 1993 22,418,250 224,182 9,412,322 250,548 9,887,052
Exercise of stock
options 27,000 270 5,637 - - 5,907
Shares issued to
purchase minority
interest in
subsidiary 165,019 1,651 176,413 - - 178,064
Net loss - - - - - - (6,499,337) (6,499,337)
Balance,
November 30, 1994 22,610,269 226,103 9,594,372 (6,248,789) 3,571,686
Shares issued in
satisfaction of
subsidiary
obligation 1,083,096 10,831 124,556 - - 135,387
Net loss - - - - - - (2,394,379) (2,394,379)
Balance,
November 30, 1995 23,693,365 $236,934 $9,718,928 $(8,643,168) $1,312,694
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended November 30,
1995 1994 1993
Cash flows from operating activities:
Net income (loss) $(2,394,379) $(6,499,337)$ 1,147,677
Adjustments to reconcile net
income (loss) to net cash used
in operating activities of
continuing operations:
Discontinued operations 1,526,060 3,750,000 - -
Depreciation, depletion and
amortization 1,223,384 1,141,658 1,589,546
Extraordinary gain - - - - ( 985,098)
Estimated loss on idle
equipment - - 189,968 - -
Gain on sale of assets ( 111,165) ( 1,235) - -
Reduction in goodwill
attributable to discontinued
segments - - 712,987 - -
Non-cash changes in assets and
liabilities of discontinued
segments - - 184,316 - -
Increase (decrease) in cash
flows as a result of changes
in operating asset and
liability account balances:
Accounts receivable-trade 773,396 740,620 (1,760,253)
Accounts receivable-affiliates - - - - 252,050
Insurance proceeds recoverable ( 682,661) - - 144,419
Litigation proceeds receivable 233,479 ( 233,479) - -
Net costs and estimated earnings
in excess of billings on
uncompleted contracts ( 347,547) 546,647 ( 330,454)
Inventory - - - - (3,056,623)
Prepaid and deferred income taxes - - 88,591 87,608
Prepaid expenses and other
current assets 44,852 52,304 ( 50,779)
Other current assets - - ( 20,938) ( 78,815)
Accounts payable ( 164,821) 411,612 2,974,240
Accrued expenses and other
current liabilities ( 79,338) 244,347 ( 374,681)
Deferred income taxes payable - - (1,540,802) 85,338
Deferred rent payable - - - - 19,990
Net cash provided by (used
in) continuing operations 21,260 ( 232,741)( 335,835)
Net cash used in
discontinued operations ( 116,050) - - - -
Net cash used in operating
activities ( 94,790) ( 232,741)( 335,835)
Cash flows from investing activities:
Proceeds from sale of property
and equipment 182,530 14,727 - -
Acquisition of property and
equipment (1,012,254) ( 551,616) (3,946,012)
Investing activities of
discontinued operations - - 6,365,383 - -
Other 29,819 - - - -
(Continued)
The accompanying notes are an integral part of these consolidated
financial statements.
F-11
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year ended November 30,
1995 1994 1993
Net cash provided by (used in)
investing activities ( 799,905) 5,828,494 (3,946,012)
Cash flows from financing activities:
Proceeds from notes payable 1,259,171 35,144 4,853,428
Financing activities of
discontinued operations - - (5,128,476) - -
Proceeds from (repayments of)
revolving line of credit, net 545,000 ( 286,352) 2,176,682
Repayments of notes payable ( 702,763) ( 334,634) (4,469,081)
Proceeds from issuance of
common stock - - 5,907 - -
Net cash provided by (used in)
financing activities 1,101,408 (5,708,411) 2,561,029
Net increase (decrease) in
cash, cash equivalents and
cash overdrafts 206,713 ( 112,658) (1,720,818)
Cash and cash equivalents at
beginning of year 76,342 109,204 1,830,022
Cash overdraft of discontinued
segments - - 79,796 - -
Cash and cash equivalents at end
of year $ 283,055 $ 76,342 $ 109,204
Supplemental disclosures of cash flows information:
Cash paid during the year:
Interest $ 358,280 $ 313,233 $ - -
Income taxes $ 22,315 $ 346,140 $ - -
Supplemental Schedule of Non-cash Investing and Financing Activities:
During 1995, 1,083,096 shares of common stock were issued in
satisfaction of outstanding debt of a discontinued segment in the amount
of $135,387
During 1995, 1994 and 1993, the Company acquired property and
equipment in connection with capital lease arrangements in the amount of
$142,371, $43,060 and $328,961, respectively.
In connection with the transfer and disposition of certain assets
and liabilities during 1995, a note payable recorded in continuing
operations was assumed by the purchaser/transferee.
During 1995 several noncash activities occurred with regard to the
Company's discontinuance of certain of its business segments. See Note 3.
During 1994, 165,019 shares of common stock were issued in
connection with the purchase of a minority interest in a discontinued
operating subsidiary.
The accompanying notes are an integral part of these consolidated
financial statements.
F-12
DSI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REALIZATION OF ASSETS - GOING CONCERN
The accompanying consolidated financial statements have been
prepared in contemplation of continuation of DSI Industries, Inc.
("DSI") as a going concern. DSI, in particular its nursery and magnetic
resonance imaging segments, have sustained substantial losses from
operations. Management on August 18, 1994 discontinued its magnetic
resonance imaging segment due to the segment's recurring losses.
Management discontinued the nursery segment due to the significant
losses incurred by it commencing in the third quarter of 1994 through
April 6, 1995, the date the Board of Directors voted to discontinue the
segment. The accompanying consolidated financial statements reflect
these segments as discontinued operations.
The accompanying consolidated financial statements reflect a
working capital deficiency of approximately $7,040,000 at November 30,
1995 of which $3,525,000 is attributable to DSI and its remaining
operating subsidiary, Norton Drilling Company ("Norton"). The estimated
liabilities of the discontinued segments exceed the assets of these
segments by $3,515,000. DSI is a holding company and accordingly does
not generate operating revenues. All costs and expenses of DSI have
previously been funded by charging the operating segments management
fees. As management fees have diminished due to the discontinuance of
the aforementioned segments, DSI will require increased funding from
Norton for its expenses as well as the extinguishment of the liabilities
of the discontinued segments.
Norton's agreements with its secured creditors prohibit virtually
any loans, dividends, advances, guarantee of indebtedness or payments
to DSI or its subsidiaries. At November 30, 1995, Norton was in
violation of some of the restrictive covenants with these secured
creditors. Waiver by the lender of such violations has been received
through May 1, 1996. The Company has obtained a 90 day extension on its
obligations which originally matured April 1, 1996 and anticipates
renewal at the end of the 90 day period. Management is of the opinion
that Norton will be able to continue as a going concern if DSI is
successful in restructuring the indebtedness of its discontinued
operations.
DSI's limited ability to obtain funds and its inability to obtain
adequate financing to meet its obligations and the obligations of its
discontinued segments raises substantial doubt concerning the ability
of DSI to realize the benefits of its assets and satisfy its
liabilities as they mature in the ordinary course of business. Unless
management's current negotiations with the creditors of the discontinued
segments to restructure the debts are successful, DSI may have to cause
these subsidiaries to seek protection from their creditors under the
bankruptcy laws of the United States. Due to cross-corporate
guarantees between DSI and its subsidiaries, the possible filing of such
petition in bankruptcy court could cause DSI, and possibly Norton, to
also seek protection in bankruptcy court.
F-13<PAGE>
1. REALIZATION OF ASSETS - GOING CONCERN (Continued)
These conditions, among others, raise substantial doubt about DSI's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should DSI
be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Historical overview
DSI was organized on December 21, 1983 to establish private
radiological office centers to which it would provide financial and
non-medical management services. DSI's then 90% owned subsidiary, Lobell
Corp. ("Lobell"), also referred to as the MRI Segment, opened a
magnetic resonance imaging center in August 1986. On June 30, 1994, DSI
issued 165,019 shares of its common stock for which it acquired the
remaining 10% of Lobell and cash and trade accounts receivable of
$178,063. On August 18, 1994 management determined to discontinue the
operations of this segment in light of its recurring operating losses
(see Note 3).
On February 28, 1991, Sunny's Plants, Inc. ("Sunny's"), a wholly
owned subsidiary of DSI, also referred to as the Nursery Segment,
acquired all of the assets and assumed certain obligations of Interior
Plant Supply Partnership, all of the outstanding shares of Sunshine
Botanicals, Inc., all of the outstanding capital stock of Interior
Plant Supply, Inc., and certain real property from the previous owners
of the three above mentioned entities. Effective November 30, 1994
management determined to discontinue the operations of this segment due
to the significant losses incurred by it through that date (see Note 3).
DSI incorporated a wholly-owned subsidiary under the laws of the
State of Delaware on August 30, 1991 which acquired the capital stock
of Norton Drilling Company ("NDC"), a Texas corporation, on October 1,
1991 and simultaneously merged NDC into Norton. Norton currently
operates thirteen (13) oil and gas drilling rigs in Texas, New Mexico,
Utah, Colorado and Wyoming as an independent drilling contractor.
Principles of consolidation
The consolidated financial statements include the accounts of DSI
and it wholly-owned subsidiary, Norton (sometimes collectively referred
to as the "Company") as continuing operations and the accounts of
Sunny's and Lobell, as discontinued operations. The consolidated
statement of operations for the
F-14
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
year ended November 30, 1993 has been restated to reflect Sunny's and
Lobell as discontinued operations. All significant intercompany
accounts and transactions have been eliminated.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash equivalents
The Company considers all highly liquid debt instruments purchased
with original maturities of three months or less to be cash equivalents.
Revenue and cost recognition
Contract drilling revenues are recognized utilizing the percentage
of completion method. Accordingly, income is recognized in the ratio
that contract costs incurred bears to estimated total contract costs.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and
administrative costs are charged to income as incurred. Expected losses
on incomplete contracts are recognized in the period the loss can
reasonably be determined.
Property and equipment
Expenditures for additions and significant betterments are
capitalized at cost. Labor costs incurred in constructing or improving
certain assets are capitalized in the respective property and equipment
accounts. Minor repairs and maintenance are expensed as incurred.
Depreciation is computed on each individual asset under the
straight-line method at rates adequate to depreciate the cost of the
applicable assets over their estimated useful lives of 3 to 20 years.
The Company follows the successful efforts method of accounting for
its oil and gas producing properties. Under the successful efforts
method of accounting, costs which result directly in the discovery of
oil and gas reserves and all development costs are capitalized.
Exploration costs which do not result directly in discovering oil and
gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease acquisition costs, intangible development costs and
lease and well equipment, are depreciated using the straight line
method which is deemed by management to approximate units-of-
F-15
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
production. Oil and gas reserve estimates cannot be reasonably
estimated, and production volumes are minimal, therefore, depletion and
amortization of producing properties have not been computed.
The Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Preliminary analysis of this new standard by
management indicates that the standard will not have a material impact
on the Company. The standard is effective for financial statements for
fiscal years beginning after December 15, 1995.
Income taxes
Income taxes are provided based on earnings reported for financial
statement purposes. The provision for income taxes differs from the
amounts currently payable because of temporary differences in the
recognition of certain income and expense items for financial reporting
and tax reporting purposes.
DSI and its subsidiaries adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") effective
December 1, 1993, the beginning of its 1993 fiscal year and did not
retroactively apply the provisions of SFAS 109 prior to that date. SFAS
109 requires the asset and liability approach be used to account for
income taxes. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between financial
statement and tax basis of assets and liabilities using enacted rates
in effect for the year in which the differences are expected to reverse.
Tax assets (net of a valuation allowance) primarily result from net
operating loss carryforwards, certain accrued but unpaid insurance
losses, unpaid state income taxes, alternative minimum tax credit
carryforwards and investment tax credit carryforwards.
The cumulative effect as of December 1, 1993, of adopting this new
accounting standard was not material to the financial position of DSI.
Also, there was no material impact on the statement of income for the
year ended November 30, 1993.
DSI files a consolidated Federal income tax return.
Goodwill
The excess of cost of the acquisition of the drilling segment over
the fair market value of the net assets of the segment at the date of
acquisition has been included in the consolidated financial statements
as goodwill and is being amortized on the straight-line method over 20
years.
F-16
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (loss) per common share
Net loss per common share for 1995 has been computed using the
weighted average number of common shares outstanding for that year.
Common stock equivalents are excluded for 1995 because their effect is
antidilutive.
Primary net income (loss) per common and common equivalent share
for 1994 and 1993 has been computed based on the weighted average number
of common shares outstanding during each of those years and on the net
additional number of shares which would be issuable upon the exercise
of warrants and stock options, assuming that the Company used the
proceeds received to purchase additional shares at market value.
Fully diluted earnings per share amounts for 1993 are based on an
increased number of shares that would be outstanding assuming conversion
of the subordinated convertible notes payable to affiliates. For
purposes of the fully diluted computations, the number of shares that
would be issued from the exercise of the warrants and the stock options
has been reduced by the number of shares which could have been purchased
from the proceeds at the market price of the Company's stock on November
30, 1993 because those prices were higher than the average market prices
during that year. Net income for fiscal 1993 has been adjusted for
interest expense (net of income tax effect) on the convertible debt.
Fully dilutive data for fiscal 1995 and 1994 is not shown as it was
anti-dilutive.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993
consolidated financial statements in order for them to conform with the
1995 presentation. The reclassifications had no effect on net
income(loss) or stockholders' equity for those years.
3. DISCONTINUED OPERATIONS
On August 18, 1994, DSI discontinued the MRI Segment due to
recurring losses experienced by the segment. Accordingly, management
estimated future costs and expenses to dispose of the segment resulting
in a $750,000 charge to operations in fiscal 1994. During 1995, certain
assets and liabilities considered in management's previous estimate were
either foreclosed, garnished or confiscated resulting in full or partial
extinguishment of the underlying liabilities. As a result, management
revised its initial estimate to consider final settlement of remaining
obligations of the segment. Such revisions resulted in a $668,200
credit to the provision for loss for the discontinued segment in 1995.
The remaining net
F-17
3. DISCONTINUED OPERATIONS (Continued)
liabilities of the segment relate to claims filed by the segment's
former landlord for past due rent and obligations remaining under a
capital lease obligation. Management is currently of the opinion that
if negotiations with the remaining creditors, principally consisting of
the former landlord and lessee, are not successful in settling their
obligations, DSI will cause the segment to seek protection from the
creditors under bankruptcy proceedings. It is possible that final
settlement will result in the payment of significantly less than amounts
currently recorded as liabilities which could result in a significant
gain realized in the reversal of such recorded liabilities. Management's
estimate of the potential gain is between approximately $68,000 and
$468,000.
Effective November 30, 1994, DSI discontinued the Nursery Segment
due to significant operating losses incurred by that segment beginning
in 1994. The accompanying financial statements for 1994 retroactively
reflect management's decision to discontinue this segment and a charge
to operations of $3,000,000 for the estimated loss to be incurred in
disposing of the segment and the estimated losses incurred from November
30, 1994 through April 6, 1995.
In August, 1995 the Nursery Segment and DSI entered into agreements
with two of its secured creditors, both of whom are banks, and an
unrelated third party (purchaser) in which the purchaser acquired the
collateralized debt of one bank and immediately foreclosed on the debt.
The segment surrendered to the purchaser all of the assets
collateralizing this indebtedness on September 6, 1995. The purchaser
took title to assets with a basis of $4,265,000, before the 1994
writedown to net realizable value, in exchange for extinguishment of
$1,293,000 in collateralized debt plus assumption by the purchaser of
a $330,000 note payable and the purchaser's guarantee to indemnify the
segment and DSI for its liabilities to certain other creditors in an
amount not to exceed $404,000. The bank has released DSI from its
guarantee of this obligation but DSI remains liable as guarantor for the
$330,000 note payable until the purchaser has fully satisfied the
obligation.
The agreement with the other secured bank requires the purchaser to
repay the outstanding balance of a mortgage note in the amount of
$2,128,000 which was collateralized by the segment's real property which
had a basis of $1,465,000, before the 1994 writedown to net realizable
value. DSI will remain liable as guarantor for this indebtedness until
the purchaser has fully satisfied this obligation.
Upon completion of those transactions, an additional charge to
operations in 1995 of $2,194,000 was made to reflect revised estimates
of the ultimate loss to be incurred in disposing of this segment. The
additional charge was primarily due to greater than expected losses from
the final wind down of operations of the segment and lower than expected
net realized values of property and equipment upon completion of the
F-18
3. DISCONTINUED OPERATIONS (Continued)
aforementioned transactions. The remaining net liability includes
significant amounts owed to numerous creditors as well as the estimated
future costs and expenses of disposal. Management is currently of the
opinion that if negotiations with such creditors are not successful in
settling the segment's obligations DSI will cause the segment to seek
protection from the creditors under bankruptcy proceedings. Should such
protection be perfected, extinguishment of the liabilities could occur
without payment which would result in a significant gain realized in the
reversal of the reserve for loss. Management's estimate of the
potential gain is between approximately $1,979,000 and $2,862,000.
There can be no certainty that any or all of the possible gains in
the MRI Segment or the Nursery Segment will ever be realized. Their
ultimate realization is dependent on a number of factors including, but
not limited to, the dissolution of the underlying subsidiaries without
liability or payment thereof extending to the continuing operations of
the Company, or the extinguishment of existing liabilities under Federal
bankruptcy laws. While management believes either of the two courses of
action will relieve the segments of their obligations and result in
gains, there can be no certainty of such due to potential rights of
creditors under applicable state laws and/or the intricacies of meeting
the technical requirement of Federal bankruptcy laws. Because of the
inherent problems which could arise under either course of action, the
outcome is subject to many issues which are outside the control of
management and therefore, the amount of liabilities that may be
extinguished and the possible resulting gain, if any, that would be
recognized is uncertain at this time.
The consolidated results of operations of the discontinued segments
for the year ended November 30, 1995, 1994 and 1993 are as follows:
1995 1994 1993
Revenues $ - - $11,047,000 $7,811,902
Costs and expenses - - 15,010,702 7,355,000
Provision for loss on
disposal 1,526,060 3,750,000 - -
Income (loss) before
income taxes (1,526,060) ( 7,713,702) 459,902
Provision (credit) for
income taxes - - ( 1,392,873) 288,926
$(1,526,060) $( 6,320,829) $ 167,976
F-19
3. DISCONTINUED OPERATIONS (Continued)
The net liabilities of the discontinued operations at November 30,
1995 and 1994 are as follows:
1995 1994
Current assets $ - - $ 4,093,000
Property assets and capital leases - - 6,906,000
Other assets - - 167,000
- - 11,166,000
Notes payable and capital lease
obligations 1,106,207 7,364,417
Cash overdraft - - 123,000
Accounts payable and other liabilities 2,253,833 2,499,000
Estimated loss on disposal of segments 155,000 3,120,000
3,515,040 13,106,417
Net consolidated liabilities of
discontinued segments $(3,515,040) $( 1,940,417)
As of January 26, 1996, the subsidiaries of DSI which comprise the
discontinued Nursery Segment were defendants in 24 actions seeking payment
of past liabilities owed to suppliers, lessors and other creditors of the
Nursery Segment. Such actions, in which damages aggregating in excess of
$611,000 are sought, have been brought in Dade, Orange, Palm Beach, Lake
and Broward counties in Florida. The Nursery Segment does not intend to
contest such claims.
4. SIGNIFICANT OCCURRENCES
Extraordinary gain - Extinguishment of indebtedness
Prior to May 1993, the Company's drilling segment's operating
subsidiary, Norton, was obligated to a bank under two installment notes,
one of which was non-recourse. The notes were collateralized by, among
other things, the Company's accounts receivable, inventory, drilling rigs
and equipment. In May 1993, the bank accepted $2,825,000 as full and
final payment for the outstanding indebtedness to it which aggregated
$4,388,098, resulting in a gain on extinguishment of indebtedness of
$1,563,098. These notes were paid by $125,000 in cash and by the
Company's incurrence of new indebtedness (see Note 7) as follows:
Two installment notes payable to a bank;
equal monthly installments of $18,750 plus
interest at prime plus 3.5% $1,400,000
F-20
4. SIGNIFICANT OCCURRENCES (Continued)
Revolving draw note from above bank up to a
maximum of $500,000 which bears interest
at prime plus 3.5% 500,000
Installment note payable to a bank payable in
equal monthly installment of $6,083 including
interest at 8% through October 1998 300,000
Subordinated convertible notes payable to two
officers of Norton and stockholders of the
Registrant in the amounts of $410,000 and $90,000 500,000
$2,700,000
Litigation settlement
Norton was a party in a class action as a plaintiff against certain
suppliers to the oil and gas contract drilling industry for alleged price
collusion in the late 1980's. In 1994, the action was settled and Norton
was awarded $233,479 in full and final settlement which was received by
Norton in 1995. The accompanying consolidated statements of operations
include this settlement in other income for fiscal 1994.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information relating to uncompleted contracts at November 30, 1995
and 1994 are as follows:
1995 1994
Costs incurred on uncompleted
contracts $ 427,008 $ 843,505
Estimated earnings on uncompleted
contracts 280,774 68,549
707,782 912,054
Less billings to date on uncompleted
contracts 189,253 741,072
$ 518,529 $ 170,982
F-21
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (Continued)
Included in the accompanying balance sheets at November 30, 1995 and 1994
are the following captions:
1995 1994
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 518,529 $ 190,465
Billings in excess of costs and
estimated earnings on uncompleted
contracts - - 19,483
$ 518,529 $ 170,982
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at November 30, 1995 and
1994:
1995 1994
Land $ 83,560 $ 75,000
Building 182,250 75,000
Drilling equipment 10,283,530 9,390,820
Transportation equipment 728,109 639,205
Office furniture and equipment 46,506 41,006
Oil and gas properties, lease and
well equipment 250,618 107,084
Miscellaneous equipment 17,583 17,583
11,592,156 10,345,698
Less accumulated depreciation,
depletion and amortization 4,181,544 2,891,719
$ 7,410,612 $ 7,453,979
F-22
7. NOTES PAYABLE
Notes payable consisted of the following at November 30, 1995 and 1994:
1995 1994
Demand note payable entered into May,
1993, in the original amount of
$1,000,000 with The Plains National
Bank of West Texas; 34 monthly
installments of $12,000 including
interest at 3.5% over the bank's prime
rate (8.75% at November 30, 1995)
through March 1996 with remaining
unpaid principal and interest due at
maturity, April 1, 1996;
collateralized by ten drilling rigs,
accounts receivable and other equipment. $ 640,000 $ 784,000
Demand note payable entered into May,
1993, in the original amount of $400,000
with The Plains National Bank of West
Texas; 34 monthly installments of $6,750
including interest at 3.5% over the
bank's prime rate (8.75% at November 30,
1995) through March 1996 with remaining
unpaid principal and interest due at
maturity, April 1, 1996; collateralized
by three drilling rigs, accounts
receivable and other equipment. 197,500 278,500
Demand note payable entered into
January 6, 1995, in the original amount
of $350,000 with The Plains National Bank
of West Texas; 14 monthly installments of
$4,175 including interest at 3.5% over
Wall Street Journal prime rate (8.75% at
November 30, 1995) through March 1996 with
remaining unpaid principal and interest
due at maturity, April 1, 1996;
collateralized by 1,000 shares of Norton
stock, accounts receivable and certain
drilling equipment. 316,600 - -
Demand note payable entered into
January 6, 1995, in the original amount
of $650,000 with The Plains National Bank
of West Texas; 14 monthly installments of
$7,750 including interest at 3.5% over
Wall Street Journal prime rate (8.75% at
November 30, 1995) through March 1996 with
remaining unpaid principal and interest
due at maturity, April 1, 1996;
F-23
7. NOTES PAYABLE (Continued)
1995 1994
collateralized by 1,000 shares of Norton
stock, accounts receivable and certain
drilling equipment. 588,000 - -
Line of credit with The Plains National
Bank of West Texas entered into May, 1993
with original facility of $500,000. The
line of credit was renewed and increased
to $750,000 in April, 1994; monthly
payments of interest only at the Wall
Street Journal prime rate (8.75% at
November 30, 1995) plus 3.5% with unpaid
principal and interest due at maturity,
April 1, 1996; collateralized by virtually
all assets of Norton. 650,000 - -
Note payable entered into October, 1993,
in the original amount of $300,000 with
South Plains Bank of Levelland, Texas;
60 monthly installments of $6,083
including interest at 2% above New York
prime (8.75% at November 30, 1995),
collateralized with a first lien on a
single drilling rig including all
equipment and revenues derived therefrom
and a second lien on all other accounts
receivable, inventory and drilling
equipment. 199,887 248,098
Uncollateralized financing agreement
entered into with Transamerica Insurance
Finance during July 1995 providing
financing for a portion of Norton's
insurance premiums totaling $206,140; 9
monthly payments of $23,616 including
interest at 7.40% 115,937 - -
Note payable entered into June 12, 1995
in the original amount of $54,900 with
First State Bank of Hubbard, Texas; 151
monthly payments of $657 plus interest
at 10.5% until June 12, 1996. On
June 12, 1996 and on June 12th of each
year thereafter the interest rate shall
be 1.5% over The Wall Street Journal
prime rate on such date with remaining
unpaid principal and interest due at
F-24
7. NOTES PAYABLE (Continued)
1995 1994
maturity on June 12, 2008; collateralized
by a five acre tract in Hockley County,
Texas 53,856 - -
Subordinated convertible notes payable
dated May, 1993 to certain officers of
Norton in the original amounts of
$410,000 and $90,000 with monthly
payments of interest at a rate consistent
with the prime rate of The Plains
National Bank of West Texas (8.75% at
November 30, 1995); principal and any
unpaid interest due at maturity,
May 18, 1998. Notes contain certain
redemption and conversion features. See
notes 12 and 13 to the consolidated
financial statements. 500,000 500,000
Other notes payable 163,349 669,256
3,425,129 2,479,854
Less current maturities 2,661,391 892,606
$ 763,738 $1,587,248
In addition to the specific collateralization discussed above, the
indebtedness to The Plains National Bank of West Texas is further
collateralized by a personal guaranty of the Chairman of the Board of
DSI and the line of credit is also guaranteed by a corporate guaranty
of DSI.
The weighted average interest rate on short term indebtedness
during fiscal 1995 and 1994 was 12.3% and 8.9%, respectively.
The aforementioned obligations contain a number of representations,
warranties and covenants, the breach of which, at the election of the
respective lender would accelerate the maturity date of the obligations.
The most restrictive covenants include:
-Maintenance by Norton of a tangible net worth of at least $4,500,000,
-Maintenance by Norton of sufficient profitability and cash flow to
service the debt obligations to the lender and others as they become
due and payable,
-Norton shall not involve itself in significant capital acquisitions,
nor shall it sale, transfer, impair or otherwise encumber underlying
collateral without prior written consent of the lender; and
-Norton shall not pay dividends or make loans to others without prior
written consent of the lender.
F-25
7. NOTES PAYABLE (Continued)
Norton is in violation of certain covenants of the debt agreements
with The Plains National Bank of West Texas. Waiver by the lender of
such violations has been received through May 1, 1996. The Company has
obtained a 90 day extension on its obligations which originally matured
April 1, 1996 and anticipates renewal at the end of the 90 day period.
The related obligations have been classified as current liabilities in
the 1995 consolidated financial statements.
Aggregate amounts of annual maturities of notes payable outstanding
at November 30, 1995 are as follows:
Years Ending
November 30,
1996 $2,661,391
1997 112,273
1998 602,747
1999 5,868
2000 3,547
Thereafter 39,303
$3,425,129
8. EMPLOYEE BENEFIT PLANS
Retirement plans
Norton has a defined contribution profit sharing plan (the "Plan")
which covers all qualified employees. Contributions to the Plan are at
the discretion of Norton's Board of Directors. There have been no
contributions made to the Plan since its inception on January 1, 1988.
Health care costs
Norton maintains a self- insurance program for health care
costs. Self-insurance retention is $25,000 per employee and an
aggregate of $164,113 per year. Liabilities in excess of these amounts
are the responsibility of the co-insurance carrier. Included in accrued
expenses at November 30, 1995 and 1994 are the estimated liabilities
owned under this self-insurance program in the amount of $15,652 and
$18,495, respectively.
F-26
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the
following at November 30, 1995 and 1994:
1995 1994
Payroll payable $530,145 $566,368
Payroll and other taxes payable 137,268 102,965
Accrued interest 35,543 25,752
Estimated workers' compensation
co-insurance payable 75,476 159,840
Estimated employee medical benefits
co-insurance payable 15,652 18,496
$794,084 $873,421
10. INCOME TAXES
The provision for income taxes for the years ended November 30, 1995,
1994 and 1993 consists of the following:
1995 1994 1993
Federal:
Current $ - - $ 75,000 $( 4,686)
Deferred income tax
(benefit) - - (75,000) 10,200
- - - - 5,514
State:
Current - - 86,000 5,845
Deferred - - (76,000) - -
- - 10,000 5,845
Total income tax expense $ - - $ 10,000 $ 11,359
The effective income tax rate varies from the Federal statutory rate
for the years ended November 30, 1995, 1994 and 1993 as follows:
1995 1994 1993
Statutory tax rate (34.0)% (34.0)% (34.0)%
Net operating loss carryforward 16.9 - - (605.3)
State and local taxes 3.0 5.9 98.0
Amortization of goodwill 11.0 21.7 613.5
Officer life insurance premiums 2.4 - - - -
Cumulative effect of change in
federal tax law for intangible
tax deductions - - - - (608.9)
Accounting losses for which deferred
income cannot be recoginzed - - - - 659.2
Inability to utilize operating loss
carryforward for state income
tax purposes - - 12.3 - -
Other 0.7 - - - -
Effective tax rate - -% 5.9% 122.5%
F-27
10. INCOME TAXES (Continued)
As of November 30, 1995, the total deferred tax asset valuation
allowance of approximately $3,045,000 was substantially due to net
operating loss ("NOL") carryforwards which were not expected to be
utilized before the expiration date. Moreover, DSI is unable to determine
the amount of benefits that would more likely than not be realized for
utilization of these NOL's.
The tax effect of significant temporary differences representing
deferred tax assets and changes therein for continuing operations were as
follows:
December 1, November 30,
1994 Net Change 1995
Deferred tax assets:
Net operating loss
carryforward $1,738,018 $1,935,682 $ 3,673,700
Accruals related to
self-insurance 6,288 24,695 30,983
State and local tax
benefit 34,918 ( 5,304) 29,614
1,779,224 1,955,073 3,734,297
Valuation allowance ( 997,057) (2,048,010) (3,045,067)
Deferred tax asset 782,167 ( 92,937) 689,230
Deferred tax liabilities:
Property and equipment
basis difference ( 782,167) 92,937 ( 689,230)
Net deferred tax asset $ - - $ - - $ - -
For tax return purposes, DSI had tax NOL carryforwards of approximately
$10,805,000 at November 30, 1995. If unused, the aforementioned tax NOL
carryforwards will expire in various amounts in years 1998 to 2010.
F-28
10. INCOME TAXES (Continued)
Deferred tax provision (benefit) in 1994 and 1993 results from
differences in the recognition of expense for tax and financial statement
purposes. The sources of these differences and the tax effect of each are
as follows:
1994 1993
Excess of tax over book depreciation
and estimated loss on idle equipment $ 51,400 $ 60,100
Accruals related to self-insurance ( 7,700) 16,600
Excess tax deductible expenses over
book expenses utilizing cash method
of reporting for tax purposes (1,239,100) 234,800
Estimated loss on disposal of segments (1,275,000) - -
Cumulative effect of change in federal
tax law for intangible tax deductions - - ( 36,300)
Benefit of utilization of operating
loss carry forwards - - - -
Reserve for operating loss future tax
benefit 1,087,500 - -
$(1,382,900) $ 275,200
11. MAJOR CUSTOMERS
For the year ended November 30, 1995, Norton had two customers
who accounted for approximately 44% of consolidated operating revenues.
For the year ended November 30, 1994, Norton had two customers who
accounted for approximately 36% of consolidated operating revenues. For
the year ended November 30, 1993, Norton had three customers who accounted
for approximately 45% of consolidated operating revenues.
12. RELATED PARTY TRANSACTIONS
In April, 1993, an officer of Norton advanced $36,000 for the
purchase of certain machinery which was pledged as collateral for the
loan. The loan was repaid in seven monthly principal payments of $3,000
with final payment in November 1993 of $15,000. During 1993 interest paid
on this indebtedness was $1,891. During May, 1993 this officer advanced
an additional $90,000 to Norton, bearing interest
F-29
12. RELATED PARTY TRANSACTIONS (Continued)
equal to the entities primary lending institution's prime rate. Interest
charged to operations on the note payable was $8,841, $5,393 and $4,890
in 1995, 1994 and 1993, respectively.
In April, 1989, an officer/stockholder of DSI advanced Norton
$225,000 in the form of an unsecured demand note with interest payable
monthly at prime which was exchanged on February 8, 1992 for an
installment note with interest payable at 1% over prime. The note was
payable in equal monthly installments of $6,250 through November 1994.
In conjunction with Norton's debt restructuring in May 1993, this officer
advanced Norton $410,000, and the then remaining unpaid $125,000 of the
prior installment note was repaid in full. Interest charged to operations
on the note payable was $40,275, $30,186 and $17,842 in 1995, 1994 and
1993, respectively. This note, as well as the $90,000 note in the
preceding paragraph, is convertible into DSI's common stock at $0.44 per
share for an aggregate 1,136,364 shares of DSI's common stock.
Four officers of Norton have ownership interests in an entity
from which Norton acquired drilling rig machinery at a cost of $98,207 and
$125,464 in 1994 and 1993, respectively. On December 6, 1993 this entity
loaned Norton $62,000 which was repaid on January 13, 1994 along with
accrued interest in the amount of $239.
The spouse of a director of DSI owns a business which charged
Norton $11,856 for furniture, fixtures and carpeting which was installed
in Norton's new general offices in 1994.
In the year ended November 30, 1995, three officers and a
corporation owned by an officer of the Drilling Segment, along with the
Drilling Segment, participated in a joint venture in three wells. The
joint venture contracted with Norton to drill and equip the three wells
and incurred costs totalling approximately $716,000 through November 30,
1995. Each joint venture participant was liable for their pro rata share
of the costs incurred. Norton's share was approximately $200,000. The
aggregate costs to be borne by the four related parties mentioned above
was approximately $79,000 of which approximately $11,000 was outstanding
at November 30, 1995.
13. COMMON STOCK
Merchant bank agreement
Pursuant to a June 1989 agreement between a merchant banking
firm, a principal of the merchant banking firm and DSI, the principal
became CEO of DSI for which the merchant banking firm received an option
to acquire 3,857,142 shares of DSI's common stock at $.21875 per share
($843,750). On February 28, 1991, the merchant banking firm's option was
increased by 682,858 shares at $0.66 per share in compliance with the
anti-dilutive provisions of the original agreement. The increase in the
F-30
13. COMMON STOCK (Continued)
shares under option to the firm was precipitated by the issuance of the
shares DSI issued in common stock in acquiring the nursery segment. On
December 11, 1991, the agreement was retroactively amended to curtail the
anti-dilutive provisions of the original agreement as of March 1, 1991.
The number of shares under option outstanding was 4,540,000 at
December 1, 1991 with an aggregate exercise price of $1,294,436. From
January 17, 1992 through March 23, 1992 the banking firm exercised
3,638,250 shares under option. Prior to the option exercise, DSI in
January 1992 filed a form S-3 with the Securities and Exchange Commission
which registered the 4,540,000 shares under option. Subsequent to the
exercise of 3,638,250 shares, the merchant banking firm deregistered the
remaining 901,750 shares subject to option which had previously been
registered. In 1994 the banking firm exercised 27,000 shares under option
for $5,907. The principal resigned as CEO and Director of DSI effective
September 1, 1993 and the agreement was terminated between the parties.
A provision of the termination was to extend the expiration of the options
to December 31, 1994 at the identical price per share at which date the
unexercised option to acquire 874,750 shares expired. At November 30,
1994, the number of shares under option outstanding was 874,750 shares
with an aggregate price of $492,662. There were no remaining options
exercised during 1995 and all options expired during 1995.
1989 stock option plan
In June 1989, the stockholders approved the Company's 1989 stock
option plan (the "Plan"). The Plan provides for the granting of an
aggregate of 500,000 qualified and non-qualified options to employees,
officers, and directors of DSI, including those directors and consultants
who are not employees of DSI.
The first options were granted under the plan on May 19, 1993.
The number of shares under options granted was 264,000 at $0.406 per share
($107,184 in the aggregate) which was the fair market value as of the date
granted. The options were granted to employees of DSI and its subsidiaries
(224,000 shares) and to two non-employee directors (20,000 shares each).
On August 27, 1993 three non-employee directors each received options to
acquire 10,000 shares each under the plan at $0.391 per share ($11,730 in
the aggregate) which was the fair market value at that date. None of the
options were exercised or canceled under these grants through November 30,
1995. The options expire in December 1998.
F-31
13. COMMON STOCK (Continued)
The following table contains information on stock options for the year
ended November 30, 1995, 1994 and 1993.
1995 1994 1993
Options outstanding at beginning
of year ($.391 to $.406 per
share) 294,000 294,000 - -
Options granted ($.391 to $.406
per share) - - - - 294,000
Options outstanding at end of
year 294,000 294,000 294,000
SFAS 123, " Accounting for Stock-Based Compensation" which was
issued in 1995 is not effective until fiscal year 1997. The Statement
defines a fair value based method of accounting (i.e., using an option
pricing model such as Black-Scholes) for employee stock options or similar
equity instrument plans, but also allows an entity to measure compensation
costs for those plans using the intrinsic value (the amount by the amount
by which the market price of the underlying stock exceeds the underlying
price of the option) based method accounting as prescribed by Accounting
Principles Board Opinion No. 25. The Company plans to continue using the
intrinsic value based method.
Warrants
DSI engaged a financial public relations firm on September 17, 1992
to enhance communications with the financial community, the media and
shareholders. In consideration of these services the consultant received
an aggregate amount of $24,000 payable over twelve months beginning
October 1, 1992. In addition, the consultant received a warrant to
purchase two hundred thousand (200,000) shares at $.66 per share for a two
year period through September 30, 1994. The warrant holder did not acquire
any shares under the warrant and it expired by its terms.
Stock issuance
On October 3, 1995, DSI issued 1,083,096 shares of its common stock
at $0.125 per share to a corporation owned by two directors/officers of
DSI and their spouses in satisfaction of an indebtedness of the Nursery
Segment of $135,387.
Subordinated convertible notes payable
In conjunction with the extinguishment of indebtedness by DSI's
drilling segment subsidiary, two officers of the subsidiary (one of whom
is DSI's Chairman, President and Chief Executive Officer) purchased at par
the subsidiary's subordinated convertible notes in the aggregate amount
F-32
13. COMMON STOCK (Continued)
of $500,000. The notes are convertible into the DSI's common stock at
$.44 per share for a total of 1,136,363 shares. The officers may, at
their option, convert any multiple of $1,000 of the note into shares at
any time. The conversion option terminates when the note is paid. The
note is due and payable on May 18, 1998.
Sale of securities
In May 1994, DSI issued 165,019 shares of its common stock for the
purpose of acquiring the remaining 10% interest in Lobell. DSI also
acquired cash and accounts receivable from the seller in the amount of
$178,064.
14. COMMITMENTS AND CONTINGENCIES
Leases
Norton entered into a five year noncancellable operating lease for
its general office space in May 1994. Previously, Norton rented its
office space on a month to month basis. Norton also leases storage
space in Texas and Wyoming on month to month leases. Rent expense
charged to operations under operating leases amounted to $46,727, $40,522
and $40,074 in 1995, 1994 and 1993, respectively.
Minimum future lease payments under operating leases are as
follows:
Years Ending Operating
November 30, Leases
1996 $ 44,000
1997 44,000
1998 44,000
1999 18,333
$150,333
Letters of credit
As of November 30, 1995, Norton is contingently liable under four
irrevocable letters of credit in the amount of $331,376.
Employment contracts
In January 1992, DSI agreed to retain a former officer/director as
a consultant to the MRI Segment. The consultant's fees charged to
operations were $20,000 in each of the two years ended November 30, 1994
and 1993. The agreement terminated on December 31, 1994 resulting in no
related fees for the year ended November 30, 1995.
F-33
14. COMMITMENTS AND CONTINGENCIES (Continued)
In connection with the acquisition of Norton, DSI entered into
employment agreements with four employees of Norton were still employed
at November 30, 1995. In addition to the applicable base salaries payable
under each employment agreement, the four employees can allocate among
themselves an aggregate of $50,000 in additional compensation each year
over the total compensation paid to such employees as a group during the
prior year. Pursuant to these employment agreements, the employees agreed
not to compete with Norton for a five year period. On December 1, 1995,
DSI, through its subsidiary, Norton, renewed the five year employment
contracts with these four employees. The new contracts provide for
salaries of $104,500 to each employee with all other provisions of the
previous agreements remaining the same.
Litigation
Norton was involved in a class action lawsuit alleging price
collusion arrangements with certain vendors of the Company in the late
1980's.This action was settled in 1994 and Norton was awarded a settlement
totaling $233,479. The amount which was received in 1995 is included in
other income in the statement of operations for the year ended November
30, 1994.
DSI is a named defendant, as guarantor of a lease obligation, in a
lawsuit commenced by Colonial Pacific Leasing Corp. in the 11th Judicial
Circuit in Dade County, Florida against its wholly-owned subsidiary
Sunny's Plants, Inc. Summary judgment in excess of $363,000 was granted
in favor of Colonial Pacific Leasing Corp. on November 15, 1995.
Amoco Production Company commenced a legal action against Norton in
connection with services rendered in 1993 and 1994. The action was brought
in District Court in Hockley County, Texas on April 6, 1995 and seeks
damages in the amount of $284,000. Norton has filed a countersuit.
Management believes that the allegations made by Amoco Production Company
are without merit and intends to prosecute its defense and counterclaims
vigorously.
The Company is also involved in various other routine litigation
incident to its business. In the Company's opinion, none of these
proceedings will have a material adverse effect on the Company.
Contingencies
DSI's drilling and oil and gas exploration and production operations
are subject to inherent risks, including blowouts, cratering, fire and
explosions which could result in personal injury or death, suspended
drilling operations, damage to or destruction of equipment, damage to
producing formations and pollution or other environmental hazards. As a
it is adequately insured for public liability and property damage to
others with respect to its operations. However, such insurance may not be
F-34
14. COMMITMENTS AND CONTINGENCIES (Continued)
protection against these hazards, Norton maintains general liability
insurance coverage of $1,000,000 per occurrence with excess liability and
umbrella coverages up to $5,000,000 per occurrence. Management believes
sufficient to protect the Company against liability for all consequences
of well disasters, extensive fire damage or damage to the environment. DSI
also carries insurance to cover physical damage to or loss of its rigs;
however, it does not carry insurance against loss of earnings resulting
from such damage or loss. The Company's lenders which have a security
interest in the drilling rigs are named as loss payees on the physical
damage insurance on such rigs. The Company has never been fined or
incurred liability for pollution or other environmental damage in
connection with its operations.
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject DSI to
concentrations of credit risk consist primarily of demand deposits,
temporary cash investments and trade receivables.
Management believes that it places its demand deposits and temporary
cash investments with high credit quality financial institutions. DSI was
not subject to concentrations of credit risk relative to its demand
deposits and temporary cash investments as of November 30, 1994. DSI's
demand deposits and temporary cash investments consisted of the following
at November 30, 1995.
Deposit in FDIC insured institutions under $100,000 $ 110,970
Deposit in FDIC insured institutions over $100,000 203,656
314,626
Less outstanding checks and other reconciling items (31,571)
Cash and cash equivalents $283,055
Concentrations of credit risk with respect to trade receivables are
primarily focused on contract drilling receivables. The concentration is
mitigated by the diversification of customers for which the Company
provides drilling services. No significant losses from individual
contracts were experienced during the years ended November 30, 1995 and
1994. Included in general and administrative expense for the periods ended
November 30, 1995 and 1994 are provisions for doubtful receivables of
$85,375 and $8,336, respectively.
16. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
At November 30, 1995, the carrying value of the Company's financial
instruments, which primarily include notes payable, approximate fair
value in management's opinion because of the frequency of their repricing.
F-35
Exhibit 10.30
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") dated as of December 1, 1995,
between Norton Drilling Company, a Delaware corporation (the "Company")
and J.P. Rose, and individual residing at 1911 Ave. H, Levelland, Texas
("Employee").
WHEREAS, DSI Industries, Inc. ("DSI") owns all the issued and
outstanding capital stock of the Company; and
WHEREAS, the Company owns and operates an on-shore, contract oil and
gas drilling business; and
WHEREAS, the Employee desires to continue to make the benefits of
his experience, business relationships and contacts and expertise
available to the Company and the Company desires to employ Employee on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual premises and
covenants contained herein and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged and
confirmed, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to employ the Employee for
the Term (as defined in Section 2 hereof) to render services to the
Company on the terms and conditions hereinafter set forth, and the
Employee hereby accepts such employment. The Employee's principle place
of employment shall be at the Company's offices in Lubbock, Texas or such
other location as the Employee shall expressly consent to in writing,
subject to such reasonable travel as the rendering of the services
hereunder may require.
2. Term. The term of the Employee's employment hereunder shall
commence on the date hereof and expire on November 30, 2000, subject to
earlier termination thereof pursuant to the provisions of Section 10(a)
hereof (the employee's employment term as so subject to early termination
is herein referred to as the "Term").
3. Offices and Duties. The Employee agrees to hold such offices
and to perform such duties as may be from time to time determined by the
Board of Directors of the Company (the "Board of Directors"), provided
that such duties shall be commensurate with the office held by the
Employee.
4. Extent of Services. The Employee agrees that he shall
faithfully, diligently and conscientiously devote his energies, skills and
experience to the discharge of his duties and responsibilities hereunder.
To this end, the Employee agrees that during the Term he shall devote
substantially all his business time and attention to the business and
affairs of the Company.
5.Compensation.
(A) Salary. As compensation for services to be rendered pursuant to
this Agreement, the Company shall pay the Employee a salary at the rate
of $104,500 (the "Annual Salary") per annum during the Term hereof,
payable in accordance with the eh payroll policies of the Company as from
time to time id effect. It is agreed that the amount of the Annual Salary
may be increased from time to time by the Board of Directors.
(B) Expenses. Subject to such policies as may from time to time be
established by the Board of Directors, The Company shall pay or
reimburse the Employee for all reasonable expenses actually incurred or
paid by the Employee during the Term in the performance of the Employee's
services hereunder.
(C) Withholding. In making all payments pursuant to this Section 5,
the Company may withhold such taxes and other charges as may be required
to be withheld by applicable law or regulation.
6. Benefits. The Employee shall be entitled to and shall receive
benefits under any health, accident or disability insurance programs and
other employee benefit plans, including profit sharing plans, which the
Company may from time to time during the Term maintain for the benefit
of its executive employees and in particular shall be entitled to receive
the benefits listed on Schedule 6 hereto.
7. Vacations. The Employee shall be entitled to vacations (taken
consecutively or in segments) during the Term, aggregating four (4) weeks
in any calendar year of the Term, during which time all compensation
hereunder shall be paid in full.
8. Insurance. The Employee agrees to cooperate and do whatever is
reasonably necessary or appropriate to enable the Company, if the Company
in its sole discretion so desires, to obtain key person insurance with
respect to the Employee.
9. Negative Covenants.
(a) Covenants Against Competition. Except as set forth on Schedule
9(a) hereto, from the date hereof through November 30,2000 (the
"Restricted Period"), the Employee shall not, directly or indirectly (i
) engage in any business that competes with the business of the Company;
(ii) render any services to any person or entity for use in competing with
the business of the Company; (iii) own any interest in any entity engaged
in any business that competes with the business of the Company; and./or
(iv) interfere with business relationships (whether formed heretofore or
hereafter) between the Company and customers or suppliers of the Company.
(b)Confidentiality. The Employee acknowledges that the Company's
trade secrets and proprietary information and processes, as they may exist
from time OT tome, are valuable, special and unique assets of the
Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee will not
during the Restricted Period disclose, in whole or in part, such secrets,
information or processes to any person, firm, corporation, association or
other entity; provided, that after the Tern, the restrictions contained
in this Section 9 (b) shall not apply to such secrets, information or
processes which are then in the public domain (so long as the Employee was
not responsible, directly or indirectly, for such secrets, information or
processes entering the public domain). The Employee agrees to hold as
confidential all memoranda, books, papers, letters, formulas and other
data, and all copies thereof and therefrom, in any way relating to the
Company's business or affairs and at the end of the Term, or on demand at
any time of the Company, to deliver same to the Company.
(c ) No Solicitation. The Employee agrees that during the
Restricted Period, he shall not, directly or indirectly, employ, solicit
for employment or otherwise affiliate with, or advise or recommend to any
other person or entity that such person or entity employ, solicit for
employment or otherwise affiliate with, any officer or director of the
Company or any affiliate or the Company or any employee of the Company or
any such affiliate, including, but not limited to, all employees involved
n the maintenance, repair or operation of the Company's drilling rigs.
( d) Specific Performance. If the Employee breaches or threatens
to commit a breach of any of the provisions of this Section 9, the Company
shall have the right and remedy to have the covenants contained in this
Section 9 specifically enforce by any court having equity jurisdiction,
it being acknowledged and agreed that any such breach or threatened breach
will cause irreparable injury to the Company and that money damages will
not provide adequate remedy to the Company.
10. Termination.
(a) By the Company. The Company may terminate the Employee's
employment pursuant to this Agreement prior to the expiration of the Term
only upon the occurrence of one or more of the following events:
(i) the Disability (hereinafter defined) of the Employee;
(ii) the conviction of the Employee of any felony involving
dishonest conduct or moral turpitude;
(iii) the willful or wanton misconduct of the Employee in connection
with the performance of his duties hereunder which conduct has an adverse
affect on the business and affairs of the Company; or
(iv) the Employee's breach of any material provision of this
Agreement.
Notwithstanding anything contained herein, the Company may
terminate this agreement pursuant to Section 10(a) (iii) or 10 (a) (iv)
above unless the Company shall have provided Employee with written notice
of the alleged misconduct or breach, and such misconduct or breach shall
not have been cured, or, if not curable, shall be continuing and shall
not have ceased, within ten days of the Employee's receipt of such notice.
As used in this Section 10 (a), the term "Disability" shall mean,
with respect OT the Employee, that due to physical or mental infirmity,
whether total or partial, the Employee is unable to substantially perform
his duties hereunder for a period of 180 consecutive days.
(b) Employee's Death. This Agreement, including all the
Employee's unaccrued entitlements to compensation hereunder, shall
automatically terminate upon the death of the Employee.
( c) Effect of Termination. In the event of any termination of
this Agreement pursuant to Section 10 (a), this Agreement shall be null
and void and have no further force or effect except that Sections 9, 11,
13, 14 and 15 shall survive any such termination and any accrued
obligations shall be paid by the Company.
11. Governing Law. This Agreement shall be governed by the laws of
the State of Texas, without giving effect to the principles of conflict
of law.
12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
taken together shall constitute one and the same instrument.
13. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner to be effective and valid
under applicable law, but if any provision of this Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any other provisions of
this Agreement. In particular, the parties hereto acknowledge and agree
that the covenants contained herein are reasonable in all respects and if
any court determines that nay of the covenants contained herein, or any
part thereof, is invalid or unenforceable, the remainder of this Agreement
shall not thereby be affected and shall be given full effect, without
regard to the invalid portions.
14. Waiver and Amendments. This Agreement may be amended,
modified, superseded, canceled, renewed or extended and the terms and
conditions hereof may be waived, only by a written instrument signed by
the parties hereto. No delay on the part of any party in exercising
any right, power or privilege hereunder, preclude any other further
exercise thereof or the exercise of any other right, power or privilege
hereunder. The rights and remedies herein provided are cumulative and
are not exclusive of any rights or remedies which any party may otherwise
have at law or in equity.
15. Notices, etc. Any notice, request, instruction or other
document to be given hereunder by any party to the other shall be in
writing and delivered personally or sent by registered or certified mail,
postage prepaid, return receipt requested, or by a reputable overnight
courier, if to Company, addressed to Company at 5211 Brownfield Hwy.,
Suite 230, Lubbock, Texas 79407, Attention: Mr Sherman H. Norton, Jr. with
a copy to Michael B. Solovay, Esq., Solovay, Marshall & Edlin, P.C., 845
Third Avenue, New York, New York 10022; and if to Employee, addressee to
Employee at 5211 Brownfield highway, Suite 230, Lubbock, Texas 19497, with
a copy to , or to such other persons
or addresses as may be designated in writing by the party to receive such
notice. Notices shall be deemed given when received.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above written.
NORTON DRILLING COMPANY
(a Delaware corporation)
By:
Name:
Title:
(Employee)<PAGE>
EMPLOYMENT AGREEMENT
SCHEDULE 6
1. Medical insurance including payment of dependent coverage and any
and all benefits thereunder.
2. Use of company vehicles.
3. The Company's Injury and Disease Plan.
4. One paid physical each year of the Term.
5. Lubbock Club membership.
6. Spouse's expenses on business trips.
7. Season ticket to football and basketball games.
8. Preparation of tax returns for personal and business purposes and
related bookkeeping.
<PAGE>
EMPLOYMENT AGREEMENT
SCHEDULE 9 (a)
1. Ownership of stock in Rose Equipment Company.
2. Investments in wells in which the Employee possesses an interest.
3. In addition to any other items listed in this Schedule 9 (a), the
ownership of securities of any entity engaged in any business otherwise
prohibited under Section 9 (a) (iii) shall be permitted if such
securities constitute less that 3% of the outstanding capital stock
thereof.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended November 30, 1995 (Balance Sheet and Statement of Operations)
and is qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<CASH> 283,055
<SECURITIES> 4,607
<RECEIVABLES> 2,261,187
<ALLOWANCES> 90,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,888,439
<PP&E> 11,592,156
<DEPRECIATION> 4,181,544
<TOTAL-ASSETS> 13,004,461
<CURRENT-LIABILITIES> 10,928,029
<BONDS> 0
0
0
<COMMON> 236,934
<OTHER-SE> 1,075,760
<TOTAL-LIABILITY-AND-EQUITY> 1,312,694
<SALES> 0
<TOTAL-REVENUES> 20,645,757
<CGS> 0
<TOTAL-COSTS> 18,860,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398,896
<INCOME-PRETAX> (868,319)
<INCOME-TAX> 0
<INCOME-CONTINUING> (868,319)
<DISCONTINUED> (1,526,060)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,394,379)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
